Elena Dijour / shutterstock
Elena Dijour / shutterstock


The Chinese are coming!

This subject has been popping up in European media for more than ten years now: Germany was caught by a Chinese “tsunami” in 2006 (Spiegel) followed by a “China invasion” in 2011 (Bild Zeitung). Britain was bought up by the Chinese in 2014 (The Telegraph); and in 2015 finally, Bloomberg stated: “China wants to buy up Europe”.

These headlines mirror public reaction towards Chinese investment, which has been oscillating between welcoming signals and mistrust, enriched with the fear of key technology being sold off to China. Recent acquisitions by Chinese state-owned companies, such as the take-over of Krauss Maffei, a German manufacturer of machine tools, by ChemChina or that of the power unit of Dutch NXP RF by JAC Capital, have again brought this issue to the headlines.

Although data on Chinese outward foreign direct investment (OFDI) differ widely, depending on their source, they confirm that OFDI from China, not only to Europe, is on the rise. By now, China has caught up with major outward investors, such as Japan and Germany.




The situation is slightly different, though, when looking at FDI outward stock: Here, China has not yet caught up with developed countries, although its stocks are growing quickly, too. So we should not forget that up to now it has been “the” West who bought up the world in terms of FDI and who – in contrast to China – was welcomed by the majority of recipient countries.




To better understand the development of Chinese OFDI, it is helpful to take a brief look at the formation of China’s policy in regard to capital outflows. The focus of China’s policy of reform and opening up was on inward FDI until the end of the 1990s. This strategy proved successful as it contributed to China’s rise as the “factory of the world” and as an economic world power.

Lately, it has become a truism, though, that the Chinese growth model based on large capital input and cheap labor is meeting its limits. The Chinese government has been aware of this issue for much longer than we may think: Already in 2000, it proclaimed the “Going Global” Strategy (走出去战略) to promote investment abroad. Core goals of the strategy include access to markets, cutting-edge technology and natural resources. The Chinese government regards OFDI in developed countries in particular as an important prerequisite to China’s progressing in the global value chain and to reducing the country’s reliance on exports.

From the Chinese perspective, increasing OFDI is a normal and necessary development in order to balance FDI flows to and from China. Western multinationals have been investing large sums in China for about three decades, whereas Chinese companies have only just started to invest abroad and are in a catching-up process in terms of internationalization. China has welcomed foreign capital and now expects Chinese capital outflows to be welcome abroad, too.

In this context, it is important to note that since its proclamation the “Going Global” Strategy has developed into a comprehensive international strategy which goes beyond the promotion of investment abroad. As the Chinese Ministry of Commerce states on its “Going Global” Public Service Platform (“走出去” 公共服务平台)”:

“‘Going global’ in the broader sense includes a nation’s cross-border activities in the fields of politics, military, economics, culture, education and news communication.”

Thus, it does not only include the promotion of international investment and cooperation, but also China’s “One Belt, One Road” initiative (OBOR), which aims at building a comprehensive infrastructure network in Eurasia under China’s financial and institutional leadership.


It is against this backdrop that the debate on Chinese OFDI has been ambivalent. The question, would investment from China pose a threat to national security, has received a high degree of attention in the European Union and even more so in the United States.

The United States has an open non-discriminating investment regime. However, when it comes to foreign acquisitions, there is a recognizable bias against Chinese bidders: A disproportionately large number of the acquisition cases investigated by the Committee on Foreign Investment in the United States (CFIUS), which monitors foreign acquisitions in regard to national security, in recent years involved Chinese investors, even though these account for less than half a percent of inward FDI stock in the U.S. Also, there have been some well-known cases of Chinese take-over attempts which foundered due to national security concerns, for example CNOOC’s bid for Unocal in 2005. It might also be that the Chinese bid for the Chicago stock exchange, brought forward in February 2016, will be subject to CFIUS investigation.

There is no equivalent to the CFIUS on the European level. There were voices among MEPs in favor of such an institution in the past, but so far no concrete measures have been taken into this direction. Currently, EU member states have very different regulations for monitoring foreign investment in terms of national security threats.


I would like to point out, though, that we tend to overlook the positive effects of Chinese OFDI if we focus our debate too much on national security concerns. Drawing from the experience of Germany, which is one of the three top destinations for Chinese OFDI in the EU, we can see that up to now there has been no sale of national assets to China. Chinese investors in Germany tend to have a long-term strategic interest in Germany as a business location. They have sustained local jobs and created additional employment opportunities. German small and medium-sized companies acquired by a Chinese investor may profit from improved access to the Chinese market and in some cases have done better with a strategic investor from China than with short-term oriented financial investors from other developed countries. Differences in corporate culture as well as in the economic, legal and political system remain challenging. However, this is true not only for Chinese investors but for any foreign investor.


Fig3 _ChinaFDI


It also is worth it to take a look at the scale of Chinese OFDI in developed countries: Chinese investors hold less than half a percent of inward FDI stock not only in the United States but also in Germany and the European Union overall. Moreover, over two thirds of Chinese OFDI in 2014 still went to Asia. Obviously, there has been no “China invasion” in developed countries so far. Chinese FDI outflows do have a huge growth potential, though, and according to our projection will reach more than $ 21 billion in the EU by 2020. China will thus continuously gain more weight in the FDI accounts of the EU member states in the future.




I would therefore like to raise three issues which in my view should be crucial to our discussion of Chinese FDI in the EU.


The first issue refers to our coping with China’s different political system and the fear of the Chinese government entering Europe through the corporate back door. In this regard, we should keep in mind that Chinese companies, even the state-owned ones, pursue business interests when they invest abroad. They regard their “going global” as a key to enhancing their corporate international competitiveness, to creating global brands, and to strengthening their research and development (R&D) capacities. In the recipient countries they may therefore contribute to economic growth. Even more importantly, Chinese companies will have to abide by local laws and regulations. This is an opportunity to make them more familiar with the market economy standards of developed countries, which in turn may influence the business environment in China in the long run. This should be a two-way street, though, since Chinese companies will have the chance to participate more strongly in the rule-making process of the international business community, too.


The second issue is a prominent internal problem of the European Union, which includes, but is not restricted to FDI: Its member states do not speak with one voice, when it comes to dealing with China. The Chinese government has long since understood this and is very adept at playing off EU countries against each other in terms of economic interests. Chinese FDI is the next field of competition between EU countries despite security concerns, which may further weaken the EU’s position vis-à-vis China. A more comprehensive approach towards FDI from China is therefore needed. The EU-China bilateral investment treaty (BIT), which is currently being negotiated, could be a step -forward, but still has a long way to go. Also, the EU might want to think about a common investment promotion agency, which has previously been discussed. This agency could provide comprehensive information on FDI in the EU member states and bundle the work of national investment promotion agencies. It could also play a key role in developing a more coordinated policy approach towards FDI in the EU, including the compilation of statistics and the monitoring of foreign M&A.


Both measures would certainly contribute to tackling the last issue, I would like to point out here: – the much discussed issue of the unlevel playing field that exists between China and the EU. Whereas the European Union offers an open investment environment, the situation for European companies in China is far from that. In contrast, they face various kinds of formal and informal discrimination. It is not an option for EU countries to go protectionist in response, though. In my opinion, the problem lies much deeper: China’s economic boom has led the Western business world to believe that they need China much more than vice versa, which in turn has influenced the attitude of politicians at all levels, who fear the loss of economic opportunities if they act as hardliners vis-à-vis China. However, China wouldn’t have come this far without Western FDI inflows and now needs access to Western markets for its own FDI outflows.


Based on these three issues, I would like to advocate for more courage in the European Union and its member states when facing China: China needs us just as much as we need China.

Interested in more? Click here to read about the effects of Mega-Regional Trade Agreements on China and Asia!