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2012 - CEED Report: Partners or rivals? Chinese investments in CEE

2012 - CEED Report: Partners or rivals? Chinese investments in CEE

Executive Summary:

Today China holds 1/3rd of the world’s currency reserves. By 2030, the Chinese economy will surpass the United States, becoming the world’s largest market. Between 2007 and 2012, the Chinese economy grew by close to 60 percent; emerging Asia as a whole by almost 50%. Over the same period, economies of high income countries have grown by a mere 3%. Clearly the world is undergoing profound changes.

Europe as a whole has witnessed a 102% increase in investment from China since their “going out” strategy began in 2010. 15% of Chinese companies that have gone out have chosen Europe as their destination. In CEE, the same phenomenon has been taking place.

China uses crises as opportunities, taking advantage of the current turmoil in global markets to make its debut in sectors and places previously neglected. China has a strategic interest in acquiring European Assets thus Europe is witnessing impressive rates of growth in inward investment from China. It is attempting to build up chains of influence in Europe extending from transport (ports, airports, roads) to local assembly (designated Chinese industrial parks) and logistics (China’s sea, air, and container companies, telecom networks) eventually to distribution, from small scale traders who form a sizeable portion of Chinese immigrants to large distribution firms working up the value chain. China’s expansion is directly visible in purchasing European government bonds, by directly investing in European companies, particularly in Europe’s periphery, and by participating in European Public procurement. As China intends to diversify away from the US dollar, bond purchases from countries such as Greece or Hungary are on the increase. Similarly, greenfield projects, mergers and acquisitions and trade and cooperation agreements relying on Chinese financing have suddenly risen in the overall level of Chinese investment in Europe.

Despite the fact that the CEE nations have been successfully reintegrated with the West, the Chinese underestimated reforms or even missed the profound changes that took part in the Central Europe. But now, there is abundant evidence of a recent change in Sino-CEE relations. While the transformation of the global economy is partially responsible for the newfound Chinese interest in CEE, it is not the only one. CEE for China presents new challenges and new opportunities, as the CEE countries become hybrid economies- somewhere between emerging markets and developed economies. It creates also new horizons for investment opportunities and developing of Sino-CEE business ventures. The Eurozone crisis has meant that CEE economies appear more dynamic as places to put Chinese money in than the periphery of Western Europe. High growth rates in CEE, high intellectual potential, relative safety of doing deals due to EU institutional framework and entrepreneurial spirit combined together mean that CEE is becoming even more attractive as a region for venture capital and private equity.

Two-way trade between China and CEE has grown rapidly. While it only amounted to 3 billion US dollars in 2000, in 2010 the volume of trade surpassed 41.1 billion, representing an annual average growth of 32%. China’s imports from CEE have grown even faster, registering an annual average rate of 38.7%.

Less than seven years ago, Chinese investments in the region were almost inexistent. During the period 2004-2010, China’s investments stock was multiplied by 6.8 in Asia, 5.3 in Latin America, 8.6 in North America and 7at the international level, but by more than 18 in the CEE region. In 2004, the total flow of China’s FDI (foreign direct investments) in Czech Republic was only of US$ 0.46 million and in Poland, of 0.1 million. However, in recent years, China has significantly increased its foreign investments in the whole CEE region1. As shown in figure 1, China’s outward FDI stock in the area, which was only of US$ 43.67 million in 2004, augmented to 821.28 million in 2010. During the period 2004-2010, China’s investments stock was multiplied by 6.8 in Asia, 5.3 in Latin America, 8.6 in North America and 7at the international level, but by more than 18 in the CEE region.

Figure 1.China’s outward FDI stock in the CEE region, 2004-2010,
millions of US$

China’s outward FDI are concentrated in unexpected places. Hungary which is, in term of GDP the fourth country in the region, received in 2010 more investments from the Middle Kingdom than all other CEE countries together. At the European level, Hungary was only surpassed by Germany and Luxemburg. The case of Romania is also interesting. In 2010, its total inward foreign investments were almost 75% less important than the Polish ones, but when it comes to the Chinese investments, the gap is only of 35%. Now it seems, that China acting in the long time perspective selected Poland as its future strategic partner.

Figure 2.China’s outward FDI stock in the CEE region, 2010,
millions of US$

Figure 3. China’s main outward FDI stock in the CEE region, 2006&2010,
millions of US$

The role of culture and common perceptions in Sino-CEE relations is enormous! The main obstacle to increasing investment links between CEE and China lies in misunderstanding of the other’s cultural and business ethics. China’s policies tend to be driven by both political and economic motives. In fact, rarely do the Chinese separate business form politics, a crucial cultural difference when it comes to investment strategies. There is a strong need for strengthening the effectiveness of CEE economic diplomacy. Simultaneously, setting up CEE-Chinese joint ventures to allow both sides to complement each other’s strengths in the global supply chain and market is also a case. Examining the case of Covec in Poland shows how miscommunication and misunderstanding of cultural differences can lead to economic and business failures. The importance of interpersonal relations for strengthening Chinese-CEE partnerships is evident in the case of both large Chinese ventures into CEE, as well as smaller scale business activities characteristic of the way the local Chinese communities work. In addition to large Chinese conglomerates, the role of the Chinese community or Diaspora is significant in CEE. The Diaspora forms Chinese networks throughout CEE, on which small and medium size Chinese firms rely to conduct their business activities.