DNBulletin

Chinese influence in Europe: Enter the dragon?

Date 17 February 2011
Theme Economy
Chinese influence in Europe: Enter the dragon?

China has recently surprised the world with a number of transactions in Europe initiated by Chinese enterprises, sovereign wealth funds or directly by political interests. Where is the money coming from and what motives do the Chinese have to invest in Europe? Although one hears more and more often of European countries being supported by Chinese money, it would be premature to speak of a 'Chinese invasion'. Moreover, it is in China’s own interest to safeguard stability in the euro zone.

Chinese external reserves: better to be SAFE than sorry

In recent months, China invested heavily in European debt certificates to promote the stability of the euro zone as a whole. These transactions were financed mainly out of China’s international reserves, which have grown hugely during the past 20 years owing to a large trade surplus combined with a more or less fixed exchange rate (Chart 1).

Countries in order of their external reserves

Much of China’s reserves is invested in other currencies. In mid-2009, the country held USD 1,350 billion’s worth of US government debt. Some 25%–30% of Chinese reserves may be assumed to be held in euro, an amount of EUR 550–650 billion. The bulk of this probably relates to sovereign bonds. Especially given continued European worries about the debts owed by peripheral euro countries, the money from China is welcomed. This offers China an opportunity to gain political influence. Meanwhile, the EU being China’s principal trade partner, the stability of the euro area is also the Chinese national interest.

Sovereign wealth funds   

Entirely separate from the country’s external reserves, the Chinese Ministry of Finance manages a sovereign wealth fund named CIC. This fund is financed and governed by the Ministry. With its estimated USD 332 billion in capital, CIC is in the same order of magnitude as the sovereign wealth funds of other, mainly oil and gas exporting countries (Chart 2).
While information on CIC’s transactions and investments is still scarce, its foreign investments appear to focus on financial institutions and electric power providers.

Sovereign wealth funds (by managed assets in USD bn)

Corporate investment    

Investments from Chinese corporations have greatly increased over the past decades. While many Chinese enterprises continue to be managed (indirectly) by political interests, takeovers in the private sector tend to be nonpolitical in nature and simply a consequence of China’s rising star in the global economy. However, China’s foreign direct investments have been relatively modest. The total value of (announced) takeovers by Chinese enterprises in Western Europe over the 2001–2010 period came to some USD 47 billion, spread across 136 transactions. Whereas the numbers have gone up considerably in recent years, one can hardly speak, given the size of the Chinese economy, of a corporate ‘Chinese invasion’. However, the mountain of capital now heaped up by the Chinese government and corporate sectors looks set to make itself increasingly felt in Europe over the next few years – both politically economically.