For three decades, European investment has increased in China. Now, starting from a very low base, Chinese investment has taken off in Europe. As the euro is weakening, it will increase.

During his visit to Europe a year ago, President Xi Jinping proposed building a China-EU partnership. Last year, bilateral cooperation moved to a new level as Beijing and Brussels launched over 70 percent of the initiatives in the 2020 Strategic Agenda for Cooperation.

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Last year, Chinese investors doubled their money in Europe to a record $18 billion (Photo: dolmansaxlil)

Initially, Deng Xiaoping’s reforms and opening-up policies were fuelled by the normalisation of US-China relations. In the course of the 1980s, trade and investment took off with Europe, as well.

Today, it is the EU – not the US – that is Beijing’s most important technology partner.

For three decades, bilateral investments were dominated by European multinational companies in China. These have contributed significantly to the mainland’s economic development.

Last year, Chinese investment in the EU almost tripled and bilateral trade exceeded US$615 billion. At the same time, some 6 million people travelled between the EU economies and China. But this is only the beginning.

Chinese investment in Europe

Even before the crisis, these flows surged, tripling from less than US$1 billion per year in 2004-8 to roughly $3 billion in 2009-10.

As the Eurozone crisis kicked in, Chinese investment tripled again to $10 billion in 2011. And last year, Chinese investors doubled their money in Europe to a record $18 billion.

Chinese capital has flooded to the EU core economies, from the UK property market and German advanced technology to French industries and Italian energy.

The UK is the top destination for Chinese investment at $5.1 billion, followed by Italy at $3.5 billion. In terms of the sector mix, Chinese capital is moving from natural resources and trade facilitation toward a broad range of industries and assets across Europe.

In the fiscally conservative Northern Europe, Chinese investors are focusing on advanced technology and innovation. In the ailing Southern Europe, Chinese investor interest has increased in privatisation opportunities, particularly in Portugal, Greece, Italy and Spain. In Central and Eastern Europe, China has developed its Silk Road from the Greek ports through the Balkans to the core economies.

By global standards, Chinese investment is still relatively low, but it is the strong trend line and potential of Chinese investment in Europe that counts.

ECB and euro

It was the plunge of the euro in 2014 and the subsequent decision on quantitative easing by the European Central Bank in late January that have drastically altered the status quo.

In the first half of 2014, the euro was still above $1.30. But when the US dollar began its ascent in mid-summer 2014, the euro began a parallel descent. Until recently, the trend has also been fuelled by the ECB’s quantitative easing as well as concerns over Greek debt and Spain’s troubled banking sector.

Due to the symbiotic relationship between the Chinese yuan and the dollar, the euro has suffered similar erosion against the yuan.

In May 2014, the euro was still worth more than 8.50 yuan. But after the ECB embraced its new QE policy, the yuan strengthened against the euro (6.57 yuan) – a plunge of almost 25 percent in barely a year.

The weakening of the euro and Chinese investment in Europe are occurring amid the scramble for regional free trade agreements, including Washington’s push for the Trans-Pacific Partnership (TPP).

That has intensified efforts toward a China-EU investment pact, despite a series of trade disputes.

In early 2014, China and the EU had their first round of talks on a pact. For Brussels, this would ensure long-term positioning in the Chinese marketplace. For Beijing, it is about accelerating catch-up growth, improving human capital and supporting ongoing reforms.

Baseline scenario

As markets expect the Fed to raise its policy rate in the coming months, while the ECB will keep its rate close to zero and continue QE, the yuan is likely to continue to strengthen against the euro.

In this baseline scenario, Chinese investment is likely to deepen and broaden in Europe.

There are negative scenarios that could halt or slow Chinese FDI in Europe in the short-term, such as an uncontrolled Greek exit from the eurozone.

But in the long-term, Chinese investment in Europe is there to stay.

Dr. Dan Steinbock is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see www.differencegroup.net