China eyes more EU investment after slow start

LONDON Mon Sep 17, 2012 10:27am EDT

A man walks outside the China Construction Bank headquarters building in Beijing August 11, 2011. REUTERS/Jason Lee

A man walks outside the China Construction Bank headquarters building in Beijing August 11, 2011.

Credit: Reuters/Jason Lee

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LONDON (Reuters) - The ambition of China's No. 2 bank to spend more on a single acquisition than the value of all of the country's European deals in the past two years sends a clear signal of intent: Europe is finally on China's takeover radar.

China Construction Bank (601939.SS)(0939.HK) expects to wrap up an overseas takeover this year, Chairman Wang Hongzhang told Reuters.

The Financial Times said Wang had identified Britain, France and Germany as attractive targets and could splash out as much as $15 billion.

An acquisition of that size would silence debate on why China has invested relatively little so far in Europe - about $6.4 billion in 2010 and $7.4 billion in 2011, according to a report released on Monday by the University of Leeds.

China, the world's second-largest economy, accounts for just 3.5 percent of the foreign direct investment in the 27-member European Union.

But that figure is bound to rise as China seeks brands and technology to help it climb the value-added ladder, said Antonio Parenti, a European Commission trade official. Up to 2008, China was investing just $1 billion a year in the EU, he noted.

"This is a trend which is set to continue. China will become a massive presence in Europe," Parenti told a conference in London on Chinese investment.

That investment provokes mixed feelings. Europe needs the jobs that Chinese capital creates or preserves, but suspicions persist that some Chinese companies are shadowy agents of an authoritarian Communist state bent on stealing the West's technological secrets.

"There are question marks. A newcomer is always questioned twice when he wants to join a club," Parenti said.

NOT WELCOME

For its part, Chinese investors have a litany of complaints about Europe, including the difficulty of obtaining visas and work permits; restrictive labor and competition laws; and the cost of hiring lawyers and other professionals to help them seal deals.

"They have the perception that they're not welcomed in the European Union and that they're not allowed to invest in certain areas or acquire certain businesses," said Heinrich Voss, a researcher at Leeds University.

Jeremy Clegg, a professor of European integration and international business management at the university, singled out non-tariff barriers that have the effect of segmenting service industries along national lines.

"These are the things that, if you're a Chinese firm coming to Europe, you're going to be particularly concerned about because that would be undercutting the whole purpose," he said.

The European Commission wants to negotiate an EU-China bilateral investment treaty that would provide more certainty for investors on both sides and pry open markets in China where European firms have a comparative advantage.

But Parenti acknowledged that this Thursday's EU-China summit in Brussels would make little headway on the issue because of China's looming once-in-a-decade leadership change.

SEA CHANGE

Regardless of progress towards a treaty, it is natural that China is keen to expand overseas investment now that a decade has passed since it joined the World Trade Organisation, said Kerry Brown, who leads the EU-funded Europe China Research and Advice Network.

"We can't walk away from this," Brown said.

Because of its own low production costs, the aim of China's outbound investment to date has not been to move factories overseas. But that will change as costs rise, with some garment and footwear firms already relocating to Southeast Asia, said Yiping Huang, chief economist for Asia at Barclays Capital.

Another sea change in the coming decade is likely to see the central bank, which manages China's $3.2 trillion in foreign exchange reserves, handing over the investment baton to the private sector - with vast implications for financial markets and the global division of labour, Huang said.

"The People's Bank of China will likely give way to the private sector as China's dominant overseas investor, and the shift from sovereign bonds to direct equities as the main focus of this investment could prove to be an historical event for the world economy," he said in an essay for the East Asia Forum.

(Editing by Jason Neely)

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