BEIJING China is preparing to buy up plum assets in Europe, the commerce minister said on Monday, as the escalating debt crisis leaves countries in the region increasingly vulnerable to the deep pockets of Chinese firms.
The fastest-growing major economy in the world is keen to invest in infrastructure in Western Europe, particularly in Britain, Lou Jiwei, the head of $400 billion China Investment Corp (CIC), wrote in the Financial Times at the weekend.
Indeed, Commerce Minister Chen Deming said China will send a trade and investment delegation to Europe next year, where potential investments will be on the agenda.
"Some European countries are facing a debt crisis and hope to convert their assets to cash and would like foreign capital to acquire their enterprises," he told a gathering of Chinese firms with overseas investments.
"We will be closely watching and pushing ahead with this effort."
China has given a cautious response to euro zone plans to raise funds from countries with big foreign exchange reserves, such as China or Japan, to boost the financial firepower of its rescue fund.
China already has some 600 billion euros ($798 billion) in euro-zone debt, a sizeable portion of its $3.2 trillion in foreign exchange reserves, the world's biggest stockpile of cash.
Instead, China may be more interested in investing in solid assets, such as companies or infrastructure. Some Chinese intellectuals argue that now is the time for Beijing to negotiate hard, securing access to, control over, or even ownership of some of Europe's best brand names, companies and intellectual property.
"It is a good opportunity for domestic firms to make equity investment in some European firms that may need cash badly right now because of the debt crisis," He Fan, a researcher at the Chinese Academy of Social Sciences, a top government think tank, said.
"The Chinese government has been nudging domestic firms to venture abroad and by encouraging capital outflows, it could also help the country to improve its international balance of payments."
Chen warned, however, that China may fight back if other countries use trade protectionism to block purchases. Chinese officials repeatedly emphasize that overseas deals have fallen through because of political opposition; although far more Chinese purchases have gone through without difficulty.
Last week, the Icelandic government rejected a plan by Chinese multimillionaire developer Huang Nubo to buy 300 sq km (186 sq miles), saying the plan did not meet legal requirements on foreign ownership.
Huang said the response revealed Western "hypocrisy and deep prejudice." Foreigners wrongly assume Chinese companies have ties to China's military, he said.
China's largest state-owned shipping firm COSCO (1919.HK) has already made a major investment in Greece's historic Piraeus port (OLPr.AT) as part of divestment plans.
"We are willing to import more products and encourage outbound investment, since the dollar is relatively weak for a long period of time," said Chen, who earlier this year urged Chinese firms to buy global brands.
MONEY TO BURN
Overseas investment by Chinese state-owned enterprises has mostly focused on resources given China's need to fuel annual economic growth of 9 percent to 10 percent.
Despite the enticing opportunities that Europe may offer, Chinese firms will move carefully for risk of being criticized for hasty moves that do not pay off, said Wang Jun, an economist at top government think-tank CCIEE in Beijing.
CIC, for example, was criticized for some of its early equity stakes in Western financial institutions during the global financial crisis because they subsequently fell in value.
In any case, there was no need for Chinese companies to rush to make investments in Europe, Wang said.
"At this point, I think it's too early to discuss," Wang said. "The euro zone crisis has not entirely played out and asset prices are very volatile. They haven't found their floor," he said.
"Overall, Europe is not a resources play, but its manufacturers are what would most interest us, with their market, their technology, and their strong experience."
Plans by the British government to make London a trading center for the Chinese yuan could attract property investment from China, which has tended to lag Southeast Asian countries for making large deals, said Nick Braybrook, a partner at property consultant Knight Frank.
"Most investor lists include Chinese money, but we haven't seen big organizations like China Investment Corporation being very active yet," he said.
The CIC's main focus would be on infrastructure projects where governments could offer lower taxes or discounted bank loans in return for investment, Lou suggested in the Financial Times.
However, CIC has indicated some caution about investing in Spain, whose borrowing costs have surged over fears of European debt contagion.
A visiting Spanish minister was met with polite disinterest earlier this month when he tried to interest CIC in upcoming divestments of state holdings in so-called cajas savings banks, in the national lottery company, airports and other infrastructure, sources said.
Chen indicated that China also faces its own investment constraints, noting expectations for a slowdown in China's economic growth next year.
Annual inflation in 2011 is likely to be about 5.5 percent -- overshooting a government target of 4 percent -- and inflationary pressures will continue next year, he said.
Another constraint, analysts say, is that China may not be a deep pocketed as it seems. They estimated that out of a foreign exchange arsenal of $3.2 trillion, only $100 billion may be spare per year to spend.
(Editing by Don Durfee and Neil Fullick)