Chinese investment in the port of Piraeus Implications

Chinese investment in the port of Piraeus
Implications for EU-China relations and the Dutch maritime logistics sector
Seminar, Tuesday 4 March 2014, Clingendael Institute, The Hague
George Cunningham, European External Action Service
“China's outward FDI to Europe”

My thanks to Clingendael Institute for hosting this symposium, and to Frans-Paul van der
Putten, Senior Research Fellow, who kindly invited me to the event. I also would like to
thank Rene van Hell for his intervention on non-EU state-owned entities' direct investments
which preceded my intervention.

The request for this talk on Chinese FDI wetted my appetite considerably when I first
received it. As part of my work as the European External Action Service Deputy Head of
Division responsible for the EU’s relations with China, I have been looking at China’s plan for
reviving the Silk Road, including its role in Piraeus port management in Greece last summer.
I also attended the 16+1 Leaders’ meeting in Bucharest which revealed some of the
planning to help East meet West.

I think that this is a turning point in EU and China economic relations, reinforced of course
by the current negotiations for the EU-China bilateral investment agreement taking place.

I will divide my intervention in two parts. Firstly, I will focus on the importance of Chinese
FDI for economic growth in Europe with particular attention on energy and infrastructure.
Secondly, I will speak about the current negotiations of the Bilateral Investments
Agreement.

From the early 2000s, Chinese "Going Out" policy has encouraged its outward FDI. Chinese
Outward FDI is still subjected to government approval but this process has become easier
over the years. So far, large state-owned companies (SOEs) dominate the investment
landscape. The Chinese Government has signed many international investment agreements
(IIAs) and established the China Investment Corporation in 2007 to support its companies
abroad.

Although China is still a net receiver of FDI, it is increasingly investing abroad using its huge
foreign exchange reserves. It is predicted to become a net investor in the coming years. In
2012, China FDI flows to the EU stood at a level of €8 Billion or 5 % of total inflows in the
EU. Despite the fact that China’s share of EU inward FDI stock is low in absolute terms, the
growth of its investments is impressive.

Chinese direct investments in economically-developed countries are motivated by a desire
to acquire technologies, distribution networks and brands as well as the capability and
competitiveness intrinsic to the firms concerned. Eurostat and Thomson Reuters data show
that although there is much year-on-year variation, European firms in the 'industrials' and
'materials' sectors have been the main targets for Chinese acquisition in the first decade of
the twenty-first century.

Between 2010 and last month, Chinese firms concluded 185 partial or full acquisition deals
of firms based in Europe. Chinese acquisitions increased dramatically from 17 in 2010 to 37
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in 2011, peaking at 65 in 2012. Last year, 59 deals were completed. The vast majority of
these deals, 168 out of 185, took place in Western Europe. Germany (53), UK (27), and
France (24) had attracted the most deals.

Central and Eastern European (CEE) countries have seen 19 deals in total so far of which
Hungary (7), Czech Republic (4) and Poland (4) account for nearly 80 per cent. Deals in CEE
have quadrupled from 2011 to 2012, though from a very low base.

While resource acquisition has been a primary goal of Chinese FDI in the rest of the world,
Chinese companies in Europe have targeted the manufacturing sector and, in particular, the
automotive industry (e.g. Geely's purchase of Volvo in Sweden, Great Wall Motors in
Bulgaria, BYD automobiles in Hungary, Dongfeng Motors investment in Peugeot), industrial
machinery (e.g. Sany's acquisition of Putzmeister in Germany), information and
communication technology (e.g. Huawei in Hungary, China Unicom in the UK), and financial
services (e.g. ICBC in the UK).

The United Kingdom has seen a wide range of industries targeted by the Chinese, including
a good number in the service sector. China’s investment in Germany is more focused on
industrial and physical goods. This is strategic targeting by Chinese firms of European
enterprises with less tangible assets, such as technology, capabilities and brands.

There is a further dimension to Chinese acquisition. The evidence shows Chinese companies
buying the operations of firms in the telecommunications and infrastructure sectors. This
suggests that they are acquiring networks of operations of firms that have grown to become
multinationals in Europe, particularly since the mid-1980s.

One reason for the low value of Chinese investments in the EU energy sector is naturally the
relative lack of endowment in oil and gas resources across the European economy. Chinese
firms are increasingly engaged in alternative energy sectors, power generation and the
power grid.

This is because of the EU’s renewable energy policy focus. In the renewable sectors, private
ownership is also more common than in the oil, gas or coal which also helps reduce
concerns towards Chinese investment in the energy sector. However, uncertainty how
European energy policies will develop and implemented at the EU and Member State level
does act as a deterrent for Chinese investments.

Chinese firms have signed nine infrastructure contracts across Europe between 2010 and
2013. They cover the sectors telecommunication (Huawei in Denmark and Italy), energy
(China Energy Engineering in Poland and Ming Yan and Huadian in Romania), transportation
(China Railway Construction, Hungary), and real estate (State Construction Engineering,
Britain and BCEGI, Greece).

An investment agreement between the EU and China should lead to an upsurge in
investments on both sides. The Treaty of Lisbon has given the EU competence for external
FDI policy with third countries. The EU officially launched Investment negotiations with
China during the EU-China Summit held in Beijing on 21 November 2013. The first round of
talks took place last month.

The current level of bilateral investment is way below what one would expect from two of
the most important economic blocks on the planet. With EU FDI to China representing only
2% of our worldwide FDI and China FDI to the EU standing only at 1%, there is huge
potential to further develop bilateral investment ties.
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
Consultations with investors and stakeholders confirmed that the main added value of an
EU-China Investment Agreement resides not only in a level playing field on investment
protection but above all in further investment liberalisation, leading towards reciprocity in
access for EU and Chinese investors to each other's markets.

An impact assessment study has pointed at the benefits of an ambitious and balanced EUChina investment agreement covering both investment protection and liberalisation. This
paved the way to the Council of Ministers last October’s adoption of negotiating directives
for the Commission to initiate negotiations.

This agreement aims to boost bilateral investment flows not only by opening up markets but
also by establishing a simpler and more secure framework, by enhancing legal certainty and
predictability for a long term investment relationship between the EU and China. It will
replace the existing bilateral investment treaties between EU Member States and China with
one single comprehensive EU-China investment agreement.

China will also benefit from this Agreement as it will be a solid investment framework with
their largest trading partner, the EU. It will help it maintain economic growth – thereby
helping the world economy - and to move its production up the value chain.

An open investment regime in Europe is crucial for our economy. Not least in time of
economic crisis, the EU naturally welcomes and needs foreign investment. Openness is also
the best argument in our efforts to push others towards similar openings. Our real concern
is lack of openness in China for EU investors. That is why we want to negotiate a quid pro
quo arrangement which improves access, transparency, and fair treatment of EU investors.

Member States already have mechanisms to control foreign direct investment on strictly
defined national security grounds. These instruments have to be in line with EU Treaties and
can protect essential security interests. They have been used very little which shows that
Europeans do not feel threatened by Chinese investments at this point in time. China finds
Europe a far friendlier environment than the United States with whom it has been
negotiating an investment agreement since 2008. The second round of EU-China
negotiations will take place in Brussels on 24-25 March 2014.

The EU’s relationship with China is vast, spanning over ninety dialogues in as diverse areas
as nuclear non-proliferation, development, human rights, trade, IPR and people-to-people.
It truly lives up to its name as a Comprehensive Strategic Partnership. At the end of this
month, the Chinese President will pay his first-ever official visit to EU institutions in
Brussels.

The diversity and growing number of the areas where EU-China interact are considerable. I
am continually struck how much this relationship is a balancing act between the converging
and diverging aspects of both our interests. It is certainly one of the greatest challenges of
the 21st Century.

Thank you.
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