Onat Kibaroğlu

Novermber 2015


Danger and Opportunity: The Chinese Approach to the Euro Crisis

In line with the Chinese phrase for crisis, “Wei Ji” which is made up of two characters that sound the same with danger and opportunity, the Eurozone crisis poses not only serious danger but also significant opportunities within the global context.

The imminent danger of a Grexit claimed the top headlines during last month as the European continent got unprecedentedly close to being hit from the Achilles heel of its economy. On the other hand, an opportunity that has been unraveling in the continent was covered in a relatively low-profile and sporadic fashion within the media. Recently, the Chinese have accelerated their trend of purchasing and investing in numerous European infrastructure projects, financial instruments and luxury brands, especially in the debt-stricken Mediterrenean countries such as Italy, Portugal and Greece.

As of 2014, the outward foreign direct investment from China surpassed the amount flowing into the country for the first time. The major recipients of this capital flow have also been significantly shifting, as the emphasis is moving from the Global South to the North. Latin America, once the uncontested Chinese OFDI recipient outside Asia, has now been relegated to the last place in the same ranking within a decade, as illustrated below.

The recent portfolio of the Chinese OFDI stock indicates the rising European appeal, intriguingly, at a time the Old Continent is suffering from its most severe crisis in decades. It must also be noted that more than $6 billion of Chinese investment stock already is present in Kazakhstan and billions more are to follow into other Central Asian countries within the context of the Silk Road project that envisions the development of a prosperous trade route between Europe and China.

So why have the Chinese been so eager to invest in a continent with no real prospect for growth in the near future and such serious financial uncertainties?

The answer initially lies in the basic financial principle of “buying  at low and selling at high” as many European assets are plunging in value due to chronic deflation and lack of domestic investment. The other major reason, arguably even more significant in terms of differentiating Europe from the rest of the world’s continents, is the prospect of brand value creation and maximisation. Despite the phenomenon that the global balance of power is shifting gradually from West to the East, most of the top global brands are still Western, with the exception of Japanese ones.

Take the Chinese investments in Italy for example. Not only is the Sino-Italian relationship is being empowered in the energy sector with the recent investments in ENI and Enel, the Chinese investors have also demonstrated a significant interest in luxury brands. Ferretti Yachts, a company that defaulted on its debt in 2009 has been recently purchased by the Chinese and De Tomaso, the brand of niche sports cars in financial woes, has also been up for grabs. Hotyork Investment, a Chinese group, said it would buy 80% of De Tomaso for only €60m. Hotyork believes that cars made with sexy Italian design, technology and craftsmanship will lure in the high-end Chinese customer. It plans to invest another €400m to extend production near Torino and market the brand abroad, especially in China. With such acquisitions, Chinese investors have gained on symbols of Italian elegance at bargain prices.

Portugal presents even more of an intriguing story, by being the 4th major destination of Chinese investment in Europe, despite accounting for less than 2% of the Eurozone’s economic output. In the ‘Quinas’, Chinese direct investment is reported to account for 45% of the total privatisation conducted within the last 5 years. The Chinese initially invested in power utility and infrastructure projects by acquiring a stake of 21% in Energias de Portugal in 2011 and 25% of REN, the national grid operator. By 2014, investments signalled to be rather concentrated in financial services, with Fosun Investments buying 80% of the Portuguese Caixa Seguros, the largest insurance company, and now bidding for assets of Banco Espirito Santo.

On the other end of the Mediterranean, Greece serves as a perfect hub within Silk Road scheme, with its extensive shipping network and well-developed ports. The Chinese shipping group COSCO had already acquired a concession to operate in the Piraeus port back in 2009 and is competing to buy the remaining 67% stake currently held by the Greek State. The move was initially blocked off by the socialist Syriza government, but will go through soon thanks to IMF concessions regarding the liberalisation of privatisations in the country. Also, in June 2014, Greece and China signed shipbuilding deals worth $3.2bn that will be financed by the China Development Bank.

In the1950s, the post-war Europe was in a state of ruins, only to be brought back to life with the famous Marshall Plan that poured capital from the US into the economies of its Western European allies. The Eurozone crisis is fortunately not as devastating and China may not have such an extensive plan as the one former Secretary of State George Marshall had for Europe in 1948. Yet, the Euro-crisis have clearly opened to China the doors of many otherwise unreachable European assets and given the urgency, the European governments have been unprecedentedly interested in drawing even more in. The capital inflow to Europe not only compensates for the continent’s stagnant economy, but also creates new opportunities for Chinese companies as the Middle Kingdom is entering a new normal of slower growth. Therefore despite all the alarming headlines, Europe was indeed never open for business from abroad at such a level for decades and as the saying goes, “you never want a serious crisis go to waste”.