REPORT: Chinese Investment in Europe 2014

Editor:
Ivana Casaburi
Director of the ESADE China Europe Club and Professor at ESADE

Index
Foreword
Executive summary
Chinese investment in Europe
China’s growth model
Outbound investment from Chinese corporations
Europe as a destination for Chinese investment
The impact of Chinese investment in Europe
The Chinese financial sector and its international presence
How the Chinese financial system operates
The major Chinese banks and their international presence
Case study. Successful growth in China and abroad: ICBC
Chinese investment in Spain
Economic relations between China and Spain
Chinese companies in Spain
Chinese firms investing in Spain – the facts
Case studies: Huawei, Huayi Compressor and Haier
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Chinese investment in Europe 2014
Index
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Foreword
Foreword
7

The shift in economic power towards Asia, and towards
China in particular, is one of the most significant events
to have been witnessed on the international economic
stage in recent years. China is fast rewriting its eco-
nomic and business relations around the globe and
changing the world as we know it. By way of example,
this Asian nation now plays a leading role in exports
worldwide, receives the bulk of inbound investments
and is a major purchaser of bonds. Its relations with
the different economic regions are also undergoing a
deep-rooted transformation as a result of this process.
China’s relations with Europe are also changing drasti-
cally. European multinationals and SMEs have now been
operating in China for some years. Commercial dealings
between Europe and China have multiplied and the two
regions have become priority business partners. China’s
investmentsinEuropehavecomeunderthespotlighttoa
lesserdegree,however;primarilybecausethisisstillanew
phenomenon, albeit one of great interest and projection.
Well aware of the significance of these developments,
ESADE Business School has embarked upon an in-dep-
th analysis of this new sphere of economic and busi-
ness relations between China and Europe. In particular,
ESADEgeo, in conjunction with its partners KPMG and
Cuatrecasas, is behind the first report to be published in
Spain on Chinese FDI in Europe. The report was drawn
up as part of the most extensive initiative undertaken
by the ESADE China Europe Club, a business platform
set up to raise awareness and boost economic and ins-
titutional relations with Chinese enterprises in Euro-
pe. Global Asia, ACCIO and Barcelona Activa have also
contributed to the elaboration of the present report.
This report aims to provide a detailed study of the
status of Chinese investment in Europe and will be
published annually. Each year the analysis will cen-
tre on a different sector of investment and a specific
country, the financial sector and Spain having been
selected as the focus for this first edition. The report
also incorporates case studies on Chinese firms that
have successfully expanded into Europe, and arti-
cles on key matters such as Chinese sovereign wealth
funds and investment regulations in force in Europe.
Javier Solana
President of ESADE Center for Global Economy and
Geopolitics
Foreword
8

Executive
summary
Executive summary
9

Executive summary
10
• China is already one of the world’s major investors,
with 18,000 companies located abroad in 177 countries.
In recent years its firms located overseas have multiplied
their operations and China has climbed from its posi-
tion as the 33rd foreign investor in 2000 to rank 3rd in
2012. China is leading the boom in foreign investments
by emerging countries. Its volume of investments world-
wide in the last three years is ahead of Russia’s, six times
greater than that of India and 29 times that of Brazil.
• China has a large number of global firms (89 among
the 500 largest in the world), such as Huawei, Cosco, ZTE,
ICBC, Lenovo and Haier. These companies are characte-
rised by their substantial management capacity, com-
mitment to innovation, decisive expansion strategy and
abundant financial resources, and have considerable ca-
pacity to transform and instigate major changes in the
sectors in which they operate.
• Chinese foreign direct investment (FDI) will conti-
nue to grow at great speed, driven by various institutio-
nal and economic factors inherent in the development
model, and particularly by the need to support a change
in the growth model through the transfer of knowledge,
technology and management techniques from abroad.
• Excluding offshore financial centres (OFCs), the Euro-
pean Union (EU) is the main destination for Chinese
investment in the world with an FDI stock of €26,768
million at the end of 2012, testimony to the robust trade
relations between the two economies (the EU is China’s
main trading partner).
• The EU offers excellent opportunities for Chinese
enterprises, such as the world’s largest high-purcha-
sing-power consumer market, or the possibility for its
firms to learn and acquire new competitive capacities.
These opportunities are set against a backdrop of con-
siderable macroeconomic, political and institutional sta-
bility, with infrastructure and quality human resources
of the highest level. The European economy has also de-
monstrated its openness to receive Chinese investments.
• Chinese FDI concentrates only 0.67% of total invest-
ments received by the EU. There is a huge margin for
growth in the coming years stemming from the inter-
nal factors mentioned previously, the decisive political
drive for greater international corporate expansion, and
the opportunities and advantages offered to Chinese
companies investing in the EU.
• 73.3% of Chinese FDI in Europe is concentrated in
six countries: Luxembourg, France, the United King-
dom, Germany, Sweden and the Netherlands. Invest-
ments have been made through a combination of small
or larger-scale acquisitions (such as Geely’s purchase of
the Swedish firm Volvo) and more than 700 new gre-
enfield investments, ranging from the opening of bank
branches by ICBC or Bank of China, the installation of
solar plants such as those set up by Suntech Power, and
logistics facilities such as those created by Hutchinson
or Cosco, to R&D centres, including those established by
ZTE or Huawei.
• In 2011 and 2012 Chinese investments in Europe
reached an all time high, amounting to €7,657 million
in the second of these years. This volume encompasses
122 projects implemented by Chinese firms in the EU in
that year (the latest year with available data).
• The proliferation of Chinese investments in the EU ca-
rries substantial advantages for Europe, such as direct
and indirect job creation; the generation of supply and
distribution activity in connection with multinationals;
the introduction of quality products at highly competi-
tive prices; headway in sector specialisation and the in-
troduction of new competitors; recapitalisation of strug-
gling companies; the opening up of the Chinese market
to European companies; and entry into third markets
through alliances and joint investments.
• The Chinese financial sector and its branches of ac-
tivity have made huge progress in recent years, but
there is still a wide margin for development and moder-
nisation. Interest rate liberalisation, financial market ex-
pansion, financial innovation and the emergence of new
businesses and operating practices, as well as shadow
banking regulations, are the main challenges the sector
will face over the next few years.
• The principal Chinese banks – Industrial and Com-
mercial Bank of China (ICBC), Bank of China, China Deve-
lopment Bank, Export Import Bank of China, China Cons-
truction Bank, Agricultural Bank of China, CITIC and Bank
of Communications – are present in the EU through ei-
ther representative offices or branches, and many have a
clearly defined strategy for growth in the EU.
• There are currently around 60 Chinese companies
operating in Spain, which is a minimal presence in
the light of the 12,000 or more foreign companies in

Ivana Casaburi. Director of the ESADE China Europe Club
and Professor at ESADE
Executive summary
11
Spain. However, in terms of the volume of Chinese in-
vestment projects received, Spain is the fourth European
country and China’s commitment to Spain has grown
considerably in recent years.
• Many of the major Chinese firms, such as Huawei,
Haier, Huayi, Lenovo, ZTE, COSCO, ICBC, Minmetals, Hut-
chinson, Kerry Logistics and Keeway Motor, are present
in Spain. Although in some sectors there is a business
presence rather than a base of Chinese companies, the
density and influence of Chinese enterprises in the ICT
and renewable energies sectors is notable.
• Chinese enterprises primarily invest in Spain to
open up new markets, support the sales network or
access distribution channels and qualified human re-
sources. Their intentions are therefore similar to those
of other foreign companies. The main challenges facing
Chinese firms in Spain are brand recognition and unders-
tanding the local market and consumers, in addition to
various regulatory aspects.
• Chinese companies have a positive perception of
the business climate in Spain, particularly in terms of
the quality and availability of human resources, market
size and access to third markets, port infrastructure and
openness to foreign investment. However, they are cri-
tical of the bureaucracy and the price of industrial land.

12
Authors:
Ivana Casaburi. PhD. Professor at ESADE.
Adrián Blanco. Researcher at ESADE China Europe Club.

Chinese invesment in Europe 2014
Chinese invesment in Europe
13
Chinese investment in
Europe
CHAPTER I

14
CHAPTER I. Chinese investment in Europe
1.1 China’s growth model
1.2 Outbound investment from Chinese corporations
1.3 Europe as a destination for Chinese investment
1.4 The impact of Chinese investment in Europe
Charts and tables
Chart 1. China’s share of worldwide GDP, trade and reserves
Chart 2. Growth in the Chinese economy (GDP anual growth)
Chart 3. Distribution of the main transnational companies (TNCs) worldwide by country of origin
Chart 4. Performance of the yuan against the US dollar and the euro
Chart 5. China’s share of commodities consumption (% of worldwide consumption)
Chart 6. China: global share of GDP, exports and incoming FDI (%)
Chart 7. Distribution of Chinese FDI stock in the world (2011) (%)
Chart 8. Chinese FDI stock in Europe (million €)
Chart 9. FDI Restrictiveness Index 2012
Table 1. China: main variables worldwide
Table 2. The 50 largest Chinese firms according to Fortune 500
Table 3. Main countries receiving cumulative Chinese investment globally and in Europe (%)
Table 4. Chinese investment in the European Union by country
Table 5.SAFE’s main investments in Europe
Table 6. China Investment Corporation’s investments in Europe
Boxes
Box I. Entities regulating Chinese foreign investment
Box II. Chinese investment in Europe: Adapting to a different legal system
Box III. Methodology concerning Chinese foreign investment
Box IV. The red dragon soars over Europe: Chinese sovereign wealth funds in Europe
Box V. The rise of Chinese multinationals

1.1 CHINA’S GROWTH MODEL
China as a world power
Since markets started to open up in 1979, China has
emerged as an economic power and its integration into
the worldwide economy has afforded it a position of
power and financial relevance that would have been un-
thinkable just a few years previously. China has been at
the helm of the global north-to-south shift in economic
power in recent years. Other Asian, Latin American and
indeed African economies have also played a substantial
role in this process; but the transformation in the world-
wide economy would be far less significant without the
input of China. In fact, according to World Bank1
calcu-
15
lations, if China’s 31 provinces were regarded as inde-
pendent economies, they would be among the 32 fas-
test-growing economies in the world.
China’s emergence as a world power is a recent pheno-
menon – coming about in the last decade – that has seen
its contribution to GDP, trade and global reserves reach
lofty heights. Present-day China is the driver of world
economy, surpassing both Germany and Japan in terms
of GDP, and all indications suggest that it will become
the largest economy by 2020. It is also the greatest glo-
bal exporter of goods and capital, the largest consumer
of raw commodities (agricultural and mineral), it holds
almost a third of the world’s currency reserves, has two
banks amongst the top ten worldwide, and 89 of its
corporations figure in the 2013 Fortune 500 ranking2
.
However, in terms of foreign direct investment (he-
reinafter FDI), China’s gradual integration into the glo-
bal economy is moving ahead at a slower pace than in
other areas. China ranks only 13th amongst outbound 1.“China 2030, Building a modern, harmonious, and creative society”. World Bank, 2012.
2. List of the world’s largest companies ranked by revenues.
Chart 1.
China’s share of worldwide GDP, trade and reserves
Source: United Nations Conference on Trade and Investment (UNCTAD) database, 2013

investors worldwide3
with a total share of 2.1%, far from
its 11% share of global GDP or goods exports.
Nonetheless, as we will see later on, various factors lead
us to believe that China will bridge this gap in the co-
ming years to become one of the world’s principal out-
bound investors. Specifically, the Economist Intelligence
Unit expects outbound investment from China to exceed
incoming foreign investment by 2017.
A transitioning growth model
Most international bodies, financial institutions and con-
sultancy firms agree that China will become the world’s
foremost economy in the coming years. However, in the
short and medium term growth in this driving force that
is China is likely to be a few percentage points short of
figures seen in recent years.
These spectacular growth rates have engendered a cer-
tain imbalance in the Chinese economy. Firstly, rapid
industrialisation has led to a marked decline in the en-
vironment and is a threat to public health in some areas
of the country. China ranks 116th in the “Environmental
Performance Index” drawn up each year by Yale Univer-
sity, which assesses environmental public health and
respect for the environment in 132 countries4
. Secondly,
the extensive loan-granting policy might have particu-
larly favoured state-owned companies as opposed to
private enterprises, undermining the growth capacity
of projects and companies that are both profitable and
productive, distorting figures and producing a“crowding
out” effect, as highlighted in a recent Brookings5
report.
In 2012, 43 of the 50 enterprises that received the ma-
jority of bank loans granted were state-owned6
. Thirdly,
coastal city development has given rise to notable diffe-
rences across areas of the country. The fast-moving ur-
ban development of these cities has built up a huge ag-
glomeration of inhabitants in the metropolitan outskirts
who live in precarious circumstances, while increased ac-
cess to information has sent demands for better working
conditions sky rocketing. According to Ma Jiantang of
the National Bureau of Statistics, salaries in urban areas
are three times higher than in rural zones, while people
working in the most profitable sectors earn up to four
times more than workers in less lucrative spheres7
.
Besides highlighting the issues inherent in rapid econo-
mic growth, these aspects constitute a hotbed that could
cultivate a loss of citizen trust in the political and finan-
cial system. World Bank data indicate that China is home
to more than a million millionaires, while more than 170
million people live on less than $2 a day8
. Meanwhile,
the rise in unit labour costs (ULC), which increased by a
factor of 2.4 between 2002 and 2010 in certain areas of
the country as a result of economic development, social
improvements and better living standards, could have a
negative impact on cost competitiveness for certain Chi-
nese enterprises9
. A range of trends is emerging, such as
a marked shift back to investing in western countries or
offshoring to other Asian economies10
. All of these fac-
tors have spurred the Chinese government to set in mo-
tion a decisive strategy to transform the growth model,
which in turn has a direct impact on its enterprises’drive
for foreign investment, as we will see later on.
The growth rate in the Chinese economy has been on
3.2012 data
4.http://epi.yale.edu/
5.“The Chinese Financial System. An Introduction and Overview”. Douglas J. Elliott and Kai Yan, Brookings,
2013
6.http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20130530000024&cid=1202
7.“China’s New Income Inequality Reform Plan and Implications for Rebalancing”. US-China Economic and
Security Review Commission, 2013.
8.“China 2030, Building a modern, harmonious, and creative society”. World Bank, 2012.
9.http://www.economist.com/news/special-report/21569570-growing-number-american-compa-
nies-are-moving-their-manufacturing-back-united
10.“The People’s Republic of China and Latin America and the Caribbean. Dialogue and cooperation for the
new challenges of the global economy”. Economic Commission for Latin America (ECLA), 2013.
16
GDP POPULATION EXPORT IMPORT FDI RESERVES
1 USA CHINA CHINA USA USA CHINA
2 CHINA INDIA USA CHINA CHINA+HK JAPAN
3 JAPAN USA GERMANY GERMANY UK SAUDI ARABIA
Table 1.
China: main variables worldwide
Source: UNCTAD and the IMF’s World Economic Outlook (WEO), 2013

the slide since 2010. The pace of growth in 2013 was
7.7%, the lowest figures for 14 years. How can we exp-
lain this decline in growth? There are three fundamental
reasons for the slowdown. First of all, the government
appears to be sacrificing growth percentage points by
curbing public expenditure in order to make the neces-
sary structural reforms to boost consumer spending and
shift from industry development to services. The second
facet is the middle income trap, which explains why a lar-
ge number of economies are having difficulties in sustai-
stimulus through both fiscal and monetary policy, and
a considerable volume of reserves to support its expan-
sion. The IMF has affirmed that the Chinese authorities
would take action if economic growth were persistently
below 7.5%11
. Moreover, China has already made major
inroads towards transforming its economic model, and
the improvements to its education system, its invest-
ment in knowledge and the dynamism displayed in re-
cent years all plant the seeds of optimism for the future.
The Chinese economy is in the midst of a quiet but
thorough transition from economic growth centred on
quantity (substantial increases in GDP) towards econo-
mic progress with a more qualitative slant.What is meant
by higher quality growth? It primarily entails a shift from
a growth model based on public investment to one fue-
ning their development to become high income coun-
tries. This is because growth through an accumulation
of factors is no longer sufficient to maintain economic
expansion; instead, an increase in productivity is nee-
ded, which proves far more complicated. Thirdly, growth
in FDI into China and in the country’s export sales is so-
mewhat on the decline due to the weak global economy,
particularly in Europe, China’s main trading partner. Chi-
na is nonetheless on firm footing to address its sliding
economic growth. It has a wide margin for economic
lled by domestic consumption and requires economic
sectors to gradually take on activities typical of the hi-
gher end of the value chain. The aim is also to continue
nurturing the private sector with a view to increasing its
weight as an economic driver, while combining the force
of state-owned enterprises (“SOEs”) with a greater boost
to private SMEs.The government’s commitment to chan-
ging the economic model was confirmed in the 12th Fi-
ve-Year Plan12
, which was approved in March 2011 and
will remain in force until 2015. This document serves as a
roadmap to assist the authorities in determining econo-
mic policy, and provides six principal guidelines for the
coming years.
Chart 2.
Growth in the Chinese economy (GDP annual growth)
Source: World Economic Outlook, IMF, 2013
11.“World Economic Outlook (WEO)”. FMI. 2013.
12.“The 12th Five-Year Plan of the People’s Republic of China (2011-2015)”. Economic and Commercial Office
of Spain in Shanghai.
17

The two main priorities pertain to restructuring the eco-
nomy, with the focus on boosting domestic consump-
tion over and above other sources of growth. The third
point aims to transform and modernise industry in China
with a view to moving Chinese enterprises up the inter-
national value chain, by placing R&D spending at 2.2%
of GDP and increasing the number of patents to 3.3 per
10,000 inhabitants. The fourth goal relates to the third
and focuses on environmental protection and reducing
pollutant gases. The fifth target addresses coordinated
regional development and centres on improving wealth
distribution (development included) and the standard of
living in general, incorporating a social security reform
that facilitates domestic consumption as opposed to sa-
ving. The ultimate goal is to create and consolidate an
urban middle class. The government’s sixth priority is to
foster the international expansion of Chinese enterprises
and promote the creation of global Chinese companies.

Of particular interest for this study, within the context
of the 12th Five-Year Plan, is the Chinese government’s
focus on developing seven specific economic sectors,
which it denominates “strategic emerging industries”. It
is reasonable to assume that the investments made by
enterprises operating in these sectors, either in China or
abroad, will benefit from tax breaks, state subsidies and
administrative incentives. We can therefore expect Chi-
nese firms to engage in a greater volume of foreign ope-
rations in the coming years across all economic sectors,
although most specifically in the fields of infrastructure,
energy, agriculture, high-tech, environment, healthcare,
agri-food and consumer goods.
Furthermore, in 2006 China announced that it would
continue to enforce rigorous control over seven strate-
gic sectors, primarily through the SOEs.These sectors are
defence, electricity generation and distribution, oil, tele-
communications, steel, civil aviation and water transpor-
tation. As such, the government can also be expected to
support outbound investment that is able to substantia-
lly improve the domestic operations of these sectors.
In late November 2012, the 18th Central Committee of
the Communist Party of China held its plenary session, at
which the Chinese heads of state announced their stra-
tegic lines of action and the main reforms to be imple-
mented in the economic sphere in the coming years.The
Chinese government once again conveyed its conviction
of the need to keep making inroads into the transforma-
tion of the economic model on the basis of higher do-
mestic consumption and increased economic moderni-
sation, in turn founded on a gradual opening-up of the
market and on innovation.
The main commitments enumerated include five en-
vironment-orientated initiatives. In the first instance,
the Chinese government has announced an extension
to the scope of public services, enabling Chinese fami-
lies to reduce the amount allocated to savings, thereby
freeing-up resources for consumer spending. Secondly,
it aims to reduce State and SOE intervention in the eco-
nomy, instead relying more heavily on market forces,
SMEs and the services sector. To this end, and amongst
other measures, barriers to the entry of private capital
will be lifted in certain economic sectors, and work to
achieve transparency and regulatory harmonisation for
foreign companies will be ongoing.Thirdly, in areas whe-
re the rapid industrialisation of recent years has severely
harmed the environment, priority will be given to pro-
tecting resources, as opposed to strictly economic crite-
ria. The fourth initiative entails upping the fight against
the corruption that pervades certain state business cir-
cles. Fifth on the agenda, local governments will be per-
mitted to issue securities in the financial markets, which
will enable them to increase their financing capacity.
1.2 OUTBOUND INVESTMENT FROM CHINESE
CORPORATIONS
Historical background
In 1979 the opening-up of China’s economy to the outsi-
de world reached a crossroads, when Deng Xiaoping in-
troduced regulatory changes to foster China’s economic
relations outside the country, in various spheres. One of
these changes authorised the SOEs to undertake cer-
tain operations abroad, under State Council supervision.
Throughout the 1980s, various regulatory barriers remai-
ned in force. Coupled with the scant competitiveness of
Chinese enterprises (both private and state-owned), this
meant that China’s FDI operations amounted to just USD
3,600 million, according to the UNCTAD13
.
The opening-up of FDI to new economic sectors and the
financial support and tax breaks received increased in-
vestments made by Chinese firms to USD 23,200 million
in the 1990s, a volume eight times that seen in the prece-13. United Nations Conference on Trade and Investment
18

ding decade, although the Chinese economy was still far
from achieving its potential. By the mid 1990s the three
major Chinese oil companies (China National Petroleum
Corporation, Sinopec and China National Offshore Oil
Corporation — CNOOC) had yet to engage in outbound
investment.
The major turning point that saw a boom in Chinese
outbound investment arrived in 2000 when President
Jiang Zemin’s “Go Global” policy came into force with a
view to boosting outbound FDI. Until 2003 China’s fo-
reign operations were essentially limited to SOE invest-
ments in the manufacturing and commodities sectors.
The “Go Global” policy was incorporated into the 10th
and, later, the 11th Five-Year Plan (2001-2005 and 2005-
2010, respectively), and therefore became a priority un-
der Chinese government policy. From then on, foreign
operations conducted by Chinese enterprises not only
became more frequent but also involved larger volumes.
“Go Global” offered enterprises favourable policies and
procedures to finance their operations, investment and
export insurance, access to foreign currency, tax relief,
information on priority target destinations, as well as tra-
ining in international expansion and languages.
In recent years the Chinese government has implemen-
ted various measures to further the liberalisation process
and boost outbound investment. In 2004 it launched its
soft loan programme for these operations, favouring
access to natural resources and technology abroad in
particular, as in the case of the hardware manufacturer
Lenovo, which gained immediate access to 80 foreign
markets when it purchased IBM’s PC unit. Furthermore,
the interests of Chinese enterprises began to be repre-
sented at bilateral government summits, SINOSURE14
started to offer cover for investment risk, MOFCOM15
began to publicise business opportunities in different
countries, and the Export-Import Bank of China16
opened
the way for outbound investment transaction financing.
In 2006 foreign economic cooperation areas began to
form in other emerging nations, such as those created
in Russia, Nigeria, Cambodia and Pakistan, with a view to
boosting the presence of Chinese firms.
The boom in Chinese outbound investment
These opening-up measures implemented from 2000
onwards culminated in a boom in Chinese FDI, which
amounted to USD 218,900 million in the 2000-2009 de-
cade. From the introduction of the “open door policy” in
1980 up until 2009, Chinese FDI increased its share of
worldwide foreign investment from 0.007% to 2.1%. Chi-
na has also moved up the worldwide FDI stock ranking
from zero outbound FDI in 1980 to 13th place in 2012,
surpassing countries such as Russia, Singapore, South
Korea, India, Mexico and Brazil. Nonetheless, as indica-
Chart 3.
Distribution of the main transnational companies (TNCs) worldwide by country of origin
Source: United Nations Conference on Trade and Investment (UNCTAD) database, 2013
14. China Export & Credit Insurance Corporation,
China’s principal state-owned credit insurance enterprise.
15. Ministry of Commerce of the People’s Republic of China.
16. One of China’s principal state-owned banks.
19

ted above, China’s presence abroad far from echoes its
position in other variables such as GDP or as an exporter
of goods, and falls notably short of the world’s other ma-
jor economies. According to the UNCTAD, China has only
two enterprises amongst the 100 leading transnational
companies in terms of asset stocks held abroad: Hutchin-
son Whampoa17
(31st) and CITIC18
(53rd).
Most outbound foreign investments made by Chinese
enterprises have been carried out by SOEs (according to
the MOFCOM, in 2009 only 7.5% of companies engaging
in outbound foreign investments were private Chinese
firms) and companies funded through private capital
play an even smaller role. This pattern is fast changing,
however, and the number of private firms (34 million
according to the SAIC19
) involved in international expan-
sion is growing. In any case, in light of the current com-
mitment towards greater market freedom and widening
the way for private capital in the Chinese economy, the
number of private firms engaging in outbound invest-
ment is expected to increase substantially in the coming
years. Meanwhile, China is already the high growth mar-
ket that engages in the greatest number of investments
in mature economies, having conducted more than 100
operations of this type in 201220
.
Chinese companies nowadays are manifestly present
on the world map and the brand image of many of the-
se firms is becoming increasingly prominent. Lenovo
sponsors the American National Football League in the
United States, Huawei had its own editorial column in
The Economist last year, and major city sea ports are
jam-packed with COSCO containers. An analysis of the
Fortune 500 ranking also highlights the rapid growth
of Chinese companies, which numbered 16 in the 2005
ranking and 89 in the 2013 ranking, blazing the trail for
international expansion amongst emerging economies.
The number of companies in the 2013 list from the other
emerging economies was minimal compared with the
89 Chinese enterprises: Brazil 8; India 8; Mexico 3; and
Russia 7. According to MOFCOM21
data, by the end of
2011 over 13,500 Chinese firms had set up 18,000 com-
panies abroad in 177 countries. Moreover, Chinese out-
bound foreign investment has created 1.2 million jobs,
of which 888,000 are held by local workers. These official
figures indicate that China’s accumulated FDI stock held
abroad at that date amounted to USD 424,780 million;
of which USD 141,840 million (33.4% of the total) reflec-
ted equity investments or shareholdings, USD 170,650
million (40.2%) were reinvested profits and USD 112,290
million (26.4%) were other investments.
The 2012 data have confirmed this trend for greater
worldwide presence of Chinese outbound investment.
China moved up from sixth outbound investor worldwi-
de in 2011 to rank third in 2012 for the first time — with
investments of USD 84,000 million, an all-time high —
falling short only of the United States and Japan22
. In ag-
gregate, the volume invested abroad by China and Hong
Kong (USD 168,000 million) would rank second amongst
outbound investors worldwide, the position it holds as
an FDI recipient. As such, China is already a major glo-
bal investor, and the volume of operations conducted
abroad by Chinese companies exceeds that of British,
German, Canadian and Brazilian firms.
Drivers of Chinese outbound investment
The drivers of Chinese outbound FDI will become in-
creasingly consolidated and extensive in the years to
come, and investments made abroad by Chinese firms
will grow as a result. Rhodium Group23
projects USD 1-2
trillion in global Chinese outbound FDI from 2010-2020,
and USD 250-500 billion in Europe in both M&A and gre-
enfield investment. Six macro factors in particular are ex-
pected to lead to an increase in Chinese outbound FDI in
the coming years. These are as follows:
1. High level of savings in the Chinese economy. Chi-
na has become the world’s foremost exporter of capital.
This is in part due to cultural factors, limited investment
alternatives for the average citizen and scant develop-
ment of a healthcare system. The exported capital is lar-
gely invested in US treasury bonds with a moderate inte-
rest rate, which should push China to increase its foreign
operations as it seeks out a higher return on its capital
investments.
2. Pressure on the yuan. China’s massive reserves con-
tinue to exert upward pressure on the yuan, and the go-
vernment will need to encourage the outflow of capital
via foreign direct investment if it wants to keep exchan-
ge rates stable against the dollar. In 2012 China’s official
17.A holding company headquartered in Hong Kong and operating primarily in the ports and
telecommunications sector.
18.A Chinese holding company engaged in different industrial activities involving, for exam-
ple, capital goods.
19.State Administration for Industry and Commerce, the body responsible for legislation
governing industrial activity and commerce.
20.“Resetting the Compass: Navigating success in deal-making for mature market sellers and
high growth market buyers”. PricewaterhouseCoopers, 2013
21.“2011 Statistical Bulletin of China’s Outward Foreign Direct Investment”. MOFCOM, 2013.
22.“World Investment Report 2013”. UNCTAD, 2013
23.“China Invests in Europe. Patterns, Impacts and Policy Implications”. Rhodium Group, 2012.
20

Table 2.
The 50 largest Chinese firms according to Fortune 500
RANKING FORTUNE 500 COMPANY SECTOR REVENUES ($b)
1 (4) SINOPEC CRUDE OIL 428,2
2 (5) CHINA NATIONAL PETROLEUM CRUDE OIL 408,6
3 (7) STATE GRID ELECTRICAL POWER 298,4
4 (29) ICBC BANKING 133,6
5 (50) CHINA CONSTRUCTION BANK BANKING 113,4
6 (64) AGRICULTURAL BANK OF CHINA BANKING 103,5
7 (70) BANK OF CHINA BANKING 98,4
8 (71) CHINA MOBILE COMMUNCATIONS TELECOMMUNICATIONS 96,9
9 (76) NOBLE GROUP COMMODITIES 94
10 (80) CHINA STATE CONSTRUCTION CONSTRUCTION 90,6
11 (93) CHINA NATIONAL OFFSHORE OIL CRUDE OIL 83,5
12 (100) CHINA RAILWAY CONSTRUCTION INFRASTRUCTURE 77,2
13 (102) CHINA RAILWAY GROUP INFRASTRUCTURE 76,7
14 (103) SAIC MOTOR AUTOMOTIVE 76,2
15 (111) CHINA LIFE INSURANCE INSURANCE 73,7
16 (119) SINOCHEM GROUP COMMODITIES 71,8
17 (134) CHINA SOUTHER POWER GRID ELECTRICAL POWER 66,7
18 (141) CHINA FAW GROUP AUTOMOTIVE 64,9
19 (146) DONGFENG MOTOR AUTOMOTIVE 61,7
20 (161) CHINA NORTH INDUSTRY GROUP MISCELLANEOUS 58,1
21 (172) CITIC GROUP MISCELLANEOUS 55,4
22 (178) SEUNHUA GROUP COMMODITIES 54,5
23 (181) PING AN INSURANCE INSURANCE 53,2
24 (182) CHINATELECOMMUNICATIONS TELECOMMUNICATIONS 53,4
25 (187) CHINA RESOURCES NATIONAL COMMODITIES 52,4
26 (192) CHINA MINMETALS COMMODITIES 51,8
27 (196) CHINA POST GROUP SERVICES 50,9
28 (212) CHINA SOUTH INDUSTRY GROUP MISCELLANEOUS 48
29 (242) AVIATION INDUSTRY OF CHINA AVIATION 47,4
30 (213) CHINA COMMUNICATIONS CONSTRUCTION CONSTRUCTION 47,3
31 (222) BAOSTEEL GROUP COMMODITIES 45,7
32 (231) CHINA HUANENG GROUP MISCELLANEOUS 44,3
33 (243) BANK OF COMMUNICATIONS BANKING 43,1
34 (256) PEOPLE'S INSURANCE OF CHINA INSURANCE 40,8
35 (258) CHINA UNITED NETWORK COMMUNICATIONS 40,6
36 (266) JARDINE MATHESON HOLDING 39,6
37 (269) HEIBEI IRON & STEEL GROUP COMMODITIES 39,3
38 (273) ALUMINUM CORP OF CHINA COMMODITIES 38,8
39 (277) CHINA NATIONAL AVIATION FUEL GROUP AVIATION 38,4
40 (292) CHINA RAILWAYS MATERIALS INFRASTRUCTURE 37,2
41 (299) CHINA GOUDIAN ELECTRICITY 36,8
42 (302) CHINA METALLURGICAL GROUP COMMODITIES 36,8
43 (311) JIZHONG ENERGY GROUP ENERGY 35,3
44 (315) HUAWEI INVESTMENT & HOLDING ICT 34,9
45 (318) JIANGSU SHAGANG GROUP MISCELLANEOUS 34,6
46 (319) CHINA NATIONAL BUILDING MATERIALS CONSTRUCTION 34,5
47 (322) SHOUGANG GROUP MISCELLANEOUS 34,3
48 (326) SINOMACH MACHINERY 34
49 (328) WUHAN IRON & STEEL COMMODITIES 33,9
50 (329) LENOVO GROUP HARDWARE 33,9
Source: Fortune 500 (2013)

reserves totalled USD 3.3 trillion, with 61.2% in US do-
llar-denominated assets, 24.2% in euro-denominated
assets, 4% in yen-denominated assets, 3.3% in pounds
sterling and 7.3% in other currencies24
.
The performance and strength of the euro, and indeed
the other currencies, plays a key role in terms of both
the distribution of Chinese reserves and the execution
of operations in this currency. Furthermore, the yuan is
likely to be increasingly used in trade and investment
operations in the coming years. Greater use of the yuan
in investments is expected to have a positive impact, by
eliminating currency risk and reducing the need for hed-
ging instruments, amongst other advantages.
3. Political impetus to increase investments. The
efforts of companies — primarily state-owned enterpri-
ses but also private firms — to engage in foreign opera-
tions will be boosted through a political drive, particu-
larly in the infrastructure, energy, agriculture, high-tech,
environment, healthcare, agri-food and consumer goods
sectors. The 12th Five-Year Plan (2011-2015) reflects an-
nual FDI growth of 17% for 2015, with a projection of
USD 150,000 million and 1 million Chinese employees
working abroad25
.
4. The need for commodities. China needs to maintain
and expand its investments in countries with abundant
supplies of foodstuffs, natural resources and commo-
dities — particularly Sub-Saharan and Latin American
nations — to prevent bottlenecks in its economic deve-
lopment. As a percent of the global production, China’s
consumption during 2010 accounted for about 20 per-
cent of non-renewable energy resources, 23 percent of
major agricultural crops, and 40 percent of base metals26
.
In the coming years, demand for these products is ex-
pected to keep rising and a need for new commodities
may in turn emerge, due to the forecast change in the
growth model.
5. Access to capital. On the one hand, Chinese sta-
te-owned enterprises benefit from considerable ease of
access to financing for foreign operations from state-ow-
ned financial institutions. On the other hand, companies
having difficulties in securing financing on the Chinese
capital market opt in many cases to invest in Offshore
Financial Centres (OFCs), through which they can gain
access to financing.
6. Desire for change in the growth model. The pressu-
re on Chinese enterprises to move up the value chain has
led numerous firms to set up R&D centres abroad or to
acquire interests in the share capital of more technologi-
Chart 4.
Performance of the yuan against the US dollar and the euro
Source: Exchange rates extracted from the OANDA database
24.“A World of Known Unknowns: A Closer Look at the Allocation of China’s
Foreign Exchange Reserves”. Peterson Institute, 2013
25.“MOFCOM identifies the major tasks and priorities for foreign investment
during the 12th Five-Year Plan period”
26.“China’s Impact on World Commodity Markets”. IMF, 2012
22

cally advanced western companies. This strategy, which
is greatly encouraged by the government, cannot repla-
ce or complement a company’s own technological deve-
lopment and innovative processes within the domestic
market.
The drive for innovation
Whereas in the previous decade China emerged as a
worldwide economic power, in this decade it is positio-
ning itself as a force in innovation. Many Chinese compa-
nies nowadays are highly efficient; they have integrated
the entire value chain and arrived at the technological
frontier. In the years to come a large number of new firms
— including more and more private companies — are
forecast to rise to leadership ranks, as could be expected
of the world’s number two economy. At present, approxi-
mately 65% of patents and 75% of Chinese technological
innovation originate in the private sector27
, and accor-
ding to Forbes magazine four Chinese enterprises rank
amongst the world’s top 30 innovative companies: Baidu
(search engines), Tencent (mobile services), Kweichouw
Moutai (liquor production and sales) and Henan Shuan-
ghui (meat production)28
.
Many companies are expected to make major strides
in their specialisation process, and to exploit their com-
petitive edge to export to global markets. Huawei (the
company that registered the most technological patents
worldwide in 2008), ZTE and Suntech are prime exam-
ples of cutting-edge Chinese enterprises that rank as
global leaders for their sector, and give an indication of
the capacity of Chinese corporations to develop major,
highly competitive business groups in the technology
sector. In the coming years a considerable number of
Chinese private sector firms should be able to move into
the international sphere ready to compete in sectors
such as assembly and parts, PVC, biotechnology, nano-
technology, high-density batteries, high-speed trains,
telecommunications equipment, turbines, aircraft parts,
satellites, supercomputers, goods containers, internet
services, and many more products29
.
Chart 5. China’s share of commodities consumption
(% of worldwide consumption)
Source: IMF, 2012
27.“Remarks in the 3rd conference of commending the outstanding builders of Chinese characteristic socialism
in the private sector”. Jia Qinglin, People’s Daily (2009)
28.Forbes list of the World’s Most Innovative Companies, 2013. For details of the methodology employed, go
to: http://www.forbes.com/sites/innovatorsdna/2013/08/14/how-we-rank-the-worlds-most-innovative-com-
panies-2013/
29.“China 2030, Building a modern, harmonious, and creative society”. World Bank, 2012.
23

BOX I. ENTITIES REGULATING CHINESE FOREIGN IN-
VESTMENT
Although the process that Chinese companies must un-
dertake to invest overseas is more complex than in Wes-
tern countries, China has taken a huge step forward in
recent years in terms of facilitating these operations.
The roles of each of the entities involved in the process
have been defined, procedures have been eliminated, re-
gulations have been simplified, the approval process for
operations under USD 10 million has been decentralised,
and waiting times have been shortened. Additionally, ac-
cess to foreign currencies has been made substantially
easier and more flexible for companies wishing to carry
out operations abroad.
There are currently eight official institutions involved
in regulating foreign investment. The State Council, the
chief administrative authority of the Chinese govern-
ment, establishes the main policies and regulations. The
MOFCOM30
oversees the main operations and under-
takes the bilateral and multilateral negotiations concer-
ning foreign investment. SAFE31
monitors and manages
the flow of foreign currencies into and out of the country.
The NDRC32
determines the countries in which Chinese
investment will receive financial support and participa-
tes in the process for approving operations. The MOF33
proposes the fiscal framework and exemptions for fo-
reign investment. The PCB34
coordinates the manage-
ment of foreign currencies with other monetary policy
objectives. The CSCR35
approves and oversees the listing
of Chinese companies overseas as well as their access to
the capital market. SASAC36
is the ultimate investor and
exercises control over the SOEs, including their expan-
sion processes.
Additionally, there are two large Chinese state-owned
banks that channel public resources into these opera-
tions. The responsibilities of the EXIM Bank include that
of allocating a substantial part of its resources to finan-
cing foreign operations, in particular those relating to
the exploration of natural resources, infrastructure and
technology projects. The China Development Bank
(CDB) performs a similar function. Moreover, there are
specific funds to which Chinese companies have access
to finance their expansion, including one fund earmar-
ked for investment in mining projects and the extraction
of other natural resources (excluding oil and natural gas),
and another for technological cooperation, which can
broadly be used for agricultural projects.
30.Ministry of Commerce: www.english.mofcom.gov.cn
31.State Administration of Foreign Exchange: www.safe.gov.cn
32.National Development and Reform Commission: en.ndrc.gov.cn
33.Ministry of Finance: www.english.mofcom.gov.cn
34.People’s Bank of China: www.pbc.gov.cn/
35.China Securities Regulatory Commission: www.csrc.gov.cn/pub/csrc_en
36.State Asset Supervision and Administration Commission: www.sasac.gov.cn/
24

BOX II. CHINESE INVESTMENT IN EUROPE: ADAPTING
TO A DIFFERENT LEGAL SYSTEM
Alexandre Ibáñez. Economist and Lawyer at Cuatre-
casas, Gonçalves Pereira
Since 2008, China has established itself as the emerging
economywiththehighestvolumeofcross-borderinvest-
ments, paving the way for the globalisation of Chinese
firms, which had until then concentrated their efforts on
the domestic market. One of the most important aspects
a multinational group must bear in mind when deciding
whether to invest in a particular country is the potential
impact that the legal and regulatory framework in force
in that country could have on its activity, its business mo-
del and the return on its investment.
Differences between the legal systems in place in China
and the rest of the world have raised doubts as to the
ability of Chinese companies to adapt to the rules of play
— that is, the legal framework — applicable in the coun-
tries in which they choose to invest and conduct their
activities. Unlike in other countries, the constitutional
configuration of the framework prevailing in China is
founded on a socialist system, whereas elsewhere a com-
mon law or civil law structure has been adopted, as is the
case in Spain. The Chinese legal system does, however,
currently resemble the civil law system adopted by most
European countries.
The Chinese legal system is influenced by a thou-
sand-year old tradition, as is evident in the singular way
in which laws are devised and applied. As such, the ques-
tion lies in determining which aspects of European legal
systems should be subject to a more in-depth analysis by
a Chinese firm considering the possibility of investing in
those European countries. Focusing specifically on busi-
ness law — which encompasses commercial law, labour
law and tax law, as well as dispute resolution through the
courts, among other factors — we should analyse whe-
ther the rules applicable in China and those in force in
Spain, for example, differ radically from the Chinese in-
vestor’s viewpoint.
First and foremost, China has made increasing efforts in
recent years to adapt and modernise its business law,
guided by regulations prevailing in the United States
and certain European countries, so that it is compa-
rable with legislation in force in many other countries.
New contract, labour, tax and procedural laws, amongst
others, have been adopted within a relatively short pe-
riod of time (many of these laws have been in force for
five years or under), causing quite a revolution for all pla-
yers regulated by the Chinese legal framework. As such,
the effective application of these new regulations by the
Chinese government and the companies concerned ca-
lled for a transition period — particularly for the benefit
of the Chinese government itself on many occasions —
and therefore these rules were not fully complied with
from the outset of their application.
Secondly, China presents a phenomenon that does not
generally occur in most countries in which Chinese firms
invest and conduct their activities, and which consists
of the constant legal requirement to obtain approval
from the Chinese authorities for the majority of invest-
ment projects or other relevant operations undertaken.
This can in turn necessitate intense negotiations with
the government whereby, on many occasions, the legal
regulations applied are strictly as interpreted by the go-
vernment, with no margin for discrepancy among those
subject to the administration in question.The phenome-
non could thus be considered outright interventionism
that in some way impacts on private initiatives. Never-
theless, it cannot be denied that operations approved or
supervised by the Chinese government will enjoy consi-
derable legal security from the outset.
By way of example, in certain circumstances the regula-
tions applicable to foreign investments made by Chinese
firms mean that the approval of the National Develop-
ment and Reform Commission is required, at either na-
tional, provincial or local level depending on the amount
of the investment or the destination economic sector.
Government approval is likewise needed to incorporate
an investment firm (joint-venture contract), for example.
In other cases, while government approval may not be
necessary, the pertinent authorities would nonetheless
exercise a certain degree of supervision. For instance,
payments abroad would on occasions be subject to su-
pervision by the authority in charge of monitoring cu-
rrency exchange, as well as verification that the payment
in question had been taxed appropriately in China.
Thirdly, a marked difference, and one not only apparent
to Chinese investors, is the vast range of regulations wi-
thin the European Union geographical area. Although
the European market is configured as a single market,
and while it is undeniable that European institutions are
making a concerted effort in terms of harmonisation,
foreign investors are still faced with diverse commercial,
25

labour and fiscal laws in each European country in which
they invest. On top of this disparity, we must also consi-
der the array of regulations existing in the different re-
gions of each European country.
Finally, brief reference should also be made to the on-
going improvements in the Chinese legal system in
terms of training for judges and enforcement of rulings
handed down. While it is a widespread belief that the-
se improvements are making headway in the right di-
rection, it is no less true that the legal systems of other
countries such as Spain still offer a far greater degree of
assurance.
Having highlighted the main differences in the appli-
cable legal framework that a Chinese investor is likely
to encounter in Spain, emphasis should also be placed
on the planning and conflict prevention processes with
which Chinese investors could come face to face, either
alongside other financial players or with the govern-
ment. From a legal perspective, the principle prevailing
in Europe is that citizens and companies are subject to
the rule of law, and must therefore respect the legisla-
tion applicable to operations of legal relevance. This sta-
tement could, a priori, also be made of the Chinese legal
system. However, the primary difference with respect to
a legislative structure such as that in place in China lies in
how the law is applied and compliance is enforced.
Whereas in China a company must seek the approval of,
or be supervised by the government, which takes effect
before any operation with legal relevance is conducted,
a company in Spain would need to analyse and perhaps
interpret the legislation applicable to the transaction it
wishes to carry out, which must then be performed with
the utmost diligence. It is clear, then, that monitoring of
compliance with legal provisions in Europe — and in-
deed the consequences of any failure to comply — oc-
curs a posteriori. Chinese firms doing business abroad
should therefore employ preventative law and seek an
advisor to assist them in ensuring that their operations
are conducted in accordance with the legal framework
applicable in each country.
On the flip side, the multi-faceted rule of law will also
enable Chinese companies subject to government pro-
cedures to resolve their disputes with either third parties
or the administration of the foreign states in which they
invest. As such, the absence of prior government con-
trols, notwithstanding exceptional cases, would be offset
by the possibility of being able to defend, in the corres-
ponding jurisdiction, any differing legal interpretations
provided for by a regime that offers firm assurance.
Chinese companies doing business in Spain should the-
refore take into account the crucial need to comply with
the applicable legal framework. While this framework
would evidently differ from that in force in China, these
substantive differences should be no obstacle to Chine-
se enterprises conducting their activities, and should
not affect their business profits. Nonetheless, Chinese
firms should equip themselves with the necessary tools
to enable compliance with applicable regulations, with
substantial assurance, by means of appropriate legal
planning.
26

BOX III. METHODOLOGY CONCERNING CHINESE FO-
REIGN INVESTMENT
The measurement of Chinese investment in Europe is
particularly complex. The main statistical limitations en-
countered, which have a direct impact on the quantity
and quality of the data used in this report, are detailed
below.
1.None of the Chinese investments made prior to
2004 meet the relevant international standards (OECD
Benchmark Definition of Foreign Direct Investment and
IMF Balance of Payments Manual, Fifth Edition), and the-
refore the data on these investments is very recent.
2.There is some discrepancy between the official data
published by the FDI provider (MOFCOM and the Natio-
nal Bureau of Statistics) and the FDI recipient (Eurostat).
3.The data published on Chinese foreign investment
refer to a longer period than European data and their pu-
blication is often irregular.
4.A significant portion of investments are channe-
lled through Offshore Financial Centres (OFCs) and tax
havens such as the Cayman Islands, the British Virgin Is-
lands and Luxembourg. As there are no statistics on the-
se investments it is not possible to determine the final
destination of these operations.
5.Chinese investments are also subject to round-tri-
pping. Numerous Chinese companies invest in OFCs,
particularly in Hong Kong, to obtain access to the capital
market, before then re-investing their funds in China, re-
sulting in a round-tripping operation37
.
6.Furthermore, since Hong Kong became a special
administrative region of China38
in 1997, investment
transactions and operations between mainland China
and Hong Kong have been accounted for as FDI and the-
re are no data indicating the percentage of these invest-
ments for which the final destination is located overseas.
At the end of 2011, 36.3% of the FDI stock in Hong Kong
came from mainland China, the principal investor in the
administrative region. In turn, 42.1% of outbound fo-
reign investment from Hong Kong was ultimately inves-
ted in mainland China, which is also the main destination
of FDI from Hong Kong39
. However, there are no available
data that would allow us to determine what percentage
of total FDI in Hong Kong from mainland China is ulti-
mately invested overseas, or what percentage returns to
China (round-tripping). Additionally, it is not possible to
determine which foreign countries are the ultimate reci-
pients of investment from Hong Kong, as 88% of this in-
vestment is concentrated between mainland China and
three OFCs: the British Virgin Islands, the Bermudas and
the Cayman Islands.
Subject to all these limitations, in this report we have
used both state and private sources available for the
analysis of Chinese investments in Europe. In the first
instance we used the two available official sources: MO-
FCOM on the Chinese side and Eurostat on the European
side. The private sources referred to were Zephyr and
Bloomberg for mergers, acquisitions and shareholdings
(M&A), and E&Y and FDI markets for greenfield invest-
ments. We also analysed a number of recent reports on
Chinese investments in Europe, as well as press releases
published by companies and a range of press articles.
37.“Round-Tripping Foreign Direct Investment in the People’s Republic of China: Scale, Causes and Implica-
tions”. Geng Xiao, 2004.
38.People’s Republic of China excluding Hong Kong and Macao
39.“External Direct Investments Statistics of Hong Kong 2011”. Census and Statistics Department Hong Kong
Special Administrative Region, 2012.
27

1.3 EUROPE AS A DESTINATION FOR CHINESE
INVESTMENT
EU-27, the main destination for FDI in the world
In recent years the sovereign debt crisis has reduced sou-
thern European countries’ economic capacity and given
rise to doubt as to the political and economic stability of
the EU, and in particular the euro. However, the EU-27
remains the main destination for FDI in the world. The
EU is the largest economy in the world in 2013, with a
total GDP of USD 17,2 trillion, ahead of the United States
(USD 16.7 trillion) and China (USD 8.9 trillion)40
. In addi-
tion, its domestic market is the largest in the world in ter-
ms of purchasing power, with 501 million people and a
per capita GDP of USD 34,50041
. The EU-27 is also one of
the most open economies in the world, with a volume of
both inbound and outbound FDI more than three times
that of the emerging economies combined42
. In addition,
it is the largest exporter of agricultural products, com-
modities, manufactured goods and services, well ahead
of the United States and Asia as a whole43
.
The EU is also very stable at a macroeconomic level – pro-
tected by the European Central Bank’s commitment to
moderate rates of inflation – and has a sound institutional
structure. In microeconomic matters, such as infrastructu-
re and human capital, the EU is one of the leading econo-
mies in the world. This is reflected by the greater density
of roads and mobile phone subscribers than the US or
Japan44
, or by the fact that almost 20 million Europeans
are studying undergraduate or postgraduate university
courses45
. All of these factors, in addition to the magnitu-
de of the EU and its economic capacity, make Europe an
attractive destination for foreign investment.
However, a number of factors weaken the EU’s position
as an economic power. One key factor is its less flexible
production facets, especially labour, making it difficult
for businesses to adapt the workforce to their require-
ments. The EU is also uncompetitive at a bureaucratic
level, and according to the World Bank’s Doing Business
project46
, just six European economies are among the
20 best in the world when it comes to establishing a
Chart 6.
Global share of GDP, exports and incoming FDI (%)
Source: World Economic Outlook database of the IMF and UNCTAD, 2013
40.“World Economic Outlook”. International Monetary Fund, 2013
41.“The World Factbook”. CIA, 2012
42.UNCTAD, 2013
43.World Trade Organization, 2013
44.“IMD World Competitiveness Yearbook”. IMD, 2011.
45.European Commission, 2013
46.World Bank,2013
47.“China in innovation challenge to Europe”. Financial Times, 2013
28

business (Denmark, United Kingdom, Finland, Sweden,
Ireland and Germany). In terms of innovation, almost all
indicators rank the European Union below other econo-
mic powers such as the United States. Moreover, China
itself could overtake the European Union in 2023 in this
area, according to a recent management survey47
. There
is also a general impression that the EU is a work in pro-
gress and that the institutional foundations have not yet
been completed, pending greater consensus to advan-
ce towards a fiscal and banking union. Furthermore, the
sovereign debt crisis has weakened the ideological and
social unity of the EU, eroding the confidence of many
citizens from the region’s southern countries in the Euro-
pean project and the euro. The enormous power-related
possibilities of widespread use of shale gas (a type of na-
tural gas extracted through a process called fracking) in
the United States could put further competitive pressure
on European companies in the global market.
Relations between the European Union and China
On a political scale, relations are free-flowing and fre-
quent at the highest levels. Besides particular EU Mem-
ber State activities, the highest authorities of the EU
and China have held bilateral meetings in recent years
to debate matters of global importance such as climate
change and the repercussions of the Arab Spring. At an
economic level, there are open discussions and ministe-
rial working groups on matters concerning intellectual
property and antitrust law. Both economies, aware of
the importance of their economic relations and the ma-
jor complementary characteristics and synergies, seem
committed to strengthening their economic links.
At the 15th EU-China Summit in September 2012, a com-
mitment was undertaken to draft and implement a bila-
teral investment treaty. Other matters discussed at the
summit included compliance with antitrust measures,
the commitment of the two economies to respecting
intellectual property agreements, progress with food
safety in bilateral trade and cooperation in government
reforms.
The economic relations between the European Union
and China have expanded and strengthened in recent
years. The potential for synergies and complementary
characteristics between the two economies seems to
have played a much larger role than the economic un-
certainty in Europe.
In recent years, the EU has consolidated its position as
China’s primary trading partner. Each is the other’s main
source of imports, trading more than €1,000 million each
day48
. The trade relations between the two economies
are notably tilted in China’s favour, although this is by
and large the norm for China’s trade balance with other
economic areas49
. In 2012 the two economies traded
products amounting to €433,700 million.
The main products China sells to European countries are
machinery and equipment, textiles, furniture and toys.
The EU’s main exports to China are higher value-added
machinery and equipment, vehicles, aircraft and chemi-
cal products. Conversely, the trade in services between
the two is much more limited, equivalent to just 10% of
the trade in goods50
.
In terms of bilateral investment, the EU as a whole is one
of the main investors in China, behind the US and Japan,
accounting for 20% of the total. In contrast, excluding in-
vestments through OFCs, the EU is the main destination
for Chinese investment, sometimes generated through
prior trade between companies from the two economies.
In any case, setting aside the factually lax attention-grab-
bing headlines about China buying up European assets
en masse, Chinese investment in Europe represents just
0.67% of the FDI received by the EU51
.
In addition to trade and investment transactions, the
role that the country with the largest foreign currency
reserves and largest volume of savings could play in the
European sovereign debt crisis is significant. Since the
onset of the crisis, the periphery of Europe has seen a
number of announcements by the Chinese government
and the CIC52
sovereign fund with regard to purchases of
European bonds. On several occasions since the start of
the sovereign debt crisis in Europe, the Chinese authori-
ties have announced purchases of bonds issued by pe-
ripheral countries. In 2011, China committed to buying
up to €6,000 million of Spanish bonds, although the fi-
nal figure was much lower. The Chinese government has
also announced purchases of Portuguese, Irish and Hun-
garian bonds since 2009.There have also been a number
of rumours about Chinese involvement in the financing
of the European Financial Stability Fund (EFSF)53
, which
some studies place at €3,900 million54
.
The Asian country seems willing to hold positions in Eu-
ropean debt, well aware of the importance of the eco-
nomic situation of its main trading partner for its own
growth. However, neither official Chinese data nor the
29

European Central Bank offer information about the hol-
ders of European public debt. As a result, there is no offi-
cial statistical information to confirm mass purchases of
European debt by China. At company level, Chinese bu-
sinesses in the international expansion process and Eu-
ropean companies complement each other significantly.
Chinese enterprises are very competitive in the middle
of the value chain, with a smaller profit margin, but not
at the high end. European firms are barely competitive
in manufacturing, but are strong in high value-added
activities, such as R&D, logistics, retail, marketing and
aftersales. Therefore, to access such businesses in the
European market without assuming excessive risks, Chi-
nese companies have been acquiring non-controlling in-
terests in EU businesses, establishing joint ventures and
signing other partnership agreements with local firms, as
well as establishing subsidiaries, sales offices and bran-
ches. In short, Chinese firms enter the European market
in a number of ways, in accordance the requirements,
targets and risk assumption specific to each transaction.
For example, in the automotive sector, both Beijing Au-
tomotive Industry Holdings (BAIC) and Geely have made
significant investments in Europe.
The former acquired Saab’s technological design divi-
sion, but not its plants or its brand, as the Beijing-based
company is only aiming to increase its technological
know-how. In contrast, Geely has followed an asset di-
versification strategy in Europe, acquiring Volvo outright,
assuming a much greater risk, as it aims to increase its te-
chnological know-how, as well as access global markets
and obtain a global brand.However, the presence of Chi-
nese companies in Europe is still limited. The main and
most significant limitation preventing a greater number
of Chinese companies in the EU is their scant global pre-
sence; as mentioned, internationalisation of Chinese firms
is a recent phenomenon. China ranks only 13th amongst
the major outbound investors worldwide, with a share of
2.1%, an undeniably limited presence for the world’s se-
cond largest economy. Of the EU’s total inbound FDI, just
0.67% comes from China (€ 26,768 million) and it is esti-
mated that Chinese companies employ just 50,000 peo-
ple in the EU, of a total workforce of more than 200 million.
Nonetheless, in recent years the transactions carried out
48.European Commission
49.“Trade and economic relations with China”. European Parliament, 2012
51.European Commission
52.China Investment Corporation, one of the largest sovereign funds in the world
53.A legal entity created by the EU to maintain financial stability in Europe by providing
financial assistance to states in the Eurozone
54.“China: less America, more Europe”. Standard Chartered Global Research, 2011
55. UNCTAD. stock data at 31 December 2012
Chart 7.
Distribution of Chinese FDI stock in the world (2011) (%)
Source: MOFCOM, 2011 Statistical Bulletin of China’s Outward Foreign Direct Investment. China Statistics Press (2012)
30

by Chinese companies in the EU have evolved rapidly,
with some extremely significant deals. These include
the acquisition of the Swedish company Volvo by Geely,
which attracted media attention from around the world,
as did Lenovo’s acquisition of IBM’s PC unit in the US.
What do the data tell us? The EU is the main global des-
tination for foreign investment, far ahead of other coun-
tries or trade blocs, accounting for 38.2% (2012) of total
incoming FDI55
. The total volume of FDI received by the
EU is greater than the sum of that entering the NAFTA56
,
ASEAN57
and Latin America blocs. However, the EU does
not seem to be a priority or even highly significant in-
vestment destination for Chinese companies, based on
available data. According to official MOFCOM data58
,
which are the latest official figures, Chinese FDI stock in
Europe amounted to USD 24,450 million at the end of
2011, 5.8% of China’s total FDI. This amount is well be-
low China’s FDI in Asia, which totalled USD 303,434 mi-
llion or 71.4% of its total FDI, and its FDI in Latin America,
amounting to USD 55,171 million or 13% of its total.
However, the investment figures for the two regions
should be considered with some caution. In the case of
Asia, 86% of the FDI was in Hong Kong, which was not
the final destination of the investment. Many of these
flows will foreseeably return to China (round-tripping)
and another portion will not have Asia as the final des-
tination. In the case of Latin America, 92% was in the
Cayman Islands and the British Virgin Islands, neither of
which are final investment destinations, and the actual
amount that ended up in Latin America is not known. If
we were to eliminate these three OFCs from the invest-
ment statistics (since they channel transactions but are
not the final destination), Europe would be the main des-
tination of Chinese foreign investment. In addition, Chi-
nese FDI in Europe (5.8%) is clearly greater than in Africa
(3.8%), North America (3.2%) and Oceania (2.8%).
Main countries and sectors for Chinese investment
Further MOFCOM data show that cumulative Chinese
FDI in 2011 was USD 424,780 million. Analysing Chine-
se FDI by country and excluding OFCs, the main desti-
nations of the Chinese investments are countries with
abundant supplies of commodities and which are key
markets in their regions, such as Australia and the Uni-
55. UNCTAD. stock data at 31 December 2012
56.North America Free Trade Agreement
57.Association of Southeast Asian Nations: Indonesia, Philippines, Malaysia, Singapore, Thailand, Brunei,
Vietnam, Laos, Myanmar and Cambodia
58.“2011 Statistical Bulletin of China’s Outward Foreign Direct Investment”. MOFCOM, 2013.
31
Table 3. Main countries receiving cumulative Chinese investment globally and in Europe (2011)
COUNTRY VOLUME % OFWORLDTOTAL COUNTRY VOLUME % OFWORLDTOTAL
1 HONG KONG 261,518 61,5 1 LUXEMBOURG 7082 29
2 BRIT.VIRG. IS. 29261 6,9 2 FRANCE 3723 15,2
3 CAYMAN IS. 21629 5,1 3 UK 2530 10,3
4 AUSTRALIA 11041 2,6 4 GERMANY 2401 9,8
5 SINGAPORE 10603 2,5 5 SWEDEN 1531 6,3
6 USA 8993 2,1 6 NETHERLANDS 665 2,7
7 LUXEMBOURG 7082 1,7 7 HUNGARY 475 1,9
8 SOUTH AFRICA 4060 1,0 8 ITALY 449 1,8
9 RUSSIA 3763 0,9 9 SPAIN 389 1,6
10 CANADA 3728 0,9 10 POLAND 201 0,8
11 FRANCE 3723 0,9 11 NORWAY 167 0,7
12 KAZAKHSTAN 2858 0,7 12 IRELAND 157 0,6
13 MACAU 2676 0,7 13 BELGIUM 140 0,6
14 UK 2530 0,6 14 ROMANIA 125 0,5
15 GERMANY 2401 0,6 15 GEORGIA 109 0,4
16 OTHER 48852 11,5 16 OTHER 4306 17,6
Source: MOFCOM, 2011 Statistical Bulletin of China’s Outward Foreign Direct Investment. China Statistics Press (2012)

ted States, which have received a cumulative investment
of USD 9,000 million to USD 11,000 million; South Africa,
Russia and Canada with a cumulative investment of USD
3,700 million to USD 4,000 million, or Kazakhstan with
slightly more than USD 2,800 million. Other countries
that have received significant Chinese investment —
USD 2,000 million to USD 2,500 million — are key econo-
mies in their area of influence, such as Macau, Myanmar
and Mongolia.
With regard to Europe, excluding Luxembourg, which
accounts for almost 30% of total foreign investment in
Europe, China has mainly invested in the three largest
EU economies. The country that has received the most
Chinese FDI is France (USD 3,723 million), followed by
the United Kingdom (USD 2,530 million) and Germany
(USD 2,401 million). In fourth place is Sweden (USD 1,531
million), although the amount is almost entirely attribu-
table to Geely’s acquisition of Volvo.
The remaining countries are on a lower scale, with a
volume of investment of less than USD 800 million.
The Netherlands ranks fifth (USD 665 million) in terms
of Chinese investment, followed by Hungary (USD 475
million), Italy (USD 449 million) and Spain (USD 389 mi-
llion). If instead of the official Chinese data (MOFCOM)
we take the official European figures published by Eu-
rostat, Chinese FDI stock in Europe amounts to €26,768
million. The volume of Chinese FDI received by the EU
represents just 0.4% of the total received from outside
the Union, three times less than that received from Bra-
zil and almost three times less than that received from
Russia. In any case, as indicated, Chinese investment in
Europe is growing rapidly, and almost all of the Chinese
foreign capital in the region has arrived in recent years.
According to Eurostat, in 2001 China’s FDI stock in the EU
was just € 638 million, meaning that in the subsequent
11 years it has multiplied by 41.
The FDI Markets database provides information that
complements the volumes of investment – including
shareholdings acquired, reinvestment of profits and in-
tragroup loans – indicating the number of new invest-
ment projects (greenfield) carried out by Chinese com-
panies in Europe. According to this source, a total of 771
Chinese projects in Europe were carried out between
January 2003 and September 2013. The country that
received by far the largest proportion of these projects
was Germany, with more than 41% of the total, followed
by the United Kingdom (16%), France (6.9%) and Spain
Chart 8.
Chinese FDI stock in Europe (million €)
Source: Eurostat, 2013
32

(4.9%). The main sectors that have received these pro-
jects were Communications, Electronic Components,
Industrial Machinery, Financial Services and Automotive
Parts. Moreover, according to FDI Markets, the Chinese
companies that made the most investments in Europe
were two technology companies, Huawei Technologies
and ZTE, followed by two banks, Bank of China and ICBC.
Other companies with more than 10 investment projects
were China National Chemical and Suntech Power Solar.
Bloomberg data show that from 2001 to July 2013 there
were 270 purchases of shareholdings, mergers and ac-
quisitions conducted in Europe by Chinese companies.
Almost half of these transactions took place since the
start of 2011, indicating that China’s interest and invest-
ment in the European Union is a very recent economic
phenomenon. Again, the destination for the highest
number of these transactions was Germany, with a total
of 66, followed by the United Kingdom with 60, France
with 33, Italy with 25, the Netherlands with 19 and Swe-
den with 12. In terms of sectors there was a high level of
activity in Automotive, Machinery, Electronics, Telecom-
munications and Energy.
In addition, the Economist Intelligence Unit recently
created an indicator, called the China Going Global In-
vestment Index59
, comparing the appeal of 67 countries
in terms of Chinese investment. This indicator, which is
based on a survey of Chinese companies and a number
of sub-indicators of investor opportunities and risk, gives
just one EU country among the top 10 most attractive in-
vestment destinations for Chinese companies: Germany.
The top 20 includes six EU countries: the above one, plus
Sweden, Denmark, Finland, the United Kingdom and
France. The country at the top of the list is the world’s
largest economy, the United States, followed by the two
financial and logistical hubs favoured by Chinese com-
panies: Singapore and Hong Kong.The other Asian giant,
Japan, is followed by a group of commodity-rich coun-
tries: Australia, Canada, Norway and Russia.
The investment method preferred by Chinese companies
to date has been outright acquisitions of local compa-
nies (100% of capital) so that they can control and mana-
ge the company and rapidly enter new markets. The lar-
gest transactions in Europe include the aforementioned
purchase of 100% of the Swedish automotive company,
Volvo, by Geely in order to enter the European mid-range
and high-end automotive market; the acquisition of the
Hungarian industrial company Borsodchem by Yantai
Wanhua Polyurethane, which has converted the acqui-
ree into one of the world’s main producers of polyuretha-
ne; or the acquisition of 60% of the British companyWee-
tabix by the Bright Foods Group, a transaction that will
not only allow the Asian company to enter the European
food and beverage market, but will also allow the British
company to sell its cereals in the enormous Chinese mar-
ket. In addition, some of the transactions correspond to
joint ventures with local companies, usually to carry out
high value-added manufacturing activities, such as the
Young Man automotive group with the Dutch company
Spyker to build a new high-end sports car.
2012, China continues to invest in Europe
According to Eurostat data, Chinese FDI in Europe in
2012 amounted to €7,657 million60
, marking an all-time
high. Chinese investment in Europe grew swiftly as a
result of two factors. Firstly, as already mentioned, Chi-
nese companies are currently in an incipient but sound
expansive stage of investment in the major global eco-
nomies. Secondly, the current situation of numerous Eu-
ropean companies – which have substantial know-how
and specialisation in the high end of the value chain, but
which are in a difficult financial position as a result of
the economic crisis – led to an increase in the number of
transactions carried out by cash-rich Chinese companies
in 2012. It seems clear that the contribution of experien-
ce and know-how by European companies and liquidity
by Chinese companies could result in a highly profitable
win-win situation for both parties.
In both 2011 and 2012 investment exceeded €3,000 mi-
llion61
. In terms of China’s economic power this is a limi-
ted investment, but they are the highest historical figu-
res. In addition, in 2012 investment increased by 77%, a
remarkable rise given the sharp contraction in FDI in Eu-
rope overall, down 31.1%. Chinese investment therefore
appears to have acted as a counterbalance for plumme-
ting foreign investment in Europe from other countries,
and the decision of Chinese firms to invest in Europe is
offsetting the considerable risk perceived by the eco-
nomy in general in certain peripheral markets. With re-
59.The index comprises two pillars: risk and investment. The former is based on market size, natural resour-
ces, intellectual property and manufacturing exports, and the latter on domestic political and regulatory risk,
international political and regulatory risk, cultural proximity and operating risk.
60.Provisional Eurostat data at January 2014. Latest data at the date of the report.
61.http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tec00048&plu-
gin=1
62.“Europe 2013. Coping with the crisis, the European way”. Ernst & Young’s attractiveness survey. 2013.
63.“European attractiveness survey”. E&Y, 2013.
33

34
Table 4.
Chinese investment in the European Union by country
FDI STOCK
(USD MILLION)
NUMBER OF GREENFIELD
PROJECTS
NUMBER OF
ACQUISITIONS
GERMANY 2401 321 66
FRANCE 3724 53 33
UNITED KINGDOM 2531 124 60
ITALY 449 36 25
SPAIN 389 38 6
NETHERLANDS 665 33 20
SWEDEN 1531 19 12
POLAND 201 26 3
BELGIUM 141 20 7
AUSTRIA 25 9 5
DENMARK 49 8 5
GREECE 5 n/a 1
FINLAND 31 n/a 5
PORTUGAL 33 n/a 4
IRELAND 157 10 2
CZECH REPUBLIC 69 13 3
ROMANIA 126 26 1
HUNGARY 475 22 5
SLOVAK REPUBLIC 26 n/a 0
LUXEMBOURG 7082 n/a 1
CROATIA 8 n/a 1
BULGARIA 73 13 2
SLOVENIA 5 n/a 0
LITHUANIA 4 n/a 0
LATVIA 1 n/a 1
CYPRUS 0 n/a 1
ESTONIA 7 n/a 1
MALTA 3 n/a 0
TOTAL 20211 771 270
Sources: MOFCOM, FDI Markets and Bloomberg. MOFCOM stock data at 31 December 2011; FDI Markets January
2003 – September 2013; Bloomberg January 2001 – July/2013; data not provided by FDI Markets for the number
of greenfield projects in Greece, Finland, Slovak Republic, Luxembourg, Croatia, Slovenia, Lithuania, Latvia, Cyprus,
Estonia and Malta. Countries in order of GDP ranking. n/a: not available.

gard to greenfield profits, a report published in 2013 by
Ernst & Young62
states that China carried out 122 of the
3,797 greenfield investments in Europe in 2012, which is
13% less than in the prior year, but higher than the 115
recorded in 2010. The report also affirms that these in-
vestments, which represent 3% of the total made in the
year, created 4,619 jobs in Europe63
.
China was, in any case, the emerging market that made
the largest investment in Europe in 2012, far ahead of
India, in second place. The report indicates that Chinese
companies are continuing to show strong interest in, for
example, Germany and the United Kingdom, with com-
panies such as ET Solar, Clenergy International and Samil
Power continuing to expand their investments in the re-
gion. The main transactions took place in the industrial
sector. Key transactions included the multinational ma-
chinery manufacturer Sany’s acquisition of Putzmeister,
a German tunnelling and concrete pump company, for
€360 million, and Hebei Linyung Industrial’s acquisition
of a German automotive technology company, Kiekert.
Other transactions in the industrial sector include the ac-
quisition by Shandong Kaitai Metal of Airblast, a company
from the Netherlands specialising in surface preparation
and finishes, for €11 million, and the Hong Kong firm Rea-
den Industries’acquisition of the Dutch storage construc-
tion company, Beemster Vastgoed.
Major transactions also took place in the services sector.
In the commercial distribution subsector the Hong Kong
distributor Fung Brands (which distributes Toys ‘R’ Us in
Asia, among others) acquired the fashion business Sonia
Rykiel. In the technology sector, Lenovo, which is already
the world’s third largest seller of smart connected devi-
ces (PCs, laptops, smartphones, tablets and smart TVs),
and which owns the German company Mediom, recor-
ded its highest profits ever in 2012.
Meanwhile, Huawei continued to expand in Europe, ac-
quiring the British R&D business, Centre for Integrated
Photonics, and through its Italian subsidiary, the Italian
fibre-optic and telecommunications supplier Fastweb
Spa. In addition, rumours have continued to circulate
that Hutchinson Whampoa intends to acquire 29.9% of
Telecom Italia. In the primary sector very few transac-
tions took place, although one noteworthy purchase was
Bright Foods’ acquisition of the British cereal company
Weetabix for GBP 700 million. In summary, in the short to
medium term we can expect an increase in transactions
in view of the interest expressed by numerous state-ow-
ned and private Chinese groups in investing in Europe,
apparent through frequent visits by trade delegates and
a multitude of corporate negotiations in recent quarters.
Chinese investors are continuing to show interest in a
range of sectors, from wineries and olive oil, to heavy ma-
chinery and R&D centres, as well as investments in pro-
perty. There is considerable room for growth in Chinese
investment in Europe across all economic sectors.
35

BOX IV.THE RED DRAGON SOARS OVER EUROPE: CHI-
NESE SOVEREIGN WEALTH FUNDS IN EUROPE
Authors: Javier Santiso & Javier Capapé, ESADEgeo –
Center for Global Economy and Geopolitics
According to the 2013 Sovereign Wealth Funds Report
edited by ESADEgeo, KPMG and Invest in Spain/ICEX,
China currently has four sovereign wealth funds. China
is the country with the highest volume of assets under
management of sovereign wealth funds (in excess of a
trillion dollars).
Sovereign wealth funds are long-term government in-
vestment funds having no pension obligations with
third parties. We will therefore not discuss pension funds
or the Chinese central bank, which is responsible for ma-
naging reserves (more than USD 3.3 trillion).
Of the four funds, three stand out in terms of the volu-
me of assets under management and their links with the
government and the development of key economic po-
licies in Beijing. They are: the China Investment Corpora-
tion (CIC), the State Administration of Foreign Exchange
(SAFE) and the National Social Security Fund (NSSF). Ac-
cording to available information, these four funds invest
USD 53.1 billion outside China, of which USD 18 billion
is placed in Europe64
(34% of total foreign investment).
Each of these three funds has distinctive characteristics
in terms of their legal status, their positions in the insti-
tutional framework, the origin of the funds and their mis-
sion as established by the government when they were
created65
.
The institutional framework reflects the pre-eminent
position secured by CIC in the very limited time since
its creation, with direct links to the State Council (the
chief administrative body of the Chinese government),
to which it reports. CIC has also established a significant
precedent which further strengthens the fund’s political
links to the government, in that the former president of
CIC was appointed Finance Minister in March 2013. Mo-
reover, NSSF reports to the State Council through the
body that manages the fund: the National Council for
Social Security Fund.
SAFE, meanwhile, is closely tied to the central bank, to
which it belongs, competing with CIC for resources. The
battle for management of these abundant financial re-
sources has resulted in a situation that is almost unique
in the world, with two large sovereign wealth funds in
the same country fighting for political favour. This com-
petition serves as a significant incentive to improve re-
turns. Indeed, the competition between SAFE and CIC
has led the two funds to improve the returns on their
international investments. Despite forming part of the
(typically rigid) structures of a central bank, SAFE has
been able to separate classic reserve management from
a riskier investment, more suited to large institutional in-
vestors (such as sovereign wealth funds).
At December 2012, through its Hong Kong subsidiary
the SAFE Investment Company, SAFE had positions
amounting to more than USD 21 billion in FTSE compa-
nies. Furthermore, SAFE has started to seek out direct
investments in various sectors such as real estate and ur-
ban infrastructure, as shown in the following table.
Investment by SWFs in London’s real estate sector has
boomed in recent years, and it would be no surprise
to see SAFE gradually move into other major real esta-
te hubs in the continent, such as Paris, Munich, Milan,
Barcelona or Madrid. Based on the precedent of other
sovereign wealth funds acquiring property in Europe (in
Spain, two good examples are the acquisitions by Qa-
tari Diar in Barcelona and IPIC’s purchase option on the
Norman Foster tower in Madrid), it seems reasonable to
assume that once SAFE has accumulated expertise in the
London real estate sector it may look for new opportuni-
ties in other continental hubs such as those mentioned.
For its part, CIC has been forced to distinguish between
its domestic and international returns in order to conti-
nue competing with its main rival. CIC, which owns 100%
of Central Huijin, assumed the government’s controlling
interest in the capital of the four Chinese banks from the
outset. This led to the creation of the subsidiary CIC In-
ternational and the calculation of the return on its port-
folio being divided into domestic and international.
Since its creation in 2007, CIC has retained the confiden-
ce of Chinese leaders year after year and now manages
64.The Heritage Foundation data (2014) on CIC and SAFE investments in 2007-2013. This figure should
be understood as a minimum estimate due to the lack of data on NSSF, CADF and many international
investments by SAFE and CIC.
65. For a more detailed study, see the work of Koch-Wesser and Haacke (2013) for the CIC, available at http://
origin.www.uscc.gov/sites/default/files/Research/China%20Investment%20Corporation_Staff%20Report_0.
pdf, Hu (2010) at http://ec.europa.eu/economy_finance/publications/economic_paper/2010/ecp421_en.htm
and Capapé (2014) at http://fletcher.tufts.edu/sovereignet for a more in-depth analysis of SAFE.
38

39
ASSETS VALUE (USD MILLION) SECTOR DESTINATION COUNTRY
Royal Dutch Shell 3.076 Energy United Kingdom
Total 2.8 Energy France
BP 1.989 Energy United Kingdom
Vodafone Group 1.52 Telecommunications United Kingdom
Bhp Billiton 1.245 Metal United Kingdom
BG Group 1.11 Energy United Kingdom
RioTinto 956 Metal United Kingdom
UPP Group 885 Real estate United Kingdom
Xstrata 596 Mining United Kingdom
AstraZeneca 587 Pharmaceuticals United Kingdom
SABMiller 585 Food and beverages United Kingdom
Diageo 532 Food and beverages United Kingdom
Tesco 522 Consumer goods United Kingdom
Standard Chartered 516 Banking United Kingdom
Anglo American 509 Metal United Kingdom
Barclays 498 Banking United Kingdom
Drapers Gardens 440 Real estate United Kingdom
AffinityWater 200 Infrastructure United Kingdom
One Angel Square 107 Real estate United Kingdom
TOTAL* 23,277
Table 5.
SAFE’s main investments in Europe
Source: ESADEgeo based on Thomson Reuters and Heritage Foundation data (2014). *Includes SAFE’s total interest
in companies listed on the London Stock Exchange at 31 December 2012.

almost USD 600 billion, even though its initial foray into
international investment began with controversial pur-
chases of interests in Morgan Stanley and Blackstone. In
Europe, its presence remains strong, at more than USD
11.5 billion, with a preference for energy-related sectors
(see table 6). As in the case of SAFE, CIC has also invested
directly in sectors such as infrastructure (Thames Water,
now AffinityWater, is the largest supplier of water in Lon-
don) and the real estate market (with the acquisition of
the corporate headquarters of Deutsche Bank).
CIC also acquired knowledge of the real estate sector
with its purchase, during the bailout, of SongBird Estates
(owner of London’s Canary Wharf), pointing to further
acquisitions in both London and the other key European
hubs. CIC entered the technology sector by acquiring
the interest held by the Spanish company Abertis in Eu-
telsat, one of the three largest satellite operators in the
world.This sector figures frequently among its latest ma-
jor acquisitions. Indeed, CIC now has a sizeable interest
in the capital of the Chinese start-up Alibaba (USD 2 bi-
llion), and we would not rule out new acquisitions in the
European technology sector.
China’s desire to create co-investment instruments be-
tween Chinese public entities and European national go-
vernments is also apparent. This has already happened
through the China-Belgium Direct Equity Investment
Fund, created in 2012, with an investment target of € 500
million, currently in the initial investment stage. More re-
cently, Summit Bridge Capital was created, a joint ventu-
re between CIC and Ireland’s National Pensions Reserve
Fund (NPRF). Each party has contributed USD 50 million,
with a target of USD 300 million, allowing for investment
in up to 15 Irish technology companies. A preliminary
agreement is also in place with the government of Bela-
rus to invest in industries such as the wood sector.
40
ASSETS VALUE (USD MILLION) SECTOR DESTINATION COUNTRY
GDF Suez 3.150 Energy France
Uralkali 1.989 Mining Russia
Russian Direct Investment Fund 1.000 Financial Russia
ThamesWater 981 Infrastructure United Kingdom
Apax Corporation 960 Financial United Kingdom
Heathrow Airport Holdings 730 Transportation United Kingdom / Spain
Eutelsat 490 Technology France
Songbird Estates 450 Real estate United Kingdom
Polyus 420 Metal Russia
Deutsche Bank Headquarters 400 Real estate United Kingdom / Germany
Diageo 370 Food and beverages United Kingdom
Nobel Holdings 300 Energy Russia
VTB Group 100 Financial Russia
Russia Forest Products* 100 Wood Russia
Moscow Stock Exchange** 80 Financial Russia
TOTAL 11.520
Table 6. China Investment Corporation’s investments in Europe
Source: ESADEgeo based on Heritage Foundation, Bloomberg and The Wall Street Journal data (2013). *The first
investment made by the JV RDIF. **Bloomberg estimate (2013).

1.4 THE IMPACT OF CHINESE INVESTMENT IN
EUROPE
Foreign investment usually benefits destination coun-
tries in numerous ways, as explained in economic lite-
rature and revealed by an analysis of the expansion of
multinationals. The direct benefits for the country recei-
ving the investment include job creation, capitalisation
of resident companies, increased competition in the
sectors where foreign companies operate and financing
of potential current account deficits. The indirect effects
can be the generation of services or auxiliary businesses
around the foreign company, a boosting effect on the
arrival of new companies, and occasionally the creation
of business clusters. In addition, as foreign companies
usually have clear competitive advantages, be they te-
chnological, organisational or related to their human
capital, they often contribute to moving the corporate
framework of the destination country up the value chain.
These companies are also significant in increasing the di-
versification of the production structure of the destina-
tion country as well as its specialisation. Other indirect
effects include spillovers, which increase the competiti-
ve capacity of local companies that are in contact with
foreign companies.
Many of these effects can be attributed to Chinese com-
panies investing in Europe. In terms of employment, it is
estimated that Chinese companies have created around
50,000 jobs in Europe, a figure that appears modest
when compared with the more than four million jobs
created by North American companies. With regard to
the generation of services or auxiliary businesses and
the boosting effect, most noteworthy is the peripheral
activity generated in the more than 10 hubs and coope-
ration areas for investment from Chinese companies in
Europe, such as those in Prague (Czech Republic), Prato
(Italy), Warsaw (Poland) and Wigan (United Kingdom).
Huawei and Lenovo, meanwhile, are good examples of
creating new competition amongst products, while in
terms of specialisation, COSCO has made a considerable
contribution to developing highly specialised logistics
solutions. As all of these companies operate at the high
end of the value chain they contribute, through exter-
nalities, to improving the local framework’s capacity for
competition and innovation.
On other occasions, Chinese companies recapitalise
resident companies and help them to improve their fi-
nancial capacity or even restructure companies in diffi-
culties, as Geely did with Volvo. They sometimes contri-
bute to increasing the resident companies’ production
capacity or their internationalisation, as CITIC did for the
Spanish company Gándara Censa or Huayi with Cubigel
in Catalonia. In some cases, the Chinese company even
has an interlocking shareholding with a European mul-
tinational, so that the European company can enter the
Chinese market and the Chinese company gains access
to the European market, such as China Unicom and Te-
lefónica. With regard to increased competitive capacity,
companies such as Lenovo and Haier have developed
high-quality products with very competitive prices for
Europe, benefiting consumers.
A number of Chinese companies have recently invested
in the privatisation of companies in southern Europe,
such as Three Georges Corporation in Electricas de Por-
tugal (EDP). In this respect, Chinese companies are po-
tential buyers of government assets of which European
countries in fiscal difficulties wish to dispose. In fact, Chi-
nese companies bidding in public tenders often offer an
above-market price. Furthermore, the arrival and increa-
sed activity of Chinese companies in Europe is helping
to smooth the way for European companies to enter the
Chinese market, as well as favouring bilateral economic
relations in various areas, from trade to purchases of go-
vernment debt and corporate bonds. In recent months
various institutional and private investors from China
have shown interest in the government assets being pri-
vatised in southern Europe. In the coming quarters, the-
refore, we may well see transactions of this type, perhaps
several.
Protectionism in the EU against Chinese FDI
The opposition that some Chinese companies have en-
countered to their foreign investment projects has been
fundamentally political. Two noteworthy examples are
the blocking of the attempt by the SOE China National
Offshore Oil Company (CNOOC) to acquire the US com-
pany Union Oil of California (Unocal), and the move by
Aluminium Corporation of China (Chinalco) to acquire a
shareholding in the Anglo-Australian company RioTinto.
The US and Australian governments displayed zealous
protectionism towards both transactions, in which SOEs
(which channel government interests) intended to enter
the natural resource extraction sector. The risks associa-
ted with these transactions for national interests, which
are normally cited by governments of Western countries,
pertain to national security, environmental protection
41

REPORT: Chinese Investment in Europe 2014

REPORT: Chinese Investment in Europe 2014

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REPORT: Chinese Investment in Europe 2014