By European Think-tank Network on China (ETNC)

Sizing Up Chinese Investments in Europe

Chinese investments in Europe have surged in recent years, and have become a critical feature of Europe-China relations. Foreign direct investment (FDI) in the European Union traced back to mainland China hit a record EUR 35 billion in 2016, compared with only EUR 1.6 billion in 2010, according to data gathered by the Rhodium Group. In a historic shift, the flow of Chinese direct investment into Europe has surpassed the declining flows of annual European direct investments into China. As China continues to grow, develop, and integrate into the global economy, its overseas investments expand in quantity and quality, reflecting both the growing sophistication of the Chinese economy and broader Chinese commercial and policy goals. Going beyond FDI, Chinese investment is creating new realities for Europe-China relations.

This report by the European Think-tank Network on China (ETNC) brings together original analysis from 19 European countries to better understand these trends and their consequences for policy making and Europe-China relations, including at the bilateral, subregional and EU levels. As in all ETNC reports, it seeks to do so using a country-level approach. Through these case studies, including an introductory explanation and analysis of EU-wide data, the report aims to identify and contextualize the motives for Chinese investment in Europe and the vehicles used. However, the originality of the report also lies in the analysis of national-level debates on China, Chinese investment, and openness to foreign investment more generally. This is not just a story about FDI strictly defined, but about the (geo)political implications that emanate from deeper economic interaction with China. Ultimately, Europe is far from speaking with a single voice on these matters, and identifying where the divergences and convergences lie, will be crucial in formulating solid and complementary policy positions at the EU and national level moving forward.

China’s growing investment interests in Europe

Until recently, it was not uncommon to depict China as a minor source of investment in Europe and elsewhere in relative terms. Indeed, of total FDI stock held in the European Union by the end of 2015, China only accounted for 2 percent according to Eurostat figures, and its investment stock in many European countries remains low when compared with older investors. However, the facts on the ground are evolving rapidly, and China still has plenty of room to grow: The total stock of Chinese outbound direct investment worldwide still only represents 10 percent of its national GDP. Compare this to France or the UK (50+ percent), Germany (39 percent), the United States (34 percent) and Japan (28 percent). If China continues on its path towards more advanced levels of economic development, we must expect a massive further increase in its outbound FDI. Europe has already become a favored destination for Chinese investment, and policymakers need to adapt to a new force shaping the economic and political landscape in Europe.

As the country analyses of this report show, European economies have a wide range of assets and features that Chinese investors seek. There should be no doubt that China needs Europe (maybe even more than vice-versa). Patterns of Chinese investment highlight sources of European attractiveness that need to be better appreciated and leveraged. Among the things that Chinese investors seek in Europe are:

• Technology, to include established high-tech assets, emerging technologies and know-how;

• Access to the European market, for Chinese goods and services;

• Access to third markets via European corporate networks, especially in Latin America and Africa;

• Brand names to improve the marketability of Chinese products both abroad and for the Chinese market;

• Integrated regional and global value chains in production, knowledge and transport;

• A stable legal, regulatory and political environment, particularly in a context of global disruption and political uncertainty;

• Political/diplomatic influence in a region that in aggregate terms remains the second largest economy after the US.

Behind the growth in China’s outbound investments is the story of China’s economic transformation towards more consumption-based growth and higher value-added industries, including technology and services. The success of China’s economic transformation depends on an increased commercial presence abroad and deepening international linkages. This is not only true for all economic enterprises in China, including SOEs and private companies, but it also serves as a critical source of Party legitimacy and political stability.

In this context, many chapters in this report confirm the importance of Beijing’s policy initiatives in shaping investments overseas, and in Europe in particular. Beijing’s “going out” policy starting in 2001, and intensifying after the Global Financial crisis, has facilitated and encouraged the internationalization of Chinese firms for much of the last two decades as a means to develop the national economy. More recently, both China’s 12th and 13th five-year plans (2011-2015; 2016-2020) have encouraged overseas investments as a means to access supply chains, quality brand names and advanced technology – all reasons for investing in Europe. As China’s industrial strategy grows in sophistication, plans such as “Made in China 2025” will increasingly channel overseas investments as a means to achieve clear policy goals in the so-called “new strategic industries” defined in Beijing. In 2016, the largest share of Chinese global mergers and acquisitions targeted the high-tech sector (24 percent of total deal values), compared to 20 percent that targeted energy and material assets (Rhodium Group, 2017). The controls on outbound Chinese capital that the Chinese government deployed in 2016 and 2017 also highlight the crucial impact of Beijing’s interests and policies, i.e., the political nature of outbound capital flows. Finally, as China continues to press forward with its Belt and Road Initiative (BRI), an initiative now elevated to constitutional rank within the Chinese Communist Party in fall 2017, Europe can also expect to see an increasing number of related Chinese investments.

Please click to read the full report.

By The Association of Southeast Asian Nations (ASEAN)

FDI flows into ASEAN in 2016 remained high despite a decline to USD 97 billion, which reflects the general downfall trend of global FDI flows into the developing economies.

FDI flows from most ASEAN Dialogue Partners and intra-ASEAN investment actually increased, with the latter reaching an all-time high and accounting for a 25 per cent share of FDI flows into the region.

However, these increases were not enough to help overcome the decline which was due to divestment, acquisition of foreign assets by ASEAN companies in their home countries and repayment of intracompany loans by affiliates within the region.

Many foreign companies have a long historical association with the region, some dating as far back as the 1800s and they continue to invest and expand in the region.

This year’s Report examines the historical investment development of two Dialogue Partners of ASEAN, namely the European Union (EU) and India. Major multinational enterprises (MNEs) from these countries have been present in ASEAN in a wide range of industries. Many of them operate in multiple locations across the region in different segments of the value chains.

This year’s Report also features the development of economic zones in ASEAN. This is a welcome follow-up to the “ASEAN Guidelines for Special Economic Zones Development and Collaboration” adopted by ASEAN Economic Ministers (AEM) in 2016. ASEAN has at least 1,600 economic zones of various types.

These zones, ranging from free trade zones, export processing zones, IT parks to mega special economic zones, have played a significant role in the socioeconomic development in the region and in attracting FDI. Given the rapid economic growth and demand, ASEAN Member States continue to develop more economic zones to boost FDI.

Policy makers, entrepreneurs, and other stakeholders may find this Report useful in understanding economic zones in ASEAN, as well as the business and investment development in the region in general.

Please click to read full report.

Coming to four years since China’s unveiling of the One Belt One Road initiative, many substantial questions remain, which has implications for financing this ambitious project. 

One Belt, One Road is an ambitious development initiative, a multi-trillion dollar plan to link Asia to Europe with an unbroken chain of modern infrastructure. It has the potential to kick start economic growth in countries stretching from the South China Sea to the English Channel.

Put forward by the Beijing government, funding for the infrastructure proposal has gained some traction lately with accumulated pledges of about US$240 billion, but private investors will need more persuasion before they commit fully.

The One Belt, One Road initiative was proposed by China in 2013 as a way to modernise trading routes running from East Asia to Europe. The “belt” represents land routes that would run through Central Asia and the Middle East before reaching Northern Europe. The “road” represents sea routes that pass Southeast Asia, South Asia and Africa, before turning northward up the Suez Canal and terminating in the Northern Adriatic Sea.

If successful, the initiative represents the world’s largest example of regional economic cooperation. 

Altogether, it will connect about 80 countries with road, seaports, railways, and pipelines, covering roughly two-thirds of the world’s population, about a third of its GDP, and about a quarter of total global trade in goods and services.

ONE BELT ONE ROAD GAINS INITIAL FUNDING 

As with any ambitious initiative, One Belt, One Road faces significant obstacles, and the first is financing. A crucial factor behind China’s economic miracle in the late 20^th century was aggressive infrastructure investment, and to create similar infrastructure improvements through Asia and Africa, annual investment of US$2 trillion to US$3 trillion will be needed. Altogether, the initiative could need public and private investments roughly 12 times the size of the Marshall Plan that helped rebuild Europe after World War II. 

Public funding for the effort has already raised hundreds of billions of dollars in pledges. For example, the Asian Infrastructure Investment Bank, funded largely by China, has about US$100 billion available for the program. The Silk Road Fund, also set up by China, has about US$40 billion, and the New Development Bank, which focuses on projects in Brazil, Russia, India, and China, has another US$100 billion. These commitments show the seriousness China and other countries along the route are giving the One Belt, One Road initiative.

While this committed US$240 billion is roughly the annual GDP of Finland, it is still less than an eighth of what is needed annually to finance the infrastructure needs of the emerging economies along the land and sea routes. Further commitments will be needed, not only from developing markets that would be the direct beneficiaries of the infrastructure improvements, but also from European governments that would benefit from improved trade connections as well as private investors.

Meanwhile, the world is watching closely to see whether China’s enthusiasm for the initiative might ebb following a slowdown in the country’s economic growth rates in recent years. 

TRANSPARENT IN ADMINISTRATION AND INVESTMENT 

With funding sources starting to materialize, the second major challenge in attacking the One Belt, One Road initiative is to create transparency in all aspects of administration and investment. Private investors especially will hesitate to join the effort unless they are persuaded that the funds and assets will be used effectively.

In particular, how the available funds will be deployed and how the programme will be administered remain critical uncertainties that hinder further commitments. This is because infrastructure investment in emerging markets is notoriously risky, and corruption and wasteful bureaucracies remain unfortunate realities for many of the countries along the routes. So public and private investors will want some assurances that the funds are not being misused on over-priced projects with no real impact on promoting trade.

China, as the primary promoter of the initiative, should take the lead in assuaging these concerns. For China, the initiative has an economic and a political dimension, and officials should be crystal clear on their motives and the economic rationale. If rhetoric can be matched with action, investor scepticism can be turned around.

Operations and projects supported by the investment funds will be scrutinised with some questions in mind. First, can One Belt One Road show that its investments follow market principles? Second, do projects adopt a clear regulatory system that transcends borders? Third, is there an appropriate balance between public and private investment such that risks are shared? If these questions are answered, they can change how private investors think about risk in these regions and for the project.

MIXED RECEPTION BY GOVERNMENTS 

Governments outside China have given the One Belt, One Road initiative mixed receptions. Some, for instance Indonesia and Malaysia, have welcomed the proposal, focusing primarily on the economic benefits it could deliver. For others, however, the economics are muddled by geopolitical disputes and other challenges, such as the conflicting territorial claims to the Spratly Islands in the South China Sea, which make bi- and multilateral discussions about funding and project priorities more complicated. 

Countries that are not directly on One Belt One Road land or sea routes, such as Japan and the United States, are also likely to focus on potential political implications. For example, concerns have been raised of whether One Belt One Road will expand China’s economic influence at the expense of these countries. This may be the case especially if the Asian Infrastructure Investment Bank tries to wrestle influence from more established institutions led by developed countries such as the US, like the Asian Development Bank and the World Bank.

MOST WILL WAIT AND SEE 

Faced with these obstacles, it would be easy for investors to wait on the sidelines until there are more certainties around the One Belt, One Road initiative. Outstanding questions should give any executive pause: Is this primarily a foreign policy play by China? Do the economics actually work? Is the geographic breadth too big? Will returns be realised?

While it might still be too early to commit financially unless these questions are answered, aggressive companies will want to devote resources to staying informed of its progress and be ready to commit if the opportunity arises. 

On the flipside, for most private and public investors, it is also still too early to decide to opt out. Doing so might relegate them to watching as others seize the opportunities presented by the world largest single trade and development initiative.

Diaan-Yi Lin is managing partner, Singapore and Joseph Luc Ngai is managing partner, Greater China in McKinsey and Company. 

Over recent years, Thailand has emerged as a highly attractive investment destination. In 2015 alone, according to figures from the United Nations, the flow of investment into Thailand increased by more than 200%. This has been facilitated by the country’s consistent and well-defined investment policies, increased regional connections and its government’s determination to improve transportation infrastructure. There has also been a widespread expectation of a long-term stability in its political and economic environment.

Well-defined Investment Policies

As part of the strategy to attract foreign investment, the 2013 reduction of its corporate income tax level to 20% saw the country’s corporate tax rate become the second lowest in the ASEAN bloc, behind only Singapore.

Two years later, in 2015, Thailand’s Board of Investment (BOI) announced a seven-year investment promotion strategy. This had a specific focus on investments intended to enhance national competitiveness, as well as activities that were environmentally friendly, energy saving or using alternative energy. It also looked to boost clusters that created an investment concentration based on regional potential, while strengthening the value chain. In particular, it aimed to nurture investments in the border provinces of southern Thailand, which could develop the local economy, as well as special economic zones capable of fostering economic connectivity with nearby countries. Additionally, it outlined plans to attract overseas investment in order to enhance the competitiveness of Thai businesses, while boosting the country’s role within the wider global economy.

Japan has long been a major investor in Thailand.

Among the incentives on offer to help realise these strategic goals are a number of tax concessions, land ownership deals, and streamlined investment procedures, as well as import duty exemptions/reductions relating to activities that meet national development objectives. Additionally, any manufacturing company in receipt of investment promotion privileges is exempt from both foreign equity restrictions and local content and export requirements.

According to the BOI, the total value of approved foreign investments in Thailand in 2016 was 358.11 billion baht (US$10.1 billion). Overall, Japan was the largest investor, accounting for 22% of the total. However, funding from Australia, Cayman Islands, China and South Korea recorded substantial increases. In 2016, China became the second largest investor in Thailand, accounting for 15% of the overall total.

In terms of individual sectors, services and public utilities accounted for the largest share of investments during 2016 (87%), followed by chemicals, plastics and papers, agriculture and agricultural products, and metal products, machinery and transport equipment. Significant growth was seen in investment into agriculture and agricultural products, and chemicals, plastics and paper.

The Logistics Sector: Set to Benefit from Increased Regional Connections

Within Southeast Asia, Thailand is situated at the strategic centre of the Indochinese peninsula. It borders Myanmar to the west and north, Laos to the northeast, Cambodia to the east and Malaysia to the south. Unsurprisingly Thailand’s border trade is growing steadily, driven by the development of its neighbouring countries and the establishment of the ASEAN Economic Community (AEC), a body dedicated to fostering regional integration. According to the country’s Foreign Trade Department, Thailand’s border trade value was estimated to be worth 1.47 trillion baht in 2016, an increase of 2.8% year-on-year. In 2017, it is expected to grow by a further 3%.

Against this backdrop, one of Thailand’s key development strategies is to establish 10 Special Economic Zones (SEZs) over the short-term. These zones will be contiguous to Myanmar at Tak and Kanchanaburi; Laos at Mukadahan, Chiang Rai, Nong Khai and Nakhon Phanom; Cambodia at Sa Kaeo and Trat, and Malaysia at Songkhla and Narathiwat.

Developments such as these as seen as demonstrating the considerable potential of Thailand’s logistics and services sectors. The country already has in place extensive and well-equipped transportation networks, capable of serving as the region’s logistics and services hub and meeting the growing demand from neighbouring countries. This demand includes an enhanced requirement for consumer and business services, including finance, logistics, regional training centres, health care and several other lifestyle-related sectors.

Historically, inadequate infrastructure has impeded Thailand's economic development. In order to tackle this particular problem, the Thai government has drawn up plans for a radical expansion of the county’s railways, highways and other core infrastructure sites over the next few years. Ultimately, this should lower logistics costs and make the country still more appealing to investors.

Major Infrastructure Projects 

In 2016, the Thai government approved 20 infrastructure projects, all intended to bolster the country’s long-term competitiveness. At the same time, these projects should create enormous investment opportunities in the country’s construction and engineering sector.

In an additional move, at the end of 2016, Thailand's cabinet approved an infrastructure action plan for 2017, said to be worth some 896 billion baht. Under the terms of the plan, 35 infrastructure projects, relating to rail, road, air transport and ports throughout Thailand, are to receive funding. The projects will be financed by borrowing 576 billion baht (64%) and through public-private partnerships (197 billion baht - 22%). Further funding will come from the government budget (74 billion baht - 8%) and the Thailand Future Fund (45 billion baht - 5%) with the remainder coming from the private companies behind the projects.

Traffic is always heavy in Bangkok.

In Thailand, domestic transport is heavily reliant on the road network, which meets some 90% of the country’s transportation requirements and, as a result, is constantly congested. In a bid to relieve this problem, work has been green-lit on the re-development of the Greater Bangkok electric train network. This would allow the national capital to extend its reach and enhance its connectivity with nearby provinces. The Thai government also plans to promote railway transportation as a means of reducing logistics costs and improving efficiency. Currently, most of Thailand's railway network is single-track, though a dual-track system is currently under construction. A second phase – consisting of seven double-track rail projects spanning 1,439 kilometres and worth 292 billion baht – is now being considered by the cabinet.

Another current priority is a major redevelopment of the country’s airports. Billed as the Airports of Thailand initiative, this envisages 194 billion baht being spent over the next 15 years on expanding six of the country’s airports – Suvarnabhumi and Don Muang in Bangkok, as well as the existing sites in Hat Yai, Chiang Mai, Chiang Rai and Phuket. Collectively, these six airports handle about 90% of Thailand’s air traffic. By 2030, these principal airports will be capable of serving 150 million passengers every year, more than twice the current capacity.

Sino-Thai Relations Under the Belt and Road Initiative

The Belt and Road Initiative – also known as the Silk Road Economic Belt and the 21st Century Maritime Silk Road – is a wide-ranging development strategy launched by the Chinese government. Its stated intention is to promote economic co-operation between countries along the proposed Belt and Road trading routes.

To date, this initiative is seen as having strengthened Sino-Thai relations, especially with regards to infrastructure development. Perhaps the primary example of this is the Sino-Thai Railway project, part of the Pan-Asia Railway Network's central route, which will connect China, Laos, Thailand, Malaysia and Singapore. For many, this is the most potent symbol of co-operation between China and Thailand for a considerable number of years.

In the most recent development, the Thai government announced plans to fund this project itself, although the trains and signalling systems will be bought from China. According to Arkhom Termpittayapaisith, the Thai Transport Minister, construction could begin as early as March this year, with bidding for the work to be concluded in February [1]. Upon completion, the train service is expected to be able to reach speeds of 250km an hour. It is expected that this high-speed connection will take Sino-Thai relations to a whole new level, particularly with regard to economic and trade co-operation.

[1] Source: “Work on High-speed Train Projects to Get 2017 Start”, Bangkok Post, 3 January 2017.

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With concern about anti-globalisation policies in developed countries medium term, China’s Belt and Road Initiative is an important factor linking Asia together in a multilateral approach, said Dr Raghuram Rajan at AFF 2017. The former Reserve Bank of India Governor also said Hong Kong could act as a super-connector to the Initiative, given important Belt and Road requirements for design, finance and construction management.   

Speaker:
Dr Raghuram Rajan, Distinguished Service Professor of Finance at the University of Chicago Booth School of Business 

Related Links:
Hong Kong Trade Development Council
http://www.hktdc.com/

Asian Financial Forum
http://www.asianfinancialforum.com/en/index.htm