How to get the eggs into the right basket

Increasingly important Chinese investment in Europe needs to be fine-tuned

Since China put forward the "going global" strategy at the end of the 1990s, its outward foreign direct investment has risen rapidly, and Europe is one place that has attracted a great deal of that investment.

According to The Economist, a ride in a London taxi from Canary Wharf to the Bank of England is very much a Chinese experience: London's black cabs are made by Manganese Bronze, partly owned by Geely, a Chinese carmaker that owns Volvo; China Investment Corporation has the third-largest stake in Songbird Estates, which controls Canary Wharf Group; CIC may soon become an investor in the Citigroup building, a landmark skyscraper in London; the Bank of England is increasingly encircled by Chinese banks; and Bank of China, which has been in London since 1929, has recently moved into its new headquarters that overlook Britain's central bank. Down the road in King William Street, the builders are at work inside the future home of the Industrial and Commercial Bank of China.

With the spectacular growth of China's economy, it has now become an exporter of capital. China's Ministry of Commerce says that by the end of July outward foreign direct investment had reached $364.3 billion (280.8 billion euros). It was undertaken by more than 16,000 Chinese enterprises located in almost 180 countries and regions.

China's investment in Europe has also been growing rapidly. According to China's official data, by the end of 2010 Chinese direct investment in Europe had risen to $15.7 billion, accounting for 5 percent of China's total overseas investment, lower than the percentages of Asia (72 percent) and Latin America (14 percent), but higher than Africa (4.1 percent), Oceania (2.7 percent) and North America (2.5 percent).

Chinese investment in Europe is mainly found in areas such as leasing and commercial services, manufacturing activities and financial sectors, accounting for 47 percent, 25 percent and 12 percent, respectively, of the total investment in 2010. The major destinations are Luxembourg, the Netherlands, Ireland and Germany.

Europe is not well endowed with natural resources, but its investment environment is favorable. Most of the countries there are developed, with high per capita GDP and huge market potential. It is politically stable and advanced in science and technology, so Europe has become one of the most favored destinations for China's outbound investment.

Martin Waller, a columnist for the British newspaper The Times, says there are three "often overlapping reasons why the Chinese should be interested in European companies. They can be summarized as infrastructure, industrial technology and brands".

Apart from those three motivations, China needs to diversify its huge foreign-exchange reserves. It is increasingly recognized that China should not put all its eggs in one basket by buying US debt. Among the many ways of diversifying, promoting overseas investment is one.