Winning the Race for Chinese Investment

2008 may be China’s year. Certainly having the eyes of the world on the country for 3 weeks of Olympic events hasn’t hurt. It also doesn’t hurt to have double-digit growth and a booming economy for the umpteenth year. And despite the global credit crunch, China appears to be undaunted and seems poised to continue its massive investment abroad. For as tourists and business interests flock to the East in search of new experiences and new markets, China is continuing its Journey to the West, by establishing an investment base in Europe for expansion into Africa, the Middle East and the rest of Europe.

Competition between New York, Europe and Asia for Chinese investment and Chinese IPOs has been fierce in recent years, after a long period when the U.S. market was the default choice for Chinese businesses. 2007 was a record-breaking year for Chinese IPOs in the United States, but since then initial public offerings from Chinese companies have virtually disappeared.

New stringent regulatory laws that make it harder for Chinese companies to pursue initial public offerings in the U.S. are partly to blame for this sudden change. And economic conditions in the U.S can also be blamed. But the aggressive campaigning of the London Stock Exchange (LSE) and other European markets for Chinese investment have also contributed to the shift.  An indication of the importance of Chinese Yuan was the establishment earlier this year of an LSE representative office in Beijing, a move which followed the openings of the New York Stock Exchange and The NASDAQ Stock Market offices in 2007.

The reason for this interest in Chinese investment?  The amount of money involved. Last year, $117.7 billion was raised on global equity markets by Chinese companies. That figure was second only to the United States. With Western companies fighting their way into the Chinese market, Chinese money is flowing out, providing an enticing incentive to markets around the world to battle for this capital.

While IPO’s are the main way Chinese businesses are establishing a foothold in Europe, other financial vehicles such as mergers and acquisitions and private partnering also contribute to the overall investment numbers.  Chinese investment in European projects has increased 500% since 2000, according to Ernst & Young China, and this increase encompasses both large and small-scale investment. While industries giants like China Telecom and Nanjing Auto grab the headlines, small and medium-sized enterprises are also joining the move to Old Europe.

With all of this capital flowing out of China, it’s no wonder that governments throughout Europe are doing everything they can to encourage Chinese IPOs and direct investment. The London government is even taking advantage of the link between the Beijing Games and the London Games in 2012 to encourage Chinese companies to move their European operations to the British capital. 

While London is the obvious leader in attracting Chinese investment, other European capitals are also seeing the benefits of increasing their economic partnership with China. Last year, trade between the EU and China topped  300 million, making the EU China’s largest trading partner. And French President Sarkozy’s  20 billion trade deal with China last year is a harbinger of future initiatives from European capitals.

Investing in Europe also makes sense for Chinese businesses and for the Chinese economy. In today’s increasingly multi-lateral world, diversification is both prudent and effective. And with the current state of the U.S. economy, China sees obvious benefits in pursuing investment in the EU. While the United States remains the world’s largest economy, the EU has stronger ties with Africa, Russia, and the Middle East and provides China with the perfect base to expand their investment into these regions.

So while the world looks East and focuses on China and the Olympic Games, it is increasingly clear that China’s Journey to the West will continue, with more and more Chinese businesses pursuing IPOs and making direct investments in the West. Helping and encouraging that investment is both an opportunity and a challenge for European governments and business interests. For in the early economic races of the 21st century, attracting Chinese investment is one of the global economy’s top prizes.

Didier J. Rault is Founder and Chairman of International Finance Capital, a Hong Kong and New York based company specializing in “West to East” and “East to West” investment.  www.ifc-group.com