Englishmen: Did you know the Chinese now control House of Fraser? Italians: Did you know the Chinese now own Pirelli? Swedes: Did you know the Chinese now own Volvo?
Depending on how old you are, you’ll likely be either embracing or resisting the Chinese economic offensive into Europe. But if you’d been a Greek youth struggling with 50 percent unemployment in the eurozone crisis, you would have been loving the extra Chinese foreign investment.
China has been looking to break into Europe for decades; in the last five years, its efforts have finally paid off. From 2010 to 2014, Chinese investments in Europe went from $6 billion to $55 billion. And remember, that huge increase happened as China’s economy had been comparatively slowing down.
Today, the European Union is the preeminent trading partner of China: In 2014, they exchanged $621 billion worth of goods. China, of course, exports more than its European partner, making a $183 billion trade deficit in favor of the Chinese.
Despite the dramatic changes, the United States still tops Chinese trade with the EU by a significant margin. It takes a lot to be shoved from the top spot, but the Chinese are eager make it happen. China’s nuts-and-bolts approach to trade in Europe is closing the gap. While the U.S. is floundering with the much-hated Trans-Pacific Partnership, China’s nuts-and-bolts approach, with its One Belt, One Road Initiative, has made some significant gains.
Why, though, is China pushing into Europe? Why not focus on the United States, which opened China’s economy to the world in the first place? Why not further the partnership of the world’s two largest economies?
There are a number of reasons. For one, the Eurasian continent contains 5 billion people—two thirds of the world’s population in one contiguous landmass. If you’re looking for the greatest potential market, it’s good to work within Eurasia.
There’s also the issue of relationships. If you tune in to American news, you’ll likely be bombarded by stories of China militarizing islands in the South China Sea or China sinking fishing boats. If you tune in to Chinese news, you’ll likely be bombarded with stories of illegal U.S. naval routes or arbitrary United Nations rulings.
As Phillipe Le Corre and Alain Sepulchre write in China’s Offensive in Europe, China is increasingly seen as the “scapegoat of choice for an anxious American political class.” The authors point to a number of deals which have been aborted because of these anxieties, including:
… the aborted purchase of the oil group Unocal by the China National Offshore Oil Corporation in 2005, or of 3Leaf, a cloud computing company, by Huawei in 2011. Even Shuanghui International’s acquisition of the agro-food giant Smithfield was almost blocked by pressure from interest groups.
Chinese and American strategic interests collide in a lot of areas, but the Europeans don’t seem to mind the Chinese. With that in mind, China is looking to the currently vulnerable EU. With debt, currency, unemployment and political crises converging in Europe, it isn’t turning down the economic helping hand.
According to a number of Pew Research polls, the majority of people in the major European countries believe that China has replaced or will replace the United States as a superpower. Pew also found that Chinese favorability ratings have been rising (albeit slowly) after the global financial crisis in 2008—caused by the United States.
China’s initial expansion into the Western world was originally promoted with a government policy called “Zou Chu Qu.” Its English translation is “Going Out,” and it encouraged the Chinese businesses to push into the international markets. In the decades American companies had been becoming multinational corporations, the Chinese had been insular.
With the government promoting outward trade, EU imports from China increased 11-fold from 1995 to 2013. Exports going the other way increased in the same period by over eight times. But there’s a huge difference between mere trading and becoming an established economic partner. It’s the difference between having goods shipped from thousands of miles away and simply walking to the store.
Until 2008, Chinese entrepreneurs thought, according to Le Corre and Sepulchre, “that European markets were too complex and overly regulated.” They could trade with each other, but direct investment was tricky business that came with culture clashes. Meetings were knotty affairs. James Mann, former Beijing bureau chief for the Los Angeles Times, wrote about how Western officials could come to a meeting with “no idea what to expect from their Chinese counterparts”:
Points they thought would be tough turned out to be extremely easy, and those they considered trivial produced astonishing reactions from the Chinese. … We could never tell where the obstacles were going to be.
While there are still major difficulties with negotiations in 2016, the Chinese are beginning to learn the EU business languages.
In 2013, the face which defines China for millions of Westerners, President Xi Jinping, launched the One Belt, One Road Initiative. Two thousand years ago, an ancient trade network now called the Silk Road connected Asia and Europe. Wanting to reconnect the two regions in the modern world, Xi used the iconic label to conjure images of China’s illustrious (but usually unrecognized) past.
Xi set aside $40 billion for the “Silk Road Infrastructure Fund,” with which he hopes to build expansive infrastructure spanning the entire Eurasian continent, such as high-speed railroads. China has been willing to upgrade other countries’ infrastructure because the project as a whole will eventually benefit them.
Then came a big year: 2015. The year saw 20 bilateral summits between Chinese and European leaders. At a summit celebrating 40 years of diplomatic relations, the two reaffirmed the EU-China Comprehensive Strategic Partnership established in 2003. At the end of the year, the Asian Infrastructure Investment Bank, which Xi had announced the creation of in 2013 in an attempt to establish China as a financial heavyweight, began operations. With $100 billion in capital, it was to be half the size of the World Bank. The United States warned countries not to join. The 57 countries who joined ignored the warning.
“China has one objective: infiltrate the block of Western countries and separate Europe from the United States; to do this the Chinese are beginning with the weakest countries like Italy,” said Italian economist Alberto Forchielli, who is also an influential blogger in Chinese media.
It has infilatrated Greece as well, a particularly vulnerable EU nation. In April of this year, the Chinese shipping company COSCO purchased a majority stake in the Port of Piraeus (the iconic port the famous Greek Themistocles built up to defend against the Persians). It is viewed as the entry point for Chinese exports into Southern, Eastern and Central Europe. The Chinese ambassador to Greece said it was a “once-in-a-thousand-year opportunity” to jump-start trade in Europe.
The Germany Factor
Making many of the European headlines today are Germany and the United Kingdom. They also happen to be the two largest European economies. Only now the United Kingdom won’t be a part of the EU. Previously, the UK was the EU’s largest recipient of foreign investment from China. With Brexit, Germany has recently taken the top spot.
China made clear its special relationship with Germany in 2011. On a visit to Berlin, then Premier Wen Jiabao announced in typical government language that it was China’s intention to “establish a governmental mechanism for consultation and coordination with Germany to institutionalize our consultations.” In plain English: China’s most important people would meet with Germany’s most important people. Foreign Affairs said that “not even Washington enjoys this sort of special status with China.”
It’s a partnership of the manufacturers. Xi once reminded the Germans that every third container that arrives in Hamburg is a Chinese one. Angela Merkel, who has visited China nearly once a year during her chancellorship, could have probably reminded Xi that almost half of the EU’s exports to China come from Germany.
Room to Move
That’s not to say that everyone wants China to fill the gaps in the European economy—as always, there’s plenty of resistance to foreign infiltration. But for all its expansion, China still has room to move.
“Multinational corporation” is an almost irrelevant term for many large Chinese companies in Europe. With many Western, Japanese or Korean multination corporations, between 80 and 90 percent of revenue is made overseas. With one exception, that of Geely-Volvo, Chinese companies generate the opposite: Only 10 percent of their sales originate abroad. This means there is huge space for the companies to expand.
Powerhouses like the United States have spent over a hundred years developing a trade relationship with Europe. China has only started.
Another factor are the Chinese banks. Le Corre and Sepulchre say “the conquest of the West is occurring thanks to Chinese financial institutions alone.” While 65 percent of Chinese businesses are technically private, they still maintain links with party officials. If big projects need to get done, you do it through the government and its banks.
And Chinese banks are huge. Four out of five of the largest banks in the world, by total assets, are Chinese. One of the major reasons the large takeovers mentioned earlier, such as Pirelli and Volvo, could take place, was because of the Chinese government banks’ willingness to fund them. Le Corre and Sepulchre say that while the interest rates of these loans are typically in line with the market, “the volume of money borrowed frequently is above the threshold of prudence.” For those of us who didn’t grow up speaking in rounded paragraphs, that means absurdly large loans.
When a country of more than a billion people creates a bank, it has the potential to move some serious resources.