With fears rising over a possible Taiwan conflict, “COVID zero” policies crimping China’s economy and relations between Beijing and several global powers seemingly in free fall, investment in the world’s second-largest economy has lost some of its luster.
But some European companies haven’t received the memo, pouring in an extra 15% in investment in the first half of this year.
That’s despite cooler ties between the European Union and China and plans by bloc heavyweight Germany and other members to curb investments and reduce dependence on the Chinese market, triggering industry concerns about the economic impact of a decoupling.
“It should not be underestimated that China still presents major economic opportunities, despite the growth risks,” said Max Zenglein, chief economist at the Berlin-based Mercator Institute for China Studies (MERICS). “It seems that companies are not yet willing to forgo the economic opportunities the Chinese market has to offer by footing the costs of diversification.”
The data, provided by research firm Rhodium Group, shows that foreign direct investment (FDI) from the European Union totaled €5.5 billion ($5.49 billion; ¥787.6 billion) between January and June, higher than the €4.8 billion registered during the same period in both 2021 and 2020, and up slightly from the €5.4 billion invested in the first half of 2019.
Notably, the figures are not the result of new firms entering the Chinese market.
A Rhodium Group report examining European FDI in China over the past decade reveals that investments have grown much more concentrated, both in terms of the companies that are investing there, the countries they come from and the sectors in which they operate.
“The top 10 European investors in China in each of the past four years made up nearly 80%, on average, of total European direct investment in the country,” wrote the authors of the report, which was published Thursday. “In 2019, the trend toward greater concentration was especially marked, with the top 10 investors representing 88% of all European FDI.”
In comparison, over the previous decade the top 10 European investors in China made up just 49% of the total European investment value.
Five sectors — automobiles, food processing, pharma/biotech, chemicals and consumer products manufacturing — now make up nearly 70% of all FDI from Europe, compared with 57% in 2008 to 2012 and 65% in 2013 to 2017, the research firm noted.
Companies from four European countries — Germany, the Netherlands, the U.K. and France — have comprised 87% of the total investment value over the past four years, compared with 69% in the previous ten years, with German firms accounting for 43% of the total over the past four years and 34% in the previous decade.
This trend, the report says, is driven by a number of factors: German companies were early entrants to the Chinese market and their presence there was actively encouraged and aided over decades by lawmakers in Berlin. They are typically in capital-intensive manufacturing and engineering industries, necessitating large, fixed investments. They also have a major presence in sectors that have seen strong growth in China over the past decade.
The auto sector, particularly Germany’s, is a stand out, representing about a third of all European FDI in China.
“This proportion was even higher in the first half of 2022 as German carmaker BMW increased its stake in its China joint venture from 50% to 75% and other European automakers poured money into new facilities to build electric vehicles,” wrote the authors of the report.
The big three German automakers — Volkswagen, BMW and Mercedes-Benz Group — and chemicals group BASF have led the way in China, with these four firms alone contributing 34% of all European FDI into China by value from 2018 to 2021.
While a handful of large corporations continue to pour money into their China operations, many other firms with a presence in the country are withholding new investment amid what Rhodium Group described as “a widening gap in how European firms perceive the balance of risks and opportunities in the Chinese market.”
The report also notes that barely any European companies are investing in the Chinese service sector, which as of 2020 made up 53% of the country’s gross domestic product. In addition, there have been fewer new entrants into the Chinese market since the outbreak of the pandemic, and the acquisition of Chinese firms has stalled, with greenfield investments — projects in which a parent company creates a subsidiary in a different country, building its operations from the ground up — increasingly dominating the FDI landscape.
This trend has been confirmed by the European Union Chamber of Commerce in China, which has pointed to the rising political tensions between Brussels and Beijing as a primary cause of the growing uncertainty for firms doing business in China in recent years.
“For example, businesses can at times find themselves caught between a rock and a hard place, simultaneously facing competing demands from Chinese and Western stakeholders, particularly as attitudes in the West towards China sour and companies’ China operations come under increased scrutiny,” said a chamber spokesperson. Adding to this is the uncertainty resulting from China’s ongoing COVID zero policy.
So why are some corporations bucking the trend?
The authors of the Rhodium Group report point to three main factors.
First, large European firms have generated significant profits in China and believe the market will continue to be lucrative despite the economic and geopolitical headwinds. These companies also feel they must continue to invest in order to remain competitive with increasingly innovative domestic rivals, for example in sectors like electric vehicles. Finally, large European firms are trying to insulate their China operations from rising global risks through greater localization — an approach that is also being actively encouraged by Chinese authorities.
“In this respect, recent FDI in China looks quite different than it did a decade ago,” wrote the authors of the report. “It has become more defensive, in a reflection of a more risky environment, in China and globally.”
Case in point: German car companies are banking on their joint ventures in China as they may face a crisis in the domestic automobile sector, which “is squeezed between a weak macro environment and the transition to EV and green-energy vehicles,” said professor Michele Geraci, a trade and China expert at the University of Nottingham.
“China is a natural place to hedge this risk and be part of the fast-growing sector, to compete with the likes of Tesla and others,” he noted.
With no clear exit strategy, the EU’s Chamber of Commerce in China notes that most European FDI will continue to come from a very small number of firms, with Beijing’s strict COVID-19 policies “involuntarily opening up the door for other Asian countries to attract European investment.”
It is unclear how long large European investments in China will last, as policymakers in Berlin and other capitals press ahead with a resilience and diversification agenda after having frozen last year the ratification of the EU-China Comprehensive Agreement on Investment.
Reuters reported on Sept. 8 that Germany’s economy ministry is considering a raft of measures to cut the country’s dependency on Asia’s economic superpower, including potentially reducing or even scrapping investment and export guarantees for China and no longer promoting trade fairs and manager training there.
That said, there are concerns about how such measures will be viewed in China, with experts warning about the high cost of a potential trade war with Beijing. According to an August paper by Germany’s Ifo Institute for Economic Research, a decoupling of the EU and Germany from China — resulting in retaliatory measures from the latter — would cost Germany almost six times as much as Brexit.
MERICS economist Zenglein expects any changes in economic ties to be slow and gradual as long as major political escalations can be avoided. “At the same time, there is a lot of strategic rethinking going on, given the emerging geopolitical risks in global economic ties,” he said. “Combined with a gloomy economic growth outlook, trade and investment in China are set to drop over the coming months.”
A full-scale decoupling, however, seems unlikely, he added. “The actual decoupling dynamics are likely to focus on much narrower areas, primarily in the most advanced high-tech sectors.”
Nevertheless, he said, as countries prioritize economic security, some of “the efficiency gains achieved through globalization over the past 30 years will be lost.”
Source: Japan Times