Category Archives: Eurozone

11th
Nov 2017

Why we are entering a new era in China-Europe relations

US President Donald Trump’s ‘America first’ announcements and policies are alienating his Western allies. This coincides with the United Kingdom beginning its departure from the EU, now set for 29 March 2019 at 23:00. In these circumstances, China has been quietly reaching out to Western nations. Both Beijing and Brussels hope to move ahead with economic globalization, and during the annual EU-China Summit held in Brussels on June 1–2, 2017, the two sides forged a new green alliance to combat global warming, a clear nose thumbing at Trump. With the EU and the United States increasingly divided, this moment may mark the beginning of a new China-EU axis in global politics.

One of the areas in which China and the EU have developed strong ties is in the monetary field. Beijing has traditionally supported the euro, which is the only serious alternative to the dollar, and has diversified its foreign exchange reserves—the world’s largest—so that it now holds over one-third in euros and just slightly more than half in dollars, a decrease of around 30 percent since 1999, when the European common currency came into circulation. What this means is that in the last several years, Beijing has swapped dollars for euros, a trend that is likely to continue in future.

China’s diversification strategy signals that the dollar is no longer the world’s only reserve currency, and this is important to Beijing, which is trying to internationalize its currency as it weans itself off of its dependency on the United States’ economic cycle and monetary policy. Europe has, in turn, supported many of China’s monetary ambitions. The Europeans unanimously backed the decision by the International Monetary Fund (IMF) in December 2015 to include the renminbi in the basket of currencies making up the Special Drawing Right (SDR), an international reserve currency that includes the U.S. dollar, the euro, the British pound, and the Japanese yen. The decision was clearly political. The EU wanted to send a friendly message to China, the world’s second-largest economy, as well as to recognize what Beijing had done to support the euro during the euro crisis of 2009–11, when the European common currency became the target of speculative attacks mainly stemming from Wall Street–based banks and hedge funds. At the time, Chinese leaders intervened on various occasions to reassure the financial markets by buying eurozone bonds.

Today, the old continent is home to the largest number of renminbi bank clearings or offshore hubs where the Chinese currency can be traded. The fact that offshore renminbi hubs have also emerged in Budapest, Frankfurt, Luxembourg City, Madrid, Milan, Paris, and Prague indicates Europe’s willingness to promote the use of the Chinese currency. In the same vein, most of Europe’s central banks have accepted—or are considering accepting—China’s currency as a viable reserve. Although London is currently the most important offshore market for renminbi trading, once the United Kingdom leaves EU, significant shares of renminbi trading in London will most likely move to the continent, in places such as Paris, Frankfurt, and Luxembourg, thus strengthening the China-EU monetary axis even more.

When it comes to trade, relations between China and the EU are more rocky, although Trump’s derision of global trade certainly provides an opening. Between 2002 and 2016, total EU-China trade has risen dramatically, from 125 billion euros to roughly 515 billion euros. Today, China and the EU trade more than 1.5 billion euros in goods each day, and total bilateral trade in 2016 was 514.6 billion euros according to the European Commission—nearly equivalent to what China exchanges with the United States. In fact, the EU is now China’s most important trading partner, although China ranks number two for the EU, after the United States.

In addition to buoyant commercial relations, Beijing is trying to charm Europe through investments. Europe is now the top destination for Chinese foreign investments, surpassing the United States. According to the China Global Investment Tracker, a joint project of the American Enterprise Institute and the Heritage Foundation, China invested nearly $164 billion in Europe between 2005 and 2016. During that same period, it invested $103 billion in the United States.

These dynamics indicate that Europe-China relations are entering a new phase. Make no mistake, however. A China-EU alliance would be more a marriage of convenience than a solid partnership—one that is facilitated by Brexit and that revolves around a shared antagonism for Trump. We must wait and see whether the new dynamics within both the United Kingdom and the United States transform this axis into a more permanent one as new possibilities for China-EU relations open up, unthinkable only a few years ago.

An earlier and expanded version of this article was published in Foreign Affairs.

14th
May 2016

Chinese firms investment spree favours Europe over America

Chinese companies made record bids for foreign acquisitions in the first quarter of 2016, focusing especially on agriculture, manufacturing and tourism. But while such investments have been met with open arms in Europe, regulatory resistance is stiff in the United States. With Chinese firms eager to gain Western technology, brands and customer bases, the European Union is likely to benefit.

Chinese investment abroad was almost nonexistent. Today, China is one of the world’s top three sources of foreign investment. According to financial data provider Dealogic, Chinese firms put up some $102 billion to buy foreign companies between the beginning of the year and mid-March 2016. This includes the mega-bids for Swiss agrochemical firm Syngenta by China National Chemical Corporation (ChemChina) and for Starwood Hotels & Resorts by a consortium led by Chinese insurer Anbang. Anbang’s $13 billion bid ultimately failed, but the numbers are still eye-popping. For comparison, Chinese companies spent $106 billion overseas throughout the whole of 2015.

The value of Chinese firms’ offshore assets is set to triple from about $6.4 trillion in 2015 to nearly $20 trillion by 2020, according to a joint report by the Rhodium Group, a research company, and the Mercator Institute for China Studies. A growing share of these offshore assets will be in Western countries. China’s global stock of investment abroad, which includes corporate mergers, acquisitions and spending on start-ups, is expected to grow from $744 billion to $2 trillion by 2020. There is plenty of room to grow. Today China’s stock of outbound investment represents only about 7 percent of gross domestic product. In Germany, the proportion is 47 percent, in the US it is 38 percent and in Japan it is 20 percent.

Chinese companies undertake cross-border deals for many reasons, including access to resources, expertise, technology and brands, as well as to move up the value chain. A classic example is Lenovo’s acquisition of IBM’s personal computer business, which allowed the Chinese firm to gain global distribution, operational expertise and brand value. Chinese companies are increasingly eager to learn from their global competitors and absorb best practices in areas such as risk management, quality control and information technology.

Chinese firms

After having relied on investment from other countries for years, China has begun encouraging domestic companies to invest and operate overseas. This is all the more important for the Chinese firms saddled with debt, overcapacity and losses – the so-called “zombie companies” – many of them SOEs. Their situation is partly the result of huge investments Chinese authorities required them to make to stimulate the economy after the 2008 global financial crisis crimped international demand. Acquisitions abroad address these problems by offering a better return on capital – which is declining inside China – and by allowing firms to offload some of their debt onto newly purchased companies. The People’s Bank of China (PBOC) has designed loan schemes to support companies that invest overseas.

There is, however, risk of a backlash from regulators, especially in the US, where the Committee on Foreign Investment could block deals – such as the recent Syngenta mega-bid – if it is deemed to endanger the country’s food supply, and thereby its national security. In February, Fairchild Semiconductor International rejected a $2.5 billion takeover offer from a Chinese-led group, opting instead for a smaller offer from an American rival. The company cited concerns that US regulators could block the deal with the Chinese. The unsuccessful offer was one of at least 10 failed Chinese bids in the last year, according to the New York Times.

The winner in the battle between American regulators and Beijing-backed companies will be Europe, which has clearly become the preferred destination for Chinese investors. According to the China Global Investment Tracker, a joint project of the American Enterprise Institute and the Heritage Foundation, between 2005 and 2016, China invested nearly $164 billion in Europe (including non-European Union countries). During the same period, it invested $103 billion in the U.S.

The Rhodium Group found that between 2000 and 2014, Chinese companies spent 46 billion euros ($52 billion) on 1,047 direct investments (greenfield projects and acquisitions) in the EU-28 countries, with the vast majority of the transactions coming after 2009. The United Kingdom received the biggest share of that amount, with a total of 12.2 billion euros ($13.8 billion), followed by Germany with 6.9 billion euros ($7.8 billion) and France with 5.9 billion euros ($6.7 billion). In 2015, however, ChemChina’s acquisition of Pirelli put Italy in the top position.

Chinese companies show no sign of slowing their investment push. More big deals can be expected in coming years. If the American politicians and regulators continue their stiff resistance to Chinese investment, Europe will see even more money flowing in.

An earlier and expanded version of this article was published by the: austriancenter.

14th
Mar 2015

China and Europe boost monetary connections

Europe’s four-largest economies – Germany, France, the United Kingdom and Italy – have decided to join the Asian Infrastructure Investment Bank (AIIB), a China-led regional bank designed to finance infrastructure projects in areas such as energy, transportation and communication in Asia. China is set to provide up to 50% of the bank’s $50 billion initial capital. Initiated in October 2014, the AIIB is seen as a potential rival to the US-based World Bank and this partly explains why Washington put pressure on the European allies to stay out from the China-led bank.

Yet, the US appears to have overlooked the extent of the monetary connections established between Europe and China in recent times. The two have, in fact, boosted monetary relations through currency-swap agreements, yuan bank clearing, and support for each other’s currency – the euro and the renminbi.

Today, the renminbi is the world’s second most used trade finance currency and the seventh-ranked global payments currency. The People’s Bank of China (PBOC) has in the past few years signed bilateral currency swap agreements worth more than 3 trillion yuan ($480 billion) with 28 central banks and monetary authorities.

More than 50 central banks have so far added the Chinese currency to their portfolios as growing trade ties and a growing number of reforms by Beijing are leading reserve managers to view it as a viable reserve currency. Most of Europe’s major central banks have added – or are considering adding – the Chinese currency to their portfolio, often at the expense of the dollar. In October 2014, for instance, the United Kingdom raised 3 billion yuan via a landmark offshore sovereign yuan bond and kept the proceeds into its foreign exchange reserves rather than converting them into dollars.

In October 2013, the PBOC and the European Central Bank (ECB) signed a bilateral currency swap agreement for a sum of €45billion (RMB350 billion), the largest ever signed by Beijing outside the region. In November 2014, the ECB decided to add the Chinese yuan to its foreign-currency reserves.

Source: www.leaprate.com

Source: www.leaprate.com

The PBOC has also designated a number of yuan clearing banks, known as RMB Qualified Foreign Institutional Investor (RQFII). Half of these ‘renminbi hubs’ are in Europe, in places like London, Frankfurt, Paris, Luxemburg and Prague. In January 2015, China’s and Switzerland’s central banks signed a RQFII agreement, making Zurich the newest hub for renminbi trading.

China’s ultimate goal is to make the yuan one of the main currencies for global trade and to place limits on the role of the dollar in the international monetary system. Since 2008, Chinese officials and scholars have maintained that the US is abusing its position as controller of the main reserve currency by pursuing irresponsible economic policies. An op-ed by Xinhua agency on 13 October 2013 did not hesitate to call for a ‘de-Americanized’ world.

The euro is seen in Beijing as a counterbalance to the dollar and instrumental for creating a multipolar currency order where the renminbi would also have its place. Consequently, China has divested away from the dollar in recent years and into the euro. Today, euro-denominated assets represent around one-third of China’s total foreign currency reserves which, at more than US$4 trillion, are the world’s largest.

Eurozone governments and institutions have actively courted Chinese purchases of euro-denominated assets. Since its establishment in May 2010, the European Financial Stability Facility (EFSF) – replaced in October 2012 by the European Stability Mechanism (ESM) – has actively sought Beijing’s support, obtaining concrete pledges for the purchase of Portuguese, Irish and Greek bailout bonds auctioned by the EFSF/ESM €440 billion rescue fund.

Monetary relations between China and Europe are expected to intensify in the future, challenging the dominant position of the dollar. If the issue is not handled with attention, there is risk of a serious transatlantic rift.

29th
Jan 2015

China’s investment spree in Europe

China’s investment outflows are growing fast and Europe is one of the main beneficiaries of this trend. By the end of 2014, China had invested $54 billion in the stocks of European companies, becoming the fifth largest investor in the Old Continent – after the United States ($3,23 trillion), Canada ($155 billion), Bermuda ($77 billion) and Japan ($56,5 billion).

China’s financial rebalancing towards Europe is part of Beijing’s broader strategy to export capital and political influence. In 2014, China became a net exporter of capital for the first time as the country is implementing legislation that reduces restrictions on outbound investment and encourages companies to look overseas for mergers and acquisitions. In 2013, Chinese outbound investments were at a high of $108 billion, up 23% from a year earlier, bringing total direct offshore investment to $660 billion.

In November 2014, China’s President Xi Jinping announced that Chinese offshore investment will reach $1.25 trillion over the next decade, nearly tripling current Chinese outbound direct investment. This sum includes a $40 billion contribution to the Chinese-led ‘Silk Road Fund’ aimed to invest in infrastructure to support Xi’s vision of a ‘new silk road and maritime silk road’ to link China with Europe and the Mediterranean. Chinese officials have repeatedly declared that Europe is one of the primary destinations of capital outflows, a trend which became evident in the second half of 2014.

Source: www.cctv-america.com

Source: www.cctv-america.com

While Germany, France and the United Kingdom have long been the preferred destinations of Chinese investments, in 2014 interest for Eastern and Southern Europe has soared, in what has been dubbed as the dawn of a second Marshall Plan for the continent’s troubled periphery. Since Spring 2014, the People’s Bank of China (PBOC) – through its investment arm, the State Administration of Foreign Exchange (SAFE) – has invested more than €3.2 billion on stakes of about 2% each in eight of Italy’s largest companies: Fiat Chrysler Automobiles, Telecom Italia, Prysmian (world’s top cable maker), Generali, Mediobanca, Saipem and state-controlled Eni (oil and gas operator) and Enel (utility). This has made the PBOC the 12th largest investor in Italy’s stock exchange. On top of it, in May 2014 Shanghai Electric Group bought a 40% stake in power engineering company Ansaldo Energia for €400 million and in July, China’s State Grid acquired a 35% stake in energy grid holding company CDP Reti for €2.1 billion.

By the end of January 2015, Beijing had invested more than €5.8 billion in Italy, a sum which represents around 7% of China’s total investments in Europe. The Italian government has supported unwaveringly Chinese investments, a move mirrored by other austerity-hit peripheral countries of the eurozone. In June 2014, Greece and China signed a ship-building deal worth €2 billion, financed by China Development Bank. In Portugal, Chinese investors swept up 45% of the total assets – mainly infrastructure – put up for privatisation under the Economic Adjustment Programme inspired by the EU and the IMF.

Project financing has emerged as one of the most promising areas for Chinese involvement in Southern and Eastern Europe. At the Third Meeting of heads of government of China and the 16 Central and Eastern European Countries (CEECs) held in Belgrade in mid-December 2104, Li Keqiang, the Chinese Premier, pledged to inject more investment to boost infrastructure and sea and land connections between China and the region, in addition to the 69 cooperation projects between China and the CEECs implemented after the second meeting in Romania in November 2013.

The Balkans have become China’s new frontier for investment. On 17 December 2014, China, Hungary, Serbia and Macedonia agreed to build a land-sea express route by expanding the Budapest-Belgrade rail line to Skopje, Athens and the port of Piraeus in Greece – one of the largest container ports in Europe – where Chinese shipping giant COSCO has a 35-year concession for two piers. Needless to say that the corridor will be built and financed by Chinese companies.

A more friendly investment environment – compared with other developed economies such as the US and Japan– and the slower than expected recovery from the debt crisis has made Europe – in particular the periphery – a valuable destination for China as it constantly looks for global opportunities to preserve and increase the value of its reserves.

A longer version of this article is published by ISN Security Watch with the title: China’s financial footprint in Europe

07th
Nov 2014

Europe to benefit from the internationalization of the Chinese currency

China is stepping up preparation for the internationalization of its currency and Europe is likely to benefit from it. Last year the Chinese government launched the Shanghai free-trade zone (FTZ), setting the country off with an ambitious plan for economic and financial reforms. If successful after the three-year test period – which will end in October 2016 – the FTZ could pave the way to the convertibility of the renminbi (or yuan), thus creating an alternative reserve currency to the dollar.

Today, the renminbi is the world’s second most used trade finance currency. The immediate goal for Beijing is to make it the main currency for trade in Asia and place limits on the role of the dollar in the international monetary system. More than 50 Central Banks have so far added the Chinese currency to their portfolios as growing trade ties and a growing number of reforms by Beijing are leading reserve managers to view the renminbi as a viable reserve currency. For instance, at the beginning of October the United Kingdom raised 3 billion yuan via a landmark offshore sovereign yuan bond and kept the yuan proceeds into its foreign exchange reserves rather than converting them into dollars or euros. Moreover, Australia publicly acknowledged a few weeks ago that it has allocated 3% of its foreign exchange reserves to renminbi. The increase of the renminbi in the foreign reserves is often done at the expense of the dollar.

Chinese currency: 100 Yuan (or Renminbi)

Chinese currency: 100 Yuan (or Renminbi)

Since the onset of the global economic crisis, Chinese officials have maintained that the US is abusing its position as controller of the main reserve currency by pursuing irresponsible economic policies. In March 2009, Zhou Xiaochuan, the People’s Bank of China (PBOC) governor, explicitly called for the creation of a new international reserve currency. An op-ed by Xinhua news agency on 22 October 2013 did not hesitate to call for a ‘de-Americanized’ world. Besides official declarations, China has also taken concrete action: since 2009, the PBOC has signed currency swaps agreements with numerous Central Banks around the world.

As China is stepping up preparation for the internationalization of its currency, Europe is seen as playing a crucial part. While the dollar still accounts for more than 60% of global – and around 55% of Chinese – reserves, the euro provides China with a formidable alternative. Today, euro-denominated assets represent around one-third of Beijing’s total foreign currency reserves (which, at US$4.2 trillion, are the world’s largest). This means that Beijing has bought around one and a half trillion euros. In October last year, the PBOC and the European Central Bank (ECB) signed a bilateral currency swap agreement for a sum of €45billion (RMB350 billion), the largest ever signed by Beijing outside the region. This October, the ECB decided to add the Chinese yuan to its foreign-currency reserves.

Today, the EU is China’s first trading partner; the two sides trade more than one billion a day. Europe is also one of the primary destinations of Chinese overseas investments and the Eurozone is now one of the major beneficiaries of Beijing’s divesting its foreign reserves away from the dollar. The internationalization of the Chinese currency is therefore likely to be a boon for Europe.