China-EU Potential yet to be Realized

December 23, 2014

After 40 years of engagement, two-way trade between the EU and China has now reached  €430 billion, but the potential for the two sides to engage further is huge, with two-way FDI levels not yet reflective of the partnership.

The EU and China are both major global economic players and their economies are immensely interdependent. Two-way trade has grown exponentially over the last decade, yet two-way FDI has not.  In fact, China represents only 2% of EU outflows, while inflows of FDI from China account for only 0.7% of total inward investment into the EU. But the relationship between the two regions is as important as ever with the EU China Investment Agreement, as well as key reforms taking place in China, set to have major implications on the growth of both economies and the health of the global economy as a whole.

That was the message heard loud and clear at the recent EU-China Economic and Finance Forum in Beijing, was co-hosted by CKGSB and formed part of the wider EU-Asia Top Economist Round Table (TERT) series. Both CKGSB’s faculty and alumni were among the experts on hand to provide in-depth analysis of the current situation.

CKGSB’s Founding Dean, Xiang Bing, gave a key address on the challenges and opportunities facing China’s economic future, and pointed out some interesting facts. While innovation is increasingly central to China, especially in the tech sector, Dean Xiang said that a strategy of replication, not innovation, had been most profitable over the past 15 years. But he added that the ‘Made in China’ model was a major limitation to the Chinese economy, with China only keeping a fraction of the revenue in high-end production projects, as well as harming the environment.

Dean Xiang stressed the importance for China to build its own brands, with Huawei a rare exception as a major global success story from China, but added that it does not yet have an Airbus, a Siemens, or a Rolls Royce. On the global stage, Dean Xiang said the perceived ‘China threat’ needs to be mitigated, but said that he was optimistic for China’s future and its ability to continue growing.

Dean Xiang argued that China and the US could learn from the EU in terms of tackling inequality, as both have very high Gini coefficient rates and need to ensure a greater convergence to the middle in terms of socialism and welfare. He called on a greater reflection of two old Chinese proverbs relating to the connection between people and the environment, the notion of the “unity of heaven and man” and the Confucian principle of harmony versus uniformity.

The EU-China economic relationship is built on a solid base of trade with two-way trade growing three-fold in the past decade to a rate of €430 billion, however, the investment relationship is relatively undervalued and has huge potential for growth. Agreement and the reforms agenda in China should create a shift in the economic realities and ensure greater two-way FDI growth.

Li Xiaoyang, Assistant Professor of Economics and Finance at CKGSB, provided an excellent analysis on the recent wave of M&A activity in China and its implications for the EU. According to Dr. Li, this M&A wave has a number of new features: the big three BAT (Baidu, Alibaba, and Tencent) are expanding through acquisitions; hybrid ownership reforms offer private enterprises great opportunities; private acquirers are increasingly common rather than the dominant SOEs; and the possibility to become publicly-listed, a key value-enhancing tool and a main exit channel for VC and PE, is also driving this wave.

Major reforms have been key in this area. In 2013, 12 ministries set out guidelines to promote important sectors for M&As, while the PBC loosened restrictions on individual/firm investment abroad in July 2014. On a wider level, M&A activity has been seen as a key support mechanism to lift SOE productivity to offset inefficiencies and diversify investment.

After outlining some recent M&A examples, Dr. Li said there are some common traits of the M&A activity from China into Europe. Chinese companies are seeking the brand and technology to upgrade consumer discretionary goods and machinery manufacturing. From the EU side, target companies are experiencing stagnant growth and high leverage, whereas Chinese buyers offer capital and market growth prospects. Interestingly, in this wave state champion SOEs, private equities and private enterprises are all active.

Also speaking at the forum was Markus Borchert, President, Greater China region, Nokia, and an alumnus of CKGSB’s MNC General Manager Program. Mr. Borchert discussed the major role that Nokia is playing in China through building partnerships and linkages in mobile broadband technologies, and highlighted the challenge involved in operating in the home market of two of their largest competitors, Huawei and ZTE, as well as the regulatory landscape that supports local enterprises and SOEs.

Nokia has seen a shift in the Chinese investment model, as business models shifted to innovation and domestic consumption driven growth. The joint ventures that Nokia has supported have seen Chinese firms wanting to be a part of the invention and innovation themselves. Nokia has supported this process and Mr. Borchert mentioned that this has been a core approach from the beginning of their operations in China to utilize technological innovations in a joint Sino-Europe operation.

This Sino-Europe venture has overseen the whole process – R&D, manufacturing, distribution, sales – as well as government and industry relations development. Through this, Mr. Bochert said Nokia has been able to utilize its sales and marketing development in China to push its global position, becoming a leader in innovation through its joint approach.

In echo of Dean Xiang’s comments, Mr. Bochert said that taking the long term view is essential in China, and committing to the market is very important. Finally, Mr. Borchert discussed the major opportunities for Nokia in China in a more connected world. He said Nokia wants to use technology to expand the human possibilities of the connected world, and sees China as the center of this connected world.

To read the full report of the forum, please click here.

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