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Sophie Meunier

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China As Savior or Predator in Europe?

Posted: 11/03/11 05:14 PM ET

What do Volvo, the port of the Piraeus, and the Château Viaud vineyard and winery in Bordeaux have in common with Spanish debt and bonds issued by the European Financial Stability Facility (EFSF)? They are all owned by Chinese investors.

In addition to the massive amounts of European sovereign debt and portfolio assets already in Chinese hands, private and state-owned Chinese companies have embarked on a shopping spree in Europe over the past four years. Chinese foreign direct investment (FDI) is still minute compared to other sources of FDI in Europe -- a mere 0.2% of all foreign investment stock in Europe according to recent calculations by the Rhodium Group. But Chinese direct investment is already present in all 27 European Union member states and will likely continue to grow as Chinese firms are encouraged to go abroad, pushed by their own government and incentivized by their own bottom line.

Will Chinese direct investment transform the political economy of Europe, and, if so, is this a real cause of concern for Europeans? Could Chinese investment threaten European unity?

This is a novel situation for European countries more accustomed to investing in emerging, problematic economies than being treated like one of them. Throughout the 20th century, direct investment flowed almost exclusively from developed to developing economies. Europe and the United States were, and still are, the largest investors worldwide and the largest stakeholders in each others' economies. However, outward direct investment originating in developing countries exploded in the past decade, mainly in the direction of other emerging economies, such as India investing in Brazil or China in Africa. A much more recent phenomenon is that emerging countries, chief among them China, are now starting to invest in developed countries. The combination of the global financial crisis, massive currency reserves accumulated by China, and the sovereign debt crises in Europe has turned China into a potential savior perhaps -- but also a potential predator for the embattled European economies.

The savior narrative comes from China seemingly dropping "helicopter money" in national economies that have few alternative prospects of cash influx. Swedish automaker Saab just won a reprieve after two Chinese carmakers agreed to buy the company hours before a court could have forced its factories to close forever. Klaus Regling, head of the EFSF, went to Beijing as soon as the European rescue package was put together, begging for Chinese investment in the fund.

On the other hand, China has also been portrayed in the media and in some political rhetoric as a predator. In this scenario, it begins by preying on the weaker EU countries before insidiously penetrating the rich European economies, using sovereign debt purchases and direct investment as part of its master plan to take over the world. Respected magazines all over Europe have used on their cover pages menacing images of fiery dragons spewing banknotes or contemporary Maos with imperialistic designs on the continent.

In any case, whether China is seen as a deus ex machina or a devil to whom weak European economies have sold their souls, the increasing willingness of Chinese entities to invest in Europe, directly and indirectly, raises a multiplicity of unanswered political questions. Will it lead to European dependency and Chinese leverage? Does Chinese investment come with strings attached, and can it act as a Trojan Horse affecting European norms and policies, from labor rights to the environment? Are there security implications to Chinese investment, especially when it comes to potential technology transfers?

European policymakers and publics are for the moment ambiguous towards this unprecedented situation. Opinion polls show that Europeans are split when it comes to viewing China as an opportunity or a threat. Of individuals in the twelve EU countries surveyed in the 2011 edition of the Transatlantic Trends poll, 41% see the Chinese economy as a threat while 46% see it as an opportunity. This reflects vast differences among countries, the French at one end of the spectrum with 56% seeing China as a threat, the Dutch on the other end with only 22% interpreting China as a threat. Similar splits were reflected in the immediate reactions to the announcement that the EFSF was looking to China to secure some of the bailout funds.

Probably the biggest concern right now is that with the current political fragility of the EU, there is a real potential for Chinese investment to exploit and exacerbate European disunity. First, opinion is split in Europe when it comes to the desirability of Chinese investment, with objections ranging from the political to the cultural. Second, no mechanism exists right now at the EU level for vetting foreign investments (on grounds other than competition policy). Third, European nations will logically compete with each other to attract Chinese investment with all sorts of incentives. All of this could combine into a perfect storm shattering European unity.

The predicted surge of Chinese investment in Europe presents great opportunities; after all, it is better for the EU if Chinese companies come to Europe and employ local workers than if European companies go East to employ Chinese workers. But in order for this investment to truly rescue European economies, Europeans have to be careful to present a unified response so that China does not end up ruling by dividing, carving out concessions in the heart of Europe as an irony of history.

Sophie Meunier is a Research Scholar in Public and International Affairs at the Woodrow Wilson School and Co-Director of the EU Program at Princeton University. She is the author of Trading Voices: The European Union in International Commercial Negotiations (2005) and The French Challenge: Adapting to Globalization (2001), as well as editor of Europe and the Management of Globalization (2010).