Mar 02 2015
Europe, weak euro and rising Chinese investment
By Den Steinbock
In late January, the European Central Bank (ECB) announced the much belated extension of its quantitative easing (QE) program to include purchases of government bonds.
The current consensus is that the U.S. Federal Reserve is likely to increase its policy rate by the third quarter of 2015, whereas the ECB and the Bank of Japan each will keep its rate close to zero. One implication is the weakening of the euro.
But what does that mean for Chinese investment abroad?
The triangle drama: U.S. dollar - euro - yuan
The euro has none of the global clout of the U.S. dollar, but it has regional might and global importance. It is used by almost 340 million Europeans and by 210 million other people (especially in Africa) whose currencies are pegged to euro. It is the second largest reserve currency and the second most traded currency in the world after the U.S. dollar.
In the markets, the euro has traded above the U.S. dollar since late 2002. Its decline intensified during the global financial crisis and accelerated with the onset of the European sovereign debt crisis in 2010.
In the first half of 2014 the euro still stayed above $1.30 as the much-feared inflation remained weak in the Eurozone and well below the ECB's target. As the U.S. dollar began its gradual rise in mid-summer 2014, the euro began to decline.
What happened to the exchange rate between the Chinese yuan and the euro, meanwhile? In May 2014, one euro was still worth more than 8.50 yuan. But then began the decline and a plunge in the fall.
When the ECB embraced its new QE policy, Chinese yuan strengthened to 6.98 against the euro. Recently, the euro has climbed back slightly to 7.10 against the yuan.
The real question is whether the euro has found its floor, however.
How did Chinese FDI surge in Europe
As the transatlantic economy was swept by the global financial crisis, China's outward foreign direct investment (OFDI) flows surged, tripling from less than US$1 billion per year around 2004-8 to roughly $3 billion in 2009-10. And as the Eurozone crisis kicked in, Chinese OFDI tripled again to almost $10 billion in 2011.
These values remain very low by global standards, but it is the trend line and continued growth potential that matters here. After all, Chinese investment in Europe took off at a time when one euro was still worth of more than 10 yuan. It was driven by the global financial recession in 2008-9 and the Eurozone sovereign debt crisis in 2010-2011.
It was the plunge of euro in late 2014 that accelerated the surge of Chinese OFDI in Europe. In 2014, Chinese investors doubled their money in Europe, pouring capital into from the UK property market to German advanced technology and the Italian energy industry.
Last year, Chinese OFDI into Europe hit a record $18 billion with food and agriculture the top draw. U.K. was the top destination for Chinese FDI last year at $5.1 billion, followed by Italy at $3.5 billion.
Future scenarios
As the Fed is likely to consider the first rate hikes in years by the third quarter of 2015, the ECB must push for increasing QE as the gap between policy rates in the U.S. and Europe is likely to diverge.
In that scenario, the U.S. dollar will appreciate relative to the euro, which will continue to fuel Chinese investment in Europe.
While Chinese FDI shall focus on the core economies - particularly the U.K., France, Germany and Italy - it will increasingly, though cautiously monitor new opportunities in the ailing Southern Europe.
In the fiscally conservative Northern Europe, China will focus on advanced technology and innovation.
In Central and Eastern Europe (CEE), China has already developed its Silk Road from the Greek ports through the Balkans to the core economies. It is a cost-efficient entry point to Europe's core capitals.
There are negative scenarios that could halt or significantly slow Chinese FDI in Europe in the short-term. These scenarios include uncontrolled Greek debt crisis, additional turmoil in other small Eurozone states, escalation of crisis in Spain or Italy, further decline of economic fortunes in Nordic countries, U.K.'s relationship with the EU, and even potential German isolationism.
In the long-term, Chinese investment in Europe has come to stay.
The current consensus is that the U.S. Federal Reserve is likely to increase its policy rate by the third quarter of 2015, whereas the ECB and the Bank of Japan each will keep its rate close to zero. One implication is the weakening of the euro.
But what does that mean for Chinese investment abroad?
The triangle drama: U.S. dollar - euro - yuan
The euro has none of the global clout of the U.S. dollar, but it has regional might and global importance. It is used by almost 340 million Europeans and by 210 million other people (especially in Africa) whose currencies are pegged to euro. It is the second largest reserve currency and the second most traded currency in the world after the U.S. dollar.
In the markets, the euro has traded above the U.S. dollar since late 2002. Its decline intensified during the global financial crisis and accelerated with the onset of the European sovereign debt crisis in 2010.
In the first half of 2014 the euro still stayed above $1.30 as the much-feared inflation remained weak in the Eurozone and well below the ECB's target. As the U.S. dollar began its gradual rise in mid-summer 2014, the euro began to decline.
What happened to the exchange rate between the Chinese yuan and the euro, meanwhile? In May 2014, one euro was still worth more than 8.50 yuan. But then began the decline and a plunge in the fall.
When the ECB embraced its new QE policy, Chinese yuan strengthened to 6.98 against the euro. Recently, the euro has climbed back slightly to 7.10 against the yuan.
The real question is whether the euro has found its floor, however.
How did Chinese FDI surge in Europe
As the transatlantic economy was swept by the global financial crisis, China's outward foreign direct investment (OFDI) flows surged, tripling from less than US$1 billion per year around 2004-8 to roughly $3 billion in 2009-10. And as the Eurozone crisis kicked in, Chinese OFDI tripled again to almost $10 billion in 2011.
These values remain very low by global standards, but it is the trend line and continued growth potential that matters here. After all, Chinese investment in Europe took off at a time when one euro was still worth of more than 10 yuan. It was driven by the global financial recession in 2008-9 and the Eurozone sovereign debt crisis in 2010-2011.
It was the plunge of euro in late 2014 that accelerated the surge of Chinese OFDI in Europe. In 2014, Chinese investors doubled their money in Europe, pouring capital into from the UK property market to German advanced technology and the Italian energy industry.
Last year, Chinese OFDI into Europe hit a record $18 billion with food and agriculture the top draw. U.K. was the top destination for Chinese FDI last year at $5.1 billion, followed by Italy at $3.5 billion.
Future scenarios
As the Fed is likely to consider the first rate hikes in years by the third quarter of 2015, the ECB must push for increasing QE as the gap between policy rates in the U.S. and Europe is likely to diverge.
In that scenario, the U.S. dollar will appreciate relative to the euro, which will continue to fuel Chinese investment in Europe.
While Chinese FDI shall focus on the core economies - particularly the U.K., France, Germany and Italy - it will increasingly, though cautiously monitor new opportunities in the ailing Southern Europe.
In the fiscally conservative Northern Europe, China will focus on advanced technology and innovation.
In Central and Eastern Europe (CEE), China has already developed its Silk Road from the Greek ports through the Balkans to the core economies. It is a cost-efficient entry point to Europe's core capitals.
There are negative scenarios that could halt or significantly slow Chinese FDI in Europe in the short-term. These scenarios include uncontrolled Greek debt crisis, additional turmoil in other small Eurozone states, escalation of crisis in Spain or Italy, further decline of economic fortunes in Nordic countries, U.K.'s relationship with the EU, and even potential German isolationism.
In the long-term, Chinese investment in Europe has come to stay.
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