Chinese Investment Could Energise The Juncker Fund

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Includes: ADRU, CHN, CN, CXSE, DBEU, DBEZ, EEA, EPV, EURL, EZU, FCA, FEEU, FEP, FEU, FEUZ, FEZ, FIEU, FXI, FXP, GCH, GXC, HEDJ, HEZU, HFEZ, IEUR, IEV, JFC, MCHI, PGJ, SBEU, TDF, UPV, VGK, XPP, YANG, YAO, YINN, YXI
by: Dan Steinbock

This article originally appeared on EUobserver on June 29, 2015.

During the onset of the European debt crisis in spring 2010, several euro economies dreamed of quick fixes, hoping to benefit from China's large foreign exchange reserves, which then amounted to $3.2 trillion/€2.9 trillion (today $3.7 trillion/€3.3 trillion).

In turn, Brussels was promoting European debt to Chinese investors.

Chinese investment in the EU almost tripled since last year, bilateral trade exceeded $615 billion, and 6 million people travelled between the EU economies and the Asian country. (Photo: Pim Geerts)

These hopes were inflated.

As the International Monetary Fund (IMF) estimated that half of the €6.5 trillion stock of government debt issued by euro area governments was showing signs of heightened credit risk, Beijing had little interest in such plans. China's interest was in hard assets.

Chinese investors seek long-term, high financial returns, within reasonable risk tolerance. As Mario Draghi replaced Jean-Claude Trichet at the European Central Bank (ECB), the latter began to follow in the steps of the US Federal Reserve. Since only a few governments have been willing to move toward structural reforms, investment-led growth is seen in Brussels as a political way out.

European Commission President Jean-Claude Juncker has been pushing the much-touted €315 billion investment plan, which hopes to build on €5 billion from the European Investment Bank and €16 billion from the EU budget. In turn, France, Germany, Italy and Poland are expected to contribute €8 billion. While Brussels is relying on private investors and development banks to contribute an estimated €1.3 trillion, EU governments have been neither able nor very willing to put seed money into the fund.

On its own, the latter will not achieve the hoped-for 15-strong leverage of "private and public investment".

Infrastructure investment in Europe and Asia

Talks about a substantial Chinese investment in the European infrastructure intensified after European economies opted for the China-proposed Asian Infrastructure Investment Bank (AIIB).

Initially, Brussels glanced cautiously toward Washington, which lobbied against AIIB participation by the OECD economies. The UK's participation, as the "first major Western country", changed the game.

Clearly London hopes AIIB membership will facilitate the city's aspiration to become the base for the first renminbi clearinghouse outside Asia.

Despite US opposition, other EU core economies - Germany, France, and Italy - followed suit, along with most of Washington's NATO allies.

As China prepares to make a pledge in the European Fund for Strategic Investments, Europe is expected to respond to Beijing's "One Belt, One Road" infrastructure drive. The latter stresses huge energy and communications links across Asia to Europe. An added bonus is that such cooperation would also support EU-Russian reconciliation.

Currently, the Juncker fund is seen as a European set-up. The question is whether it should remain so and whether a synergy can be built between the European fund and the Chinese "Belt and Road" Initiative. The Commission's representatives have signaled that Chinese funds are welcome in the region. "If we can make it work - and I hope we can - I see huge benefits for both China and the EU," says Juncker himself.

If Brussels has to choose between Chinese participation or the fund's failure amid European stagnation and a host of debt and geopolitical risks, it is not difficult to predict which way the wind will blow.

Only the beginning

The European Investment Bank (EIB) has advised Beijing on governance standards and best practices in setting up the AIIB. China is looking for ways to build up synergies between the "One Belt, One Road" initiative and the Juncker plan, as China's ambassador to the EU, Yang Yanyi, has acknowledged. Though starting from a very low base, Chinese investment has now taken off in Europe. With the weakening of the euro, it has intensified dramatically in the past few months. In China, the recent $10 trillion market explosion has also made eurozone equities an attractive opportunity for Chinese asset allocations.

During his visit to Europe a year ago, President Xi Jinping proposed building a China-EU partnership. Last year, Beijing and Brussels launched over 70 percent of the initiatives in the 2020 Strategic Agenda for Cooperation. Meanwhile, Chinese investment in the EU almost tripled, bilateral trade exceeded $615 billion, and 6 million people travelled between the EU economies and the Asian country.

That may only be the beginning.

According to new data, China is likely to become the world's largest overseas investor by 2020, with global offshore assets tripling to $20 trillion.