China to Increase Investment in Europe, Maybe

China’s investment in Europe tripled to $10 billion in 2011, compared to the amount in 2006 to 2009. But that is not very much money, given the size of the European economy. Research firm Rhodium Group believes the current investment is only a beachhead that will allow Chinese investment in the region to increase to more than $250 billion by 2020, or perhaps even as much as double that. The conduit will be M&A and greenfield investments.

The Rhodium Group forecasts may not come true at all. The think tank admits as much, without any focus on a potential drop in China’s gross domestic product and its ability to place large investment overseas if its economy, real estate and bank problems worsen quickly. Rhodium Group’s focus on why its China forecast will not come to pass centers around security fears by EU governments, as well as the potential that Chinese investment may be so great that it would drive up asset values in the sectors where most of the investments are made.

The advice Rhodium Group offers EU governments is that they should anticipate the huge flood of Chinese money by “keeping their doors open” and taking national security issues seriously. All of that may be useful, unless China has to spend more money propping up its own economy, or until a new hard-line government blocks more investment by the private and public sectors overseas.

Like many predictions about China’s commercial activity outside it borders, they are based on the assumption that the GDP of the People’s Republic continues to grow at almost 10% a year for another decade or more. The assumptions also are based on future and growing liberalization of the central government. Neither may be the case. It is useless making predictions based on forecast of what a politically and economically volatile country and its businesses will do.

Douglas A. McIntyre