Practical analysis for investment professionals
23 April 2012

How Can Central and Eastern Europe Attract Investment from China?

How best can Central and Eastern Europe (CEE) attract more investments from China? This was the theme of a panel discussion at the inaugural Central and Eastern European Investment Conference that took place in Bucharest, Romania, on the 4 April 2012.

Xu Sitao, the chief representative for China for the Economist Group, chaired the panel, and he opened the discussion by remarking that to become an affluent country China needs to allow reforms, including those pertaining to the movement of capital. Such reforms are likely to greatly increase China’s outbound investments, according to Sitao.

He then invited each of the four panel members to share their views on the topic:

  • Ming Zhang, a senior research fellow at the Institute of World Economics and Politics, Chinese Academy of Social Science, talked about different aspects of Chinese economy. He agreed with the view that China’s traditional growth model, which relied on exports and investment, has become obsolete, and in the future domestic consumption will have to play a greater role in driving growth. He pointed out that there are three major arguments for a hard landing: shrinking exports, the downturn in the property market, and problems with the debt of local governments. But Zhang contended that there are also three major arguments against a hard landing: due to an increase in household income, consumption is resilient; economic housing provided by the government will mitigate the impact of the slowdown in commercial real estate investment; and the government has policy space to pursue expansionary policy. Zhang was of the view that there will be a slowdown in China’s economic growth but there will not be a hard landing.
  • Stuart Leckie, president of Stirling Finance Limited, talked about the role of China’s sovereign wealth funds (SWF) in investing abroad. He said that following the establishment of a SWF in Kuwait in the 1950s, there has been a proliferation of SWFs, but out of the world’s ten largest SWFs, four are from China, including one from Hong Kong. China has more than US$3 trillion worth of surplus reserves, and it has set up its SWF for different purposes — although their purposes are not very clear. He said most of China’s SWF money is invested domestically, and only about 7% is invested internationally. His view was that in future more of China’s outbound investments will take place through its SWF for strategic acquisitions in different areas, such as minerals and food. Leckie referred to the Sovereign Wealth Funds Institute and Santiago Principles, and said that the ratings of China’s SWF have room for improvement when compared to those of Norway’s SWF. He explained that the expectation in China is that the return generated by the SWF will be positive and higher than the bank deposit rate, but this may not be the best way to judge performance in the long term. He cautioned that one cannot be sure that the available performance data complies with Global Investment Performance Standards. Leckie said that China has an SWF specific to Africa, and there are plans to make an SWF specific to South America — which raises the question as to why China should not have an SWF for CEE. He suggested that CEE should understand the areas that are becoming increasingly important to China, such as food, to attract investment from China.
  • Ori Efraim, head of China Practice in CEE at KPMG, said that within CEE, Romania is best positioned to attract investment from China. He explained that there are a variety of reasons for Romania’s advantageous position, such as its relatively large size in terms of geography and population, a well-educated work force, lower production cost and taxes, and room for investment in infrastructure and renewable energy. Efraim was of the view that Romania could also be a possible gateway for China into Western Europe. He said that majority of companies from Chinese businesses currently operating in Romania are state owned, but now more private companies are also coming. He pointed out that there are challenges that need to be addressed to attract Chinese investment in CEE, such as providing longer-term government policies that match the time horizon of investors from China, recognizing the differences in culture and language, and reducing bureaucracy in issuing visas and work permits to the Chinese.
  • Alejandro Reyes, visiting professor at the University of Hong Kong, said that China is a force for globalization in the world economy, and there is a fear in CEE that its relationship with China will not be of equals because China possesses disproportionally more power and its interests will prevail. Reyes said that in the past Southeast Asia had similar fears about globalization and China, but growth in China’s exports have contributed to growth in the exports of Southeast Asia. He said that when a laptop is assembled in China, it includes components from many countries — including Malaysia, Thailand, and the Philippines — which shows that there are opportunities for others to benefit from China’s economic growth. Reyes said that CEE countries need not fear globalization and they should reform their economies to have a beneficial economic relationship with China. His advice to CEE countries was to build their capacity by investing in infrastructure and to work together to strike a balance in their relationship with China.

A number of other VIPs attended this high profile conference organized by CFA Romania, most notably Mihai-Rãzvan Ungureanu, prime minister of Romania, Huo Yuzhen, the ambassador of China in Romania, and Bogdan Olteanu, deputy governor of the National Bank of Romania. The speakers at the conference also included some prominent names from the global investment industry, including Jim Rogers, president of Rogers Holdings and Beeland Interests.

About the Author(s)
Usman Hayat, CFA

Usman Hayat, CFA, writes about sustainable, responsible, and impact investing and Islamic finance. He is the lead author of "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals;" the literature review, "Islamic Finance: Ethics, Concepts, Practice;" and the research report "Sustainable, Responsible, and Impact Investing and Islamic Finance: Similarities and Differences." He is interested in online learning and has directed three e-courses for CFA Institute: "ESG-100," "Islamic Finance Quiz," and "Residual Income Equity Valuation." The other topics he writes about are macroeconomics and behavioral finance. He has experience working in securities regulation and as an independent consultant. His qualifications include the CFA charter, the FRM designation, an MBA, and an MA in development economics. He has served as a content director at CFA Institute. He is a former executive director at the Securities and Exchange Commission of Pakistan (SECP) and former CEO of the Audit Oversight Board (Pakistan). His personal interests include reading and hiking.

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