A Political Menace or Commercial Opportunity? Chinese Sovereign Wealth Funds’ Investments in the European Union

Abstract

With an estimated total of US $1.2 trillion under management, the two top Chinese sovereign wealth funds (SWFs) are a force to be reckoned with globally. Thus far, their investment exposure to European assets (an average of US$4.0 billion annually in 2009-2013) has been insignificant and has not exhibited deliberate overemphasis on industries, activities or individual targets deemed particularly vulnerable from the socioeconomic or political perspective. Furthermore, country variations in the distribution of Chinese SWF investments across Europe lay bare more of a reflection on host country openness and local capital market competitiveness than a proactive bias on the part of the SWFs to under- or overweight particular economies. These findings, however soothing in the context of hinese SWF investment in the EU, do not obviate the need for a coordinated pan-EU strategy aimed at upgrading the transparency of inward investment by all SWFs (including Chinese) and actionable policy measures to suspend or repel investments whose motifs are unclear and might be detrimental socioeconomically and politically. On the other hand, the EU needs to work hard on improving its investment climate to attract more Chinese investment (also in the form of SWF capital injections). This study comes up with a compendium of potential steps that the EU might contemplate to militate against harmful practises adopted by individual SWFs and to promote general SWF transparency. The paper draws on empirical transaction statistics recorded under the Sovereign Wealth Fund Transaction Database reconciled with those of the SWF Center Transaction Database.

Keywords: Sovereign wealth funds (SWFs), European Union (EU), Chinese investments, EU-China relations, Chinese SWFs

JEL Classification: E62, G 29, P16, P26