Keynote Address by DG for Trade of the European Commission at the EU-Sichuan Conference Go back »

2008-10-26 | All chapters

China and Investment: reconstruction and investment in Sichuan

Keynote Address by Mr David O'Sullivan, DG for Trade of the European Commission at the EU-Sichuan Investment & Cooperation Conference in Chengdu on 26th October 2008  

Dear Mr. Li Chengyun, ladies and gentlemen,

I welcome this opportunity to speak to you today on Europe's investment relationship with China.

It is hard not to be acutely aware that we are meeting in the capital of a region which only five months ago was hit by the most devastating earthquake in over 30 years in China. Indeed one of the worst the world has seen in decades. I would like to take this opportunity, speaking here on behalf of the European Commission, to convey to the people of Chengdu and Sichuan our sympathy and solidarity. The shockwaves of the earthquake without doubt reverberated across this entire country. Our thoughts are with the 80 000 people who lost their lives and the hundreds of thousands who lost friends and family, homes and jobs.

The financial earthquake

These days, it seems that the entire world is also facing something of an earthquake. What is shaking us is a global financial earthquake. In the last three weeks the financial crisis has taken on dimensions that few of us might have predicted, and it while we still do not know how precisely the problems in financial markets will spill over into the real economy, we can be sure that it will affect us all. We are economically interdependent.

China has become the main engine of the world economic growth in recent years. But while China remains a fast growing emerging economy with abundant resources, decreasing consumer spending in Europe and the US in the wake of this crisis, will be felt in China through falling inward investment and a drop in export demand.

Sichuan has been historically referred to as the region of abundance. In the current economic climate, you would be forgiven for seeing not abundance but scarcity: falling consumer demand, more limited access to credit. And of course, tighter competition for the world's inevitably finite stocks of foreign investment.

We all recognise that the current crisis has emphasised the extent to which a world of globalised finance demands new regulatory approaches. But as we act to reduce the levels of risk in financial markets, or to better coordinate financial oversight at an international level, it is important to continue to make the case for open markets in productive foreign investment.

A joint interest in a balanced debate
 
It is worth saying this very clearly: Europe strongly believes that our global economy can only thrive with an open investment environment. Europe has long presented a stable, predictable environment for foreign investment and we are committed to continuing to do so. An economic downturn will bring in its wake rising protectionist sentiment. I believe that that protectionism is the wrong response. We should be working to keep foreign direct investment markets open.

Europe and China have closely aligned interests in fostering an open global investment climate. Europe obviously has substantial foreign investment interests. But so, increasingly, does China. As China and its companies become very important players on a global stage, China's strategic interest in fostering an open investment climate is growing accordingly.

China is rightly concerned about some of the alarmist and protectionist rhetoric in the EU and the US about the intentions of its Sovereign Wealth Funds and state-backed investment vehicles. In any rational assessment, Europe should be welcoming this investment. In particular in the current financial crisis we realise that SWFs can have an important role to play in our European economies and we welcome them provided that we can have trust in their investment principles.

On this issue China and Europe have rightly seen the need to avoid defensive rhetoric and reassert the value of open investment.

Important progress was made towards a draft code of conduct for SWFs in the recent meeting of the International Monetary Fund's working group in Santiago de Chile. The EU's focus throughout has been on creating a set of good practice principles and standards on transparency, governance and accountability.

This work has been balanced by a parallel process to define matching commitments to openness from recipient countries. It's important to be clear about this: guarantees of good conduct from sovereign investors are important and necessary. But recipient countries also have responsibilities to transparency and openness. They are two sides of the same coin.

So this kind of work suggests the balance we should be trying to achieve in the global investment market. It is a settlement built on the recognition of mutual benefit and the importance of reciprocity.

A downward trend

In this respect the recent trends in EU-China investment should worry us. European Union investment in China shrank in 2007 dropping sharply from 6 billion Euros in 2006 to 1.8 billion Euros last year. This is despite a strong growth in our overall cash flow into foreign-based companies, China accounted for just 2 per cent of overall European foreign direct investment.  Meanwhile, Chinese investment in the EU also decreased significantly from 2.2 billion Euros in 2006 to merely 0.5 billion Euros last year.

China is now facing tough competition for European investment. Last year and over  the last five years, Europe has invested more in the other three major emerging economies than in China. 17 billion in Russia in 2007. 11 billion in India. 7billion in Brazil.

These low levels of investment are in sharp contrast to our booming trade. In 2007, the EU remained China's largest trading partner, while China continued to be the EU's second largest trading partner.

This downward trend in investment is disappointing –for both sides. There are many in Europe who worry that our openness to Chinese investment is a bit of a one-way street. European investors show a strong interest to engage in China but are still often met with barriers that deter them. Industry feels that while much has been done in recent years new legislation has stopped short of resolving many horizontal barriers to investment. 

I don't want to confront you with a list of investment barriers – we know what they are, and we have an increasingly open dialogue with the Chinese authorities about them. I do not believe that anyone gains when productive European investment is turned away in China. Instead I want say something about how an open investment climate between the EU and China might contribute to helping this region to rebuild.

Cooperating to rebuild

In a recent statement an official of the Sichuan Province said that 4.5 million homes had to be rebuilt; 51000 kilometres of highway; 5500 kilometres of railway as well as ten thousands of schools following the earthquake. China and the Sichuan government are pouring investment into the region. I believe that greater European involvement in this work is not only possible, but could genuinely complement the government's efforts to rebuild what was lost.

There are some parallels with the experience of rebuilding European cities after the Second World War, or the economies of Central and Eastern Europe after the collapse of the Berlin Wall.  Both recoveries were built on openness to foreign investment and the skills and experience that came with those investments, which were no less important than the money itself. 

The immense reconstruction effort here will see, and increase, the need for construction services.  China is urbanising fast and will remain the world's largest building and construction market. However, the construction industry is an example of a sector which has actually seen an increase in barriers to foreign participation in recent years. The number of foreign construction companies active in China has actually decreased.

Although foreign companies operate in the Chinese construction market, their share amounts to only about 1%. Complex access restrictions to enter and operate in the Chinese market both as joint-ventures as well as wholly foreign owned enterprises inevitably turn away foreign firms.  The successive regulations put in place by the Chinese authorities are not perceived to have substantially improved the situation.

There are very few markets globally where you do not find European construction companies working together with local companies. EU companies are present worldwide. To take an example, they have been instrumental in building the booming business centres of the Gulf. Their expertise makes them invaluable partners. But, unfortunately, European construction companies are questioning their presence in China.

This prevents European companies from playing a valuable role. Not just in helping rebuild here, which will call upon huge resources. But also, for example, in assisting China in meeting the objectives set by the Chinese government in terms of energy efficiency. The building and construction sector will have to undergo a sea change in the years ahead to ensure that its building practices, technologies and materials are able to meet those standards.

I believe that European companies could contribute real expertise here. European standards for security and energy efficiency of buildings have evolved over many years. By engaging with local companies in China we could share this experience with local companies, workers and communities.

We should be looking at bringing scientific, technical and economic expertise into your region and country through companies that will invest here, work here and train here and cooperate with your local companies while doing so. Their presence here will have the effect of encouraging the transfer of green technology from EU companies to China.

I do think that it is incredibly important to see investment as not simply about injecting money, but about sharing knowledge and ideas. This is an important basis for innovation and future economic growth. It will be how we work together to pass the skills and technologies for building low carbon economies around the world fast enough to make a difference in the fight against climate change. They will be the bedrock for long term economic development and cooperation between China and the EU.

Conclusion

By organising this high level conference here, the European Chamber of Commerce in China and the Sichuan Province People's Government are doing something that has not been done before. They want to put this part of South-Western China on the foreign investment map – a map that has overlooked it, despite it being one of the major industrial bases of China.

Last month, in a speech at the opening of the World Economic Forum, the Chinese Premier Wen Jiabao very rightly said that reform and opening up continue to constitute the eternal driving force for China's development 30 years after the process was started. China's changes over the past three decades would not have been possible without this growing openness. The Premier confirmed the firm commitment to push forward trade and investment liberalisation.

Although I always come to China with a list of market access problems in my pocket – because my job is to address barriers in our trade in order to bring the Chinese and European markets closer to each other – I do acknowledge that we have made steps in improving the investment climate here. The new monopoly law is one. 

I hope that this conference today will foster a continuing dialogue between the EU and China on the opportunities and challenges investments can create. Our joint goal is attracting the world's best investment, with long term prospects which injects new expertise in addition to money.  We welcome the commitment this conference symbolises and look forward to work closely with our Chinese partners to build an investment climate from which both sides benefit.

Source: EU Delegation of the European Commission to China