The most noticeable trend under the leadership of Xi Jinping since the 2012 National Congress of the Chinese Communist Party (CCP) has been the continuing consolidation of power. In particular, the military has been a key forum in which Xi has strengthened both his personal power and his new administration’s authority. Xi has adopted several approaches and political tactics to achieve this, including purging the two highest-ranking generals under the previous administration for corruption and other charges; arresting 52 senior military officers on various charges of wrongdoing; reshuffling generals between regions, departments, and services; attempting to systematically reform the PLA’s structure and operations; and, last but not least, rapidly promoting “young guards” (少壮派) in the Chinese military.

These bold moves will have profound implications—not only for Xi’s political standing in the lead-up to the next leadership turnover in 2017, but also for the development of civilian-military relations in the country and for the trajectory of China’s military modernization. The third installment in this series focuses on personnel changes that have occurred during the early phase of military reform.

Who are the rising stars in the PLA following the recent reorganization and reshuffling? What are the distinguishing characteristics of the “young guards”? What are possible explanations for and implications of some of the highest-level personnel changes, such as the retirement of the heavyweight military figure General Liu Yuan and the marginalization of Xi’s confidant General Cai Yingting? How does Xi successfully perform the delicate balancing act in personnel appointments by aggressively promoting his own long-time protégés and new loyalists while avoiding making too many enemies?

This is part three of a series that will appear in the upcoming issue of the China Leadership Monitor. Download the article in full below. The first paper in the series can be found here: Promoting "young guards": The recent high turnover in the PLA leadership (Part 1: Purges and reshuffles), and the second paper here: Promoting “young guards”: The recent high turnover in the PLA leadership (Part II: Expansion and escalation).

Downloads

• Promoting "Young Guards": The Recent High Turnover in the PLA Leadership (Part III: Personal and Political)

China’s approach to Europe is a contrasting mix of economic opportunism and strategic vision.

A continent gripped by economic weakness and debt is crying out for Chinese investment, and Chinese state enterprises and funds are eagerly participating in the sale of the century, buying up ports, prime real estate and technology firms from Greece to the U.K.

At the same time, Beijing views Europe as the terminus for its massively ambitious “One Belt, One Road” project – a string of ports, logistics hubs and other trading infrastructure stretching all the way from Southeast Asia to the north of England.

Yet a populist backlash against China is building in Europe: recent street demonstrations by European workers over Chinese steel dumping have highlighted the risks of a relationship that increasingly looks troubled.

In their book “China’s Offensive in Europe,” Philippe Le Corre, a visiting fellow at the Brookings Institution, and Alain Sepulchre, a senior adviser with BCG in Hong Kong, analyze China’s rapidly expanding footprint on the continent — and what it means in global terms. They set out some of their thinking in a written Q&A with China Real Time:

You title your book “China’s Offensive in Europe.” This sounds somewhat alarming. Should we be worried?

It may have sounded slightly alarming a few years ago, but China’s economic intentions toward Europe are not just about creating jobs and value: they are about spreading influence on a weakened and somewhat divided continent (the U.K. being perhaps the most obvious example) that is also far away from the U.S., the country seen by China as the ultimate competitor. Europe is part of “the West” where China is willing to leave more than footprints.

Overall, how do you assess the relationship between the EU and China? What are the opportunities and the risks?

On one hand, China has offered to take part in major EU projects such as the European Strategic Investment Fund, launched by the European Commission to relaunch European infrastructure. It will probably become the biggest non-European stakeholder in the ESIF. But on the other hand, there is an attempt by China to divide the EU at various levels. A typical example is the “16+1” group created by China and sixteen Eastern and Central European countries in 2011. Once a year, leaders of these countries meet with Chinese Premier Li Keqiang. Last year in Suzhou, they also met with President Xi Jinjping. Seven countries signed memorandums of understanding with China on “one-belt, one-road.” Three of them hosted Mr. Xi recently, and were offered substantial Chinese investment promises. China has also tried to establish similar platforms with Southern Europe and Nordic countries, so far without success, but there is a risk that a large number of smaller countries (some of them non-EU members, a good example being Serbia which is getting a Chinese-made high-speed railway) will take a separate approach from the rest of Europe when dealing with China. This is not what Europe needs now.

How coordinated is Chinese investment in Europe? Is there a master plan in Beijing?

There is no “master plan” to take over Europe. First, Europe was part of the “China goes out” [investment] policy in the late 1990s. It then started accelerating with opportunities in 2008-2009 during the euro-debt crisis (and thanks to a favorable exchange rate), when China bought eurobonds and started buying into European infrastructure such as Athens’ Piraeus Harbor (which it now controls). Now, Chinese investment is taking a different dimension through the cultivation of individual European countries via the “one belt, one road” initiative as was demonstrated by Mr. Xi’s visits to the Czech Republic in May, and to Poland and Serbia more recently. Although many aspects of OBOR remain unclear, Europe is definitely a final destination for this project.

Would “Brexit” make the U.K. a less attractive destination for Chinese capital?

As a financial center, London would remain attractive to Chinese investors who would still use it as an renminbi trading hub – but they would also use Frankfurt, Paris and Luxembourg, where they have started trading, too. As for the British market, it would be treated as a medium-sized economy with some prospects but a much less important group than the 450-million consumer common market. For all its flaws, the EU is a powerful trade block with clear interlocutors on issues of importance to China, such as the Market Economy Status. Finally, it is not clear if the U.K. would remain a top destination for Chinese investments. Real estate is one thing, but projects such as the “Northern Power House,” a massive development plan in the north of England, have little chance to receive Chinese financial support if the U.K. votes to exit the EU on Thursday.

Chinese companies are on a buying spree in Europe. This is good news for job creation, yet it also creates anxiety, particularly in Germany, about the loss of key technologies. How do you see this playing out?

Overall, the mood within European elites is about welcoming Chinese investments providing they play the European way. So far Chinese investors have been targeting primarily nonsensitive sectors or companies in financial trouble. The case of [German robot maker Kuka being acquired by Chinese home appliance giant Midea] is quite unique as it involves some specific high-tech content in a sector which is of huge potential. The fact that the Chinese acquirer is perceived as low-tech and very aggressive in its domestic and international expansion strengthens the anti-China Inc. feeling.

Is there a danger of a real populist backlash in Europe against perceived unfair Chinese trading practices, including steel dumping?

It is already happening with the recent (nonbinding, but overwhelming) vote on May 12 by the European Parliament against granting market economy status to China by the end of 2016. Members of the European Parliament are directly elected by the European people, and they reflect the continent’s worries over unfair trade practices from China. These are sensitive times in Europe, and China’s message is obviously not popular with European grassroots where people worry about jobs and the future of the continent’s economy.

What is behind the debate on giving China market economy status?

It is a complicated issue for Europeans as the EU itself is based on the rule of law. In this case, the law is the 2001 World Trade Organization agreement that says that China should receive MES by December 2016. Economics and politics are two other factors European leaders cannot avoid: both France and Germany are facing general elections in 2017 and populism is on the rise everywhere. It would be suicidal to grant the status to China now, as almost none of the criteria to be a market economy have been met – except perhaps the upcoming deadline. A compromise will be needed with mitigating measures at the very least, and in the current political context, it will obviously take time.

Europe complains that while its markets are wide open to Chinese investment, China is closing up. German Chancellor Angela Merkel has called for greater reciprocity. How can China be persuaded to level the playing field?

European cumulative overseas direct investment into China is far bigger than what China has been investing so far into Europe. China is still considered an emerging market, typically showing some kind of protectionism. At the same time, China is often not sympathetic to reciprocity be it in politics or business. Two ways could be considered to pressure China. One way – as we have just heard from Chancellor Merkel – is to be offensive by blocking some Chinese investments in deemed sensitive areas (similarly to what is taking place in the US through the CFIUS mechanism) and by finding alternative suitors to firms like Kuka that China wants to acquire. Another way would be to use the pan-European card. In many cases, European businesses and / or political bodies have been battling each other for Chinese investments. This has been going on for years, and it is time for Europeans to partner vis-a-vis China.

On her recent visits to China, Ms. Merkel has spoken out strongly on issues from human rights to the South China Sea. This compares quite markedly with the approach to China adopted by Britain, which tends to avoid sensitive issues. What accounts for Ms. Merkel’s frankness?

There is still a Chinese fascination for Germany’s economic and technological model, which has no equivalent in Europe. Although the German trade surplus with China is shrinking, many German industrial brands are recognized and vastly respected in China (Audi, Siemens, BMW, BASF…). German technology and brands give Germany an incentive. In addition, Ms. Merkel, who has been in power for almost 11 years, is seen by Beijing as Europe’s clear leader. David Cameron is only considered as his country’s prime minister, with little influence on decisions taken within the EU. The fact Ms. Merkel has spoken frankly and repeatedly about sensitive issues has not weakened her – it is the opposite. A good lesson for others, perhaps?

What is the experience so far of European companies bought by Chinese firms?

The experience so far has been a mixed bag. On the workforce front, most companies have been expanding rather than the opposite, but some have been downsizing their labor force at least initially. A typical challenge lies more at the top management / governance level: Chinese owners tend to over-manage or under-manage dispatching too many or too few skilled managers, governing too tightly or too loosely. The right balance has not been found yet. The most ‘non value-added’ factor is probably on the transfer of technology side. In many instances, Chinese investors have not been able to fully leverage the European technology content into their domestic operations. 

This interview originally appeared in the Wall Street Journal. 

For years China has been known as a destination for foreign direct invest- ment, as multinationals flocked there to build export platforms and take advantage of its fast-growing market. Now, however, it is China’s outbound foreign direct investment (OFDI) that is shaping the world. In the first quarter of 2015, China claimed its largest-ever share of global mergers and acquisitions (M&A), with mainland companies’ takeovers of foreign firms amounting to US$101bn, or 15% of the US$682bn of announced global deals. In three months, China recorded more outbound investment transac- tions than in the whole of 2015, when US$109bn in deals were announced.

These figures probably overstate the true level of capital flows, since some announced deals inevitably fail to reach fruition. But whatever the levels, it is clear that China’s outbound investment is rapidly growing, and that its share of global direct investment flows is among the largest of any country.

The rise in China’s direct investment in Europe is especially striking. According to a recent report by law firm Baker & McKenzie and consultancy Rhodium Group, the total stock of Chinese investment in Europe increased almost ten-fold from US$6bn in 2010 to US$55bn in 2014. In 2015 alone, Chinese OFDI in Europe increased by 44 percent (with deals such as Italian tire manufacturer Pirelli’s US$7.7bn takeover by ChemChina). Total flow of US$23bn exceeded China’s investments in the US, which were US$17bn in the same year. This year could see an even more dramatic jump, if ChemChina’s pro- posed US$46bn takeover of Swiss agro-technology firm Syngenta is approved by regulators.

There are two main reasons why Chinese investors favor Europe over the US. First, the issue of Chinese direct investment is less politicized in Europe. A handful of high-profile Chinese investments in the US have been blocked for political reasons, and the national security review process of the Committee on Foreign Investment in the United States poses an obstacle for some types of acquisitions, especially by Chinese state-owned enterprises (SOEs). Europe lacks a similar review process, and this perhaps explains why SOEs represent nearly 70% of Chinese OFDI in Europe, but less than half in the US. Second, Europe’s ongoing economic and financial difficulties since the global financial crisis of 2008 mean there has been a hunger for Chinese cash to finance infrastructure or bail out debt-ridden firms.The flows are impressive, but it is important to remember that on a stock basis, China’s aggregate investment in Europe is still fairly modest. By the end of 2014, China’s cumulative OFDI represented only 3-4% of all FDI in Europe, and the pool of workers directly affected by Chinese FDI was a mere 2% of the number of Europeans working in American-owned firms in Europe. The rising trend of Chinese investment, however, raises some interesting economic and political questions for European leaders.

Moving up the value chain…

What motives, aside from the sheer availability of cash, are driving this enormous wave of Chinese outward investment? A review of China’s OFDI in Europe over the past decade points to five distinct strategies. Some of these are similar to the strategies seen in earlier waves of cross-border investment by Western, Japanese and South Korean companies; others seem to be more China-specific. They also display widely divergent reliance on political leverage—with SOE investments, unsurprisingly, being the most politically driven.

Authors research

The first strategy is driven by a desire to move from cheap products to more sophisticated ones. An exemplar is Haier, the world’s largest white goods manufacturer. Haier’s development closely tracks that of Japanese and South Korean consumer appliance makers: it first concentrated on making cheap copies of established products, for sale in the Chinese market. It gradually moved up to more sophisticated and innovate products and services and began to export more aggressively.

Haier came to cross-border M&A relatively late, and has used it main- ly to scale up its core “made-in-China” portfolio and accelerate its move up the value chain. Its first acquisitions came in 2012, when it bought a part of Sanyo’s Asian operations and New Zealand’s Fisher & Paykel. After a failed effort to acquire bankrupt European white-goods firm FagorBrandt in 2014, it bought GE’s consumer appliances business for US$5.4bn in January 2016. Political backing for Haier’s overseas expansion has been limited, probably because of the low political importance of the white goods sector.

A second strategy, exemplified by telecoms equipment maker Huawei Technologies, is a straightforward effort to raise margins by diversifying out of the low-margin Chinese market into higher-margin foreign ones. Huawei has derived more than half its sales from abroad for over a decade, and has gradually increased its presence in European markets, in part through loose alliances with major clients such as BT, Orange, Deutsche Telekom, and Telefónica. It has also moved quickly into the device sector. From tablets to smartphones and 3G keys, its products are now spreading across Europe, as are its greenfield investments in European R&D centers. Its efforts to expand through M&A have been hampered by its image as an arm of the Chinese state—although privately owned, it has benefited from huge lines of credit from Chinese policy banks, and has never put to rest rumors of close ties with the People’s Liberation Army.

…and acquiring technology

The third model essentially involves technology acquisition that enables a Chinese firm both to bolster its position at home and create strategic opportunities abroad. Notable examples include personal computer maker Lenovo (which bought IBM’s PC division), carmaker Geely (which acquired Volvo’s passenger-car unit), and more recently ChemChina (with its purchases of Pirelli and Syngenta). The technology-acquisition strategy is much more characteristic of Chinese firms than of Japanese or South Korean companies, which mainly preferred to build up their technological know-how internally, or through licensing arrangements. Even though many of the Chinese acquirers in these deals are private, they are often able to mobilize enormous state support in the form of generous and low-cost financing.

The fourth internationalization model is characteristic of the hospi- tality industry and is one we dub (perhaps controversially) “Orientalist.” Essentially this involves the acquisition of established high-end hotel and leisure brands, with the ultimate aim of reorienting them to cater to a growing Asian—and especially Chinese—clientele. Examples include Shanghai-based Jinjiang International’s recent purchase of the Louvre Hotels group and of 11.7% of Accor’s hotel business. Hong Kong hotel chains Shangri-La, Mandarin and Peninsula have focused their expansion over the past three years in Europe, buying high-end assets in Paris and London. Dalian Wanda, a conglomerate with interests in real estate, retail and cinemas has plans for a series of major mixed-use projects in the UK and France. Like many such projects in China, these are designed to offer a combination of commercial, residential, shopping and recreational facilities. These culturally-oriented acquirers have also benefited from generous financing from China’s state-owned banks.

Heritage Foundation, media reports

The final strategy is a “national champions” model, under which big SOEs use political and financial support from the government to make acquisitions that they hope will vault them into positions of global market leadership. A noteworthy recent example in Europe Dongfeng Motor’s purchase of 14% of PSA, the parent company of Peugeot.

The wave of Chinese investment creates several challenges for European companies and policymakers. For firms, the sudden appearance of hungry and well-financed Chinese acquirers has prompted incumbent multinationals to step up their own M&A efforts, in order to maintain their market dominance. Moves into the European market by China’s leading construction equipment firms, Zoomlion and Sany, most likely prompted the purchase of Finnish crane company Konecranes by its American rival Terex. Similarly, ChemChina’s unexpected bid for Syngenta has caused disquiet among European chemical firms, and probably motivated Bayer’s subsequent bid to take over Monsanto.

In the policy arena, two issues stand out. The narrower one relates to reciprocity: Chinese firms are pretty much free to buy companies in any sector in Europe, without restriction; foreign firms by contrast are barred from investment or majority control in a host of sectors in China, including banking, insurance, telecom, media, logistics, construction, and healthcare. One potential solution is to include reciprocity provisions in the EU-China bilateral investment treaty now under negotiation.

The broader question for Europe is whether some broader geopoliti- cal strategy lies behind China’s outward investment surge, and if so what to do about it. There can be little doubt that in recent years China has increased its political leverage in Europe, and has done so via a “divide and rule” approach of dealing as little as possible with the EU as a whole and as much as possible with individual states. Another tactic has been to create new multilateral forums in configurations favorable to China, the most prominent example being the “16+1,” which consists of 16 central and eastern European nations plus China. Beijing has tried—so far with- out success—to develop similar forums with the Nordic and Southern European countries.

Anxiety along the Belt and Road

A related issue is to what extent Europe should welcome Chinese investment that comes in the form of infrastructure spending. Part of China’s “Belt and Road Initiative” is about increasing connectivity between China and Europe, and this comes with clear financial benefits: China has pledged, for instance, to contribute to the European Commission’s European Strategic Infrastructure Fund; and Chinese-led logistics platforms such as Athens’ Piraeus Port are proliferating. 

But with increased connectivity comes an increased flow of Chinese goods—and especially a flood of low-priced products from China’s excess capacity industries such as steel and building materials. In response to the apparent dumping of Chinese industrial goods in Europe, the European Parliament on May 12 adopted a non-binding but pointed resolution asking the European Commission to reject China’s claim to “market economy status” in the World Trade Organization (WTO). That status—which China says should come to it automatically in December this year under the terms of its 2001 WTO accession—would make it much harder for the EU to impose anti-dumping duties on Chinese imports. The Commission now faces the delicate choice of accepting China’s claim (to the detriment of European producers) or rejecting it (an action that is likely to invite some form of economic retaliation from Beijing). A possible middle way would be to recognize China’s market economy status but to carve out a set of exceptions to protect key European industries. However this dispute plays out, it will simply mark the beginning of a long and complicated relationship between Europe and its fastest-growing investor.

The piece originally appeared in China Economic Quarterly.