Andrey Ganzha: China coming home. To Europe

While the highly intellectual European experts are forecasting a disastrous fall in GDP growth in China (to 7% and lower), the EU’s GDP recorded just a 1.9% growth in 2015. As regards the Chinese, this apocalyptical forecast is not discouraging them from pushing their grandiose geopolitical One Belt One Road initiative.

The Europeans do not like this initiative as, in their opinion, it will not help them to overcome the obstacles their business is facing in China. To be more precise, they don’t like China’s efforts to create value chains in a number of sectors. In other words, China is not going to pump natural resources to Europe as Russia or Africa are doing but is forming a high added value for its own self. According to Joerg Wuttke, President of the European Union Chamber of Commerce in China, five trains full of cargo leave Chongqing for Germany every week, but only one full train returns. “Europe is open, buying €1bn worth of goods from China every day. China, however, only buys half that amount from Europe,” complains Wuttke.

It seems that the Europeans have realized that the Chinese are not only hampering their access to their market but are also robbing them blind at their own trading facilities. But who says that those facilities are purely European?

The Chinese are buying Europe by retail…

In 2016, European companies invested in China just 8 billion EUR.

This does not mean that they are not interested in China: in the United States, they invested as much as 200 billion EUR during the same year - though mostly in derivative securities markets – systems that have nothing do to with real economy. The nominal cost of the derivative securities circulating in the world for the moment amounts to $100 trillion, while the cost of the deals made on them is lower than $500 billion a year. In other words, today, we have as many as 200 US dollars of stocks per each US dollar of real trade.

In the meantime, the rich Chinese have already invested as much as 161 billion GBP or 181.6 billion EUR in leading Western brands. Let’s see where specifically they are investing their money in.

— VOLVO — Chinese Zhejiang Geely Holding Group has invested $1.3 billion in 2010;

— GIEVES & HWKES — Hong Kong-based Trinity bought it in 2012 for $115 million;

- CERRUTI — the selfsame Trinity bought it in 2010 for $70 million;

— FC INTERNAZIONALE MILANO — Suning Holdings from Nánjīng has bought a 69% stake in the club for $289 million;

— HAMLEYS, — C. banner from Nánjīng bought it in 2016 for $124 million;

— HOUSE OF FRASER – sold to Sanpower for $560 million.

And one of the latest deals: Chinese internet holding Tencent has bought a 73% stake in SUPERCELL, a big Finnish video game producer, for 7.4 billion EUR.

This is not the whole list. Even Silvio Berlusconi has sold its AC MILAN to a consortium of Chinese investors for $792 million.

…and by wholesale

All these deals are just retail. The Chinese are making much bigger deals in Europe.

On Mar 9, 2010, 17 EU states decided to set up European Financial Stability Facility (EFSF). The cost of the project was 780 billion EUR, the goal was to fight the consequences of the crisis 2008. In Jan 2012, the EU created one more fund, European Stability Mechanism (ESM) – a 500 billion EUR facility for funding problematic EU members. The limit of one loan there was 60 billion EUR.

But, all of a sudden, while presenting ESM in Luxembourg on Oct 8, 2012, then ESM President Jean-Claude Juncker (who is now President of the European Commission) said that the fund would be able to provide loans worth as much as 200 billion EUR. The natural question was where would it take the money from? Director General of both EFSF and ESM Klaus Regling hurried to explain that 40% of EFSF had been bought by a group of Asian countries, primarily, China, and expressed hope that the Chinese would buy a stake in ESM as well.

That caused a stir in the Western press. Some mass media reported that ESM already had 1 trillion EUR. Spiegel said it had twice as much. Regling made it clear: the fund was attracting money from private investors.

Just for you to know, 1 trillion EUR is more than the EU’s budget in 2014-2020.

It is not clear on what terms this money has been given but in any case, this implies high leverage and high leverage means financial dependence.

In a few days, the stir in the European press calmed down: the Europeans are good at silencing their press. But the fact is still there! And if the money in those two funds are actually Chinese, it means that China has bought Europe and is now paving “a silk road from home to home” - from the Chinese economy in the peninsula of Indochina to the Chinese economy in the peninsula of Europe.

China is expanding into the Russian Arctic.

It is worthy to note that the One Belt One Road initiative was announced right after the news about Asian money in European funds. While visiting Kazakhstan in 2013, Xi Jinping proposed the idea of a Maritime Silk Road of the 21st century, which later evolved into One Belt One Road.

The Chinese suggest creating six onshore economic corridors: the New Eurasia Land Bridge, China-Mongolia-Russia, China-Central Asia-West Asia, China-Indochina Peninsula, China-Pakistan, and Bangladesh-China-India-Myanmar. Much has been said and written about the Malacca Strait-Suez Canal maritime corridor…

But little attention is being paid to one more maritime road – in the Arctic. As many as six Chinese trade ships have navigated the Russian Northern Sea Route so far. Xue Long icebreaker was the first Chinese ship to reach the Barents Sea and to come back to China. The trip of the Tian Xiang ship showed that for navigating the Northern Sea Route, the Chinese needed 15 days and 383 tons of fuel less than for navigating the traditional route to Suez Canal (according to Cosco). This year, Xue Long has not only crossed the Northern Passage (along the northern shore of Canada) but has also navigated the Central Arctic Fairway outside Russia’s economic zone.

This means that the Chinese are looking for the best option. For the time being, the best option is the Northern Sea Route. In 2014, the Chinese set up a Silk Road Fund with a capital of $40 billion. And one of its biggest purchases so far have been a 9.9% stake in the Yamal LNG project and a 10% stake in Sibur Holding.

Yamal LNG is not also the South Tambey gas condensate deposit (with 1.3 billion cubic meters of natural gas!) but also the young port of Sabetta.

Sibur is a whole bunch of pleasures for an investor: (1) Russia’s biggest petrochemical holding (the 24th among the country’s top 50 tax payers); (2) the company controls the resources of Yamal-Nenets and Khanty-Mansi autonomous okrugs; (3) it enjoys a low tax burden - 6.4%; (4) it owns an LNG terminal in the most promising port of Russia, Ust-Luga, Leningrad region; (5) it has contacts with the Russian government through shareholder Gennady Timchenko and the U.S. government through Wilbur Ross, U.S. Secretary of Commerce, the co-owner of the customer of the Ust-Luga terminal, Navigator Holdings; (6) “What do you expect? Sibur is not on the sanction list. Don’t you remember how they carried Donbass coal from Rotterdam to Ukraine through South Ossetia,” such an answer I received to my question if the Americans pump Russian LNG to Europe from Ust-Luga.

In conclusion, I cannot help admiring China’s professionalism: for small money (both investments are not bigger than $4 billion) it has buried its arms into the resources of the Russian Arctic and has gotten one more route to Europe.

Andrey Ganzha, Kiev