China ‘eclipses’ US investments in neighboring EU countries

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China ‘eclipses’ US investments in neighboring EU countries

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Chinese investment in Eastern Europe, North Africa and Central Asia has far outpaced that of the United States, as Beijing seeks ways to circumvent U.S. trade sanctions, according to a new report.

Last year, the 36 countries in which the European Bank for Reconstruction and Development operates – from Poland to Mongolia in the east and from Morocco to Turkey in the south – received just under 39 percent of their combined new investments from China, up from 5.1 percent. percent in 2022 and just 0.6 percent 20 years ago, the international lender reported Wednesday.

“China is eclipsing FDI from Germany and the United States,” Beata Javorcik, chief economist at the EBRD, told the Financial Times. The United States and Germany each accounted for just under 8 percent of new foreign direct investment in the regions covered by the international lender.

This push partly shows how “China has tried to diversify production sites in terms of possible trade barriers,” she said.

For example, China is spearheading investment in Morocco, which has a free trade agreement with the United States and can export raw materials for electric vehicles without being subject to punitive tariffs and qualify to American subsidies for renewable energies.

CNGR Advanced Material, a Chinese manufacturer of battery components, signed an agreement last year to build a cathode materials factory in Morocco to supply the US and European markets.

With this type of investment, China also hopes to exploit “the long reach of U.S. subsidies,” Javorcik said.

Washington announced on Tuesday significant increases in customs duties on imports from China, particularly on electric vehicles, batteries and semiconductors, in order to protect American jobs.

But as the EU debates whether to follow suit, Javorcik highlighted the possibility of Europe attracting Chinese manufacturers rather than blocking them altogether, just as Washington has pushed Japanese automakers to open factories in the United States in the 1980s. The strategy would help “create jobs and ensure the EU remains a manufacturing base,” she said.

Chinese FDI lags behind that of the US and Germany in central and eastern EU member states as Brussels takes a more forceful approach to businesses Chinese companies subsidized by Beijing and competing at lower prices on the domestic market.

Line chart of greenfield FDI capital investment by country of origin (%) showing that China's FDI into EBRD EU countries lags behind the US and Germany.

The EBRD expects GDP in its regions to average 3 percent this year and 3.6 percent in 2025, up from 2.5 percent in 2023.

The countries in which it operates have struggled to bring down inflation that soared during the Covid-19 pandemic and after Russia’s full-scale invasion of Ukraine in 2022. Although the pace of disinflation has been “somewhat faster than expected a year ago”, inflation remains around two percentage points above pre-pandemic levels, the EBRD said.

The central bank lowered its GDP forecast by 0.2 percentage points from its previous report in September, partly due to slowing growth in Central Europe and the Baltics, which are suffering from the impact of the war in Ukraine and the slowdown of the German economy. “Half a percentage growth in Germany is something that will be felt,” Javorcik said.

The EBRD’s chief economist, who is Polish, also noted that countries in her own region continue to be hampered by rising borrowing costs over the past two years, unlike other regions in the region. EBRD where the risk premium has fallen back to previous levels. The invasion of Russia.

“It’s another way of seeing the long shadow of war in the region,” she said.

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