China will buy dairy 'til cows come home - but don't expect investment

Wed, May 23, 2012, 01:00

China doesn’t figure as a foreign direct investor in Europe, never mind Ireland. Beijing accounts for just 1 per cent of FDI

ASKED WHAT she thought of Red China, Nancy Reagan is famously supposed to have replied: “Never on a yellow tablecloth.”

Last week at a conference hosted by Bloomberg, a group of speakers were asked what they thought of possible major Chinese investment in Ireland or whether this was exaggeration again of China’s potential.

David Lynch, author and a journalist with Bloomberg, told the story about wishful thinking among English cotton-mill owners in the 19th century who believed that if they could convince men in China to lengthen their shirts by one inch, then their mills could run all week long and they would prosper forever.

The idea that Ireland can climb out of its economic morass by mass-producing items for Chinese consumption, or tapping China’s $3 trillion reserves for investment, were knocked on the head during an interesting discussion.

Those images of Chinese vice-president and soon-to-be leader Xi Jingping visiting the Co Clare farm of James Lynch in February creates a warm feeling about close and lucrative trading bonds that can be developed.

The following month Taoiseach Enda Kenny led a trade mission to China during which he signed a strategic partnership agreement that could open the door for inward investment from the Far East.

But these visits really only suggest the potential that exists. China accounts for just 3 per cent of exports and most of that is dairy products, notably infant milk formula.

UCD economist Colm McCarthy pointed out that Ireland exported the same amount of merchandise to China last year as it did to Northern Ireland and noted facetiously that there were very few Government trade missions to Dungannon and Coalisland.

Countries tend to export to the countries closest to them for obvious geographic reasons so the chances of China replacing the UK as Ireland’s main export market are slim.

“Any notion that we are suddenly going to start manufacturing widgets and exporting them to China is fanciful,” said McCarthy.

The recent tie-up with the Irish thoroughbred industry, including John Magnier’s Coolmore Stud, to help the Chinese develop a thoroughbred facility in Tianjin showed China was more interested in tapping Irish expertise than buying Irish product.

There are certainly gains to be made from Chinese money coming into the country.

Barry O’Leary, chief executive of the IDA, told the conference that China was more likely to invest in Ireland through acquisition rather than setting up new “greenfield” businesses.

McCarthy said that a Chinese firm’s purchase of a stake in Portugal’s semi-state power giant EDP suggests others may take a look at the Irish state assets on the block.

The proposed Euro Chinese Trading Hub at Athlone, the one million-plus square foot development dubbed “Shanghai on the Shannon”, which has been granted planning permission, seems more like a project looking for investment than an investment itself.

The problem is that China doesn’t figure as a foreign direct investor in Europe, never mind Ireland. Beijing accounts for just 1 per cent of foreign direct investment into Europe.

The US is responsible for 72 per cent of Ireland’s foreign direct investment followed by Europe with 20 per cent, so any investment from China is starting from a very low base.

The biggest immediate value China could offer is if Beijing bought Irish bonds as the Government eyes a re-entry into the markets before the end of this year, despite the unending financial turmoil in the euro zone.

Cash-rich Chinese state coffers and banks could also be a source of funding for the Irish banks when they borrow on their own again.

China has three of the six biggest banks in the world (based on market value): ICBC, China Construction Bank and Bank of China.

One way of attracting Chinese investment into AIB, for example, would be to seek funding for the bank that could be converted into equity over time, when it recovers, so as to reduce the State’s shareholding in the lender.

But China is wary of touching European banks. The chairman of the country’s sovereign wealth fund, China Investment Corporation, Jin Liqun said last year that it would only invest in Europe’s crisis-ridden banking system if it can be sure “there are no black holes”. That is far from clear.

So, what should we think of Red China and whether it will invest? Beijing is interested but so far only in the likes of Irish stallions and dairy products. This is a good start but don’t assume China is Ireland’s great hope.

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