As you come out of the Oktogon MRT station in Budapest on the elegant Andrássy Avenue – Hungary’s answer to the Champs-Élysées – massive neon signs on top of the nineteenth-century buildings that line the Grand Boulevard advertise Bank of China, Huawei and Samsung.
It is an obvious sign of how much investors from Asia, especially China, now dominate the business landscape in the region.
A report in January from international law firm CMS showed that China was by a long shot the top investor in Central and Eastern Europe (CEE) in 2018, responsible for €6.4 billion ($7.1 billion) worth of M&A deals.
What is behind the figures?
Speaking by telephone to FinanceAsia outside a partners’ conference in Frankfurt, Helen Rodwell, co-author of the report and partner at CMS in the Czech Republic and Slovakia, explains that that “the enormous number is underpinned by three very big deals”.
These were China National Petroleum Corporation’s (CNPC) Eur5.35 billion ($5.9 billion) acquisition of a 20% stake in Russia’s Arctic LNG-2 project; a Eur621.7 million, 51% stake in the Yavuz Sultan Selim Bridge and Northern Marmara Highway taken by a consortium of Chinese firms led by Chinese Anhui Expressway and China Merchants Expressway; and Zijin Mining Group’s Eur234.8 million purchase of a 56% stake in the lower zone of the Timok copper-gold project in Serbia.
These megadeals aside, there is still a significant trend here. “The Belt and Road Initiative is pushing China’s outbound mergers and acquisitions, and the CEE region is becoming more and more attractive for Chinese investors,” said Zhe Qiu, head of the Warsaw-based CEE-China Desk of law firm Mazars, citing Beijing’s Made in China 2025 strategic plan.
There is an unspoken sense too that with a more inward-focused US, Asian companies are grabbing opportunities while they can.
Part of the reason for China’s push into Central and Eastern Europe is practical. A base in Eastern Europe can often allow simpler access to the European Union. As Qiu points out, more and more Western European countries are starting to put up barriers to Asian investors, whereas transactions in eastern Europe are simpler and tend not to have too much baggage.
Rodwell explains that although governments in the region are not changing the laws to make it easier for Chinese and Asian companies to invest, on the other hand, they have not been passing prohibitive laws either. “We haven’t had a foreign investment agency that will block Chinese investment,” she said.
It is no surprise that the focus for Chinese investment is still mainly in natural resources (towards the end of last year, Zijin Mining Group, for example, bought out its partner in the gold project in Serbia) as well as energy, and infrastructure. But China is also moving into traditional regional strengths such as manufacturing and pharmaceutical products as well as newer industries like renewable energy.
An obvious question to ask is how this spending spree is being financed.
Money is not an issue. The head of M&A at one of the international banks is blunt on the subject. “Chinese SOEs have huge access to state lending vehicles and there’s unlimited capital available to them to do these acquisitions that fit in with the national development priorities. And private companies have huge access to cash because Chinese banks assume that they have the support of the government,” he said.
On the ground they are helped by Bank of China. It opened in Hungary in 2003, the first Chinese commercial financial institution in Central and Eastern Europe. “They set up branches across the region with the sole purpose of financing Chinese investment into the region,” said Rodwell.
KOREA STEPS UP
It would be a mistake to think that all the major investment coming into Central Europe is Chinese. One of the other headline deals was the Eur1.17 billion buyout of the DCT Gdansk container terminal in Poland by an international consortium which is 40% owned by Singapore government investment company Temasek.
But the country to watch now is Korea. In the CMS report, although South Korea is in 11th place with Eur717.1 million in terms of volume of investment, that figure is up more than 1,000% on the same period the previous year.
“There has been a marked increase in the level of interest from Korean investors across the region,” said Rodwell. “They have been quite disruptive in the real estate market,” she added.
Hanwha Investment & Securities, the brokerage arm of Hanwha Group bought the five-building Waltrovka office complex in Prague, Czech Republic, for $286 million from Penta Real Estate. While London’s Valesco Group together with Seoul-headquartered asset manager AIP Asset Management acquired the Twin City Tower in Bratislava, Slovakia, on behalf of Korean investors from HB Reavis for Eur120 million.
Korean investors have also been visible in the automotive sector. Hyundai Motor took an Eur80 million 13% stake in Croatia’s Rimac Automobili which is known for its high-voltage battery and electric powertrain technologies – essential for electric vehicles.
“We see a strong investor and technology partner in Hyundai Motor Group and believe that this collaboration will charge the company’s position as a Tier 1 electrification components supplier to the industry,” said Rimac Automobili chief executive Mate Rimac.
The level of interest in East Central Europe does not appear to be diminishing, even if, as the banker said, the impact of the coronavirus means that “you’re going to be hard-pressed to see as many deals announced in the next three to six months”.
But as long as the Belt and Road Initiative remains a top national priority, investment will continue.