Jiri Kominek in Prague -

Czech tycoon Petr Kellner's PPF Group may be about to take its consumer lending business to China, but for the most part the investment is flowing in the other direction.

Armed with suitcases full of cash, Chinese state and private investors are scouring Central and Eastern Europe (CEE) in search opportunities. These range from building roads in Poland in preparation for that country's co-hosting of the Euro 2012 football championships, to eyeing distressed high-tech companies in the neighbouring Czech Republic.

One of the reasons for the sudden upsurge in interest in the region is that China is bursting with US dollars and is looking to invest roughly $600bn before the currency devalues further given the poor performance and burdensome debt levels of the US economy. "Up until recently, the Chinese have been preoccupied with investing in African and Central Asian states in order to safeguard the flow of oil, gas and raw materials essential to its economic expansion," says Kelly Brown, senior fellow at London-based think-tank Chatham House. "Having safeguarded these needs to some degree, the Chinese, particularly private investors, are now searching for more politically stable countries for their investment purposes, and these include Central and Eastern Europe."

Oodles of noodles

Although by Chinese standards investment into CEE is still quite small, this could change in a relatively short period of time.

One of the main reasons for this stems from legislative changes in recent months that will allow both state and private sector companies to invest more abroad. Based on this, Chinese companies are doing more than building infrastructure projects in Moldova or solar energy farms in Bulgaria; private companies, including investment funds, are now eyeing retail operations in CEE that possess technological know-how and bright managers. "As Chinese companies seek to become more internationally recognized, and globally more competitive, many are keen to hire foreign managers to help shape future strategy and run day-to-day affairs in a more modern fashion," Brown says.

Chinese companies are also seeking to fill a void left by cash-strapped Western investors who previously combed CEE in search of investment opportunities. While the recession has left most Western investors, including banks, cash-strapped and nervy, Chinese entrepreneurs are becoming more adventurous and opportunistic - seeking a strategic advantage that will give them a competitive edge once the current hard times ebb.

During the fourth quarter of 2009, Prague saw one high level Chinese delegation visit after another. Each was not only searching for new investment opportunities, but also testing the local waters by picking the brains of government officials at key ministries, parliamentarians and academics over issues such as public finance strategy and taxation. "Not only do they have capital, they are also searching for local companies that are keen on attracting strategic investors," says Jaromir Cernik, director for East Asian activities at CzechInvest.

Among these include companies involved in the aerospace and other high-tech sectors, as well as companies looking to participate in potential joint ventures.

On October 15, Great Wall Motor Company, one of China's biggest automotive manufacturers, signed a joint-venture deal with Bulgarian diversified holding company Litex Commerce to produce cars - a sports utility vehicle (SUV), a pickup and two passenger car models - at a plant with an annual production capacity of 50,000 units. The first vehicles are expected to roll off the line in 2011. The total initial investment is around €80m, potentially reaching €300m if the project is successful. The cars are expected to be sold under the Great Wall badge, boosting the firm's output from around 400,000 at present.

Another deal is with Optimus B-Trade, a Czech company specialising in the import of Chinese solar panels into the Czech Republic. "The Chinese are now in the process of constructing a production facility in Bulgaria. They have grown conscious of the 'Made inChina' stigma and are now searching for ways to put a 'Made in EU' badge' on their products," Miroslav Smolka, director of Optimus, tells bne.

He believes more and more Chinese manufacturers will seek to sacrifice lower labour costs in favour of improving product image. "I think this is just an interim solution, since it is an inevitability that Chinese products will become equal in name to those produced in Japan, South Korea or the EU," says Smolka.

However, China's expansion into the CEE region won't be without its headaches.

Labour pains

One obstacle that Chinese investors have already encountered, and in some cases have already been forced to make concessions on, is making use of local labour.

In Moldova, the Chinese government in 2009 agreed to provide a $1bn loan to the China Overseas Engineering Group Company (Covec), China's largest construction company, to build roads and power plants in Moldova. The Moldovan government, however, under pressure from labour organizations insisted that locals perform the lion's share of the construction work as part of an effort to offset high unemployment in what is Europe's poorest country. The Chinese eventually caved in and agreed that apart from management and supervisors, all labour would be performed by locals.

In Poland, Covec has come under fire for underselling local construction companies in bids to construct roads. Poland's construction lobby group OIGD has urged the EU to take action against the Chinese for subsidizing its €319m bid to build a crucial artery road after it claimed the Covec bid was 48% less than the cost of the tender and 23% less than the second lowest bid. According to OIGD, the Chinese government will simply subsidise the losses incurred by Covec. It seems being cheaper and faster isn't enough to satisfy everyone.

There are other concerns that Chinese investment into non-EU member states in the CEE region such as Moldova and Belarus could have hidden political motives as well. "Chinese capital may stabilize these countries and make them less dependent on EU neighbourhood policy," says Hanns Gunther Hilpert of the German Institute for International and Security Affairs (SWP)

Hilpert also cautions that the CEE region can be just as treacherous for unwary Chinese investors as China can be for the foreign investor. "Chinese companies are relatively inexperienced investors, with initial data and inquiries indicating their profitability is quite low," Hilpert says.

Inevitably, some Chinese companies will be holed as they attempt to navigate CEE's murky waters that are infested with corrupt bureaucrats and unscrupulous businessmen.