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China FDI In Iceland. Soft Power Done Hardly Well At All.

Posted in China Business, China Travel

The following is a guest post from one of our readers in Iceland, Neil Holdsworth. Neil has been updating me via email regarding a Chinese investor who is seeking to purchase a massive amount of land in Iceland and the controversies that have been attendant to that. When he asked me why I don’t write a post about it, I asked him the same question and the below is the result. 

As has been reported extensively elsewhere, China has taken an interest in Iceland as a potential location for a deep sea port on arctic shipping routes and as a future source of fresh water. Though China has not shown signs of embarking on an Africa-style resource grab in Iceland, it obviously has a long term strategic interest in the country. It is proposing to develop what will be by far the biggest embassy in Reykjavik, raising eyebrows among the country’s 320,000 inhabitants.
 
Despite Iceland’s being part of the European Economic Area, investment opportunities for outsiders here are limited. However, the tourism industry is open to foreign investment and a number of successful tourism related businesses are seeking finance for expansion. Financing is nearly impossible to obtain in Iceland because of its banking problems (there are mostly no new loans, only old loans being renegotiated and written off). For this reason and others, the government is keen to attract foreign investors in this sector.

Instead of buying into relatively safe and established companies, this China group is trying to do something much more symbolic and grand. China wants to come to Iceland’s rescue, but on China’s own terms and in its own way — buying no less than 0.3% of the land mass of the country and unveiling a vision of a new Chinese sponsored tourism in the country. China-based investors are proposing two huge hotels, a new airline, golf courses to be built in the mountains, horse riding, and hot air balloon rides. And all of this is going to happen year round.
 
This vision for Iceland makes little commercial sense and is very unlikely to work, mainly because for about 80% of the time in Iceland, the weather is so miserable you can’t go outside for more than a few minutes at a time. What probably started as a genuine and good natured attempt to invest in an area of the economy in which Icelanders are desperate for investors, has descended into a fiasco. Everyone wants to know why the Chinese investors need 300 square kilometers of land for a hotel, and Mr. Nubo, who is heading up the investment from the China side, has no convincing answer.

Mr. Nubo is saying the controversy is making him think about taking his money elsewhere. Iceland’s  interior minister (from whom approval of the deal is necessary) has responded to the effect that he is more interested in looking at speeding up the approval times for residency permits, than in dealing with Mr Nubo, who can wait in line with everyone else.

Though buying up 300 square kilometres of overgrazed wilderness does not confer rights to build a Chinese military base in the Icelandic countryside, there are some people here [in Iceland] who seem to believe that. Even if Mr. Nubo and his group buy the land, Iceland will still require they secure planning permission and pass Environmental Impact tests, for whatever it is they want to do with it. Whatever Mr Nubo’s motivations for his project, this episode does demonstrate how suspicious people are of China, and of how little soft power China actually has, particularly in the West.

Indeed, the most believable analysis I have heard of the project itself is that China wanted to help Iceland out and so it sent over a property developer/poet/cat lover/arctic explorer with connections to the Icelandic Social Democratic party to invest in the one area of Iceland’s economy where foreign investment is tolerated. Despite this, it has all backfired spectacularly. As someone who lives part-time in Iceland and who is cautiously optimistic about China’s role in the world, I’d suggest that if China wants to use FDI as a way of building up good will among Icelanders, it consider building a brewery in my town of Flateyri would achieve a lot more (and cost much less) than golf courses and five star hotels. 

11-26-2011 Update.  Iceland has rejected Mr. Nubo Huang’s purchase of this land, saying that it is incompatible with Icelandic laws. An article on this can be found here.

  • http://dansommer.biz Dan Sommer

    Absurd statements like “about 80% of the time in Iceland, the weather is so miserable you can’t go outside for more than a few minutes at a time” proves that the author lacks sincerity. If the above statement were true Icelandic tourism would be dead in the water, instead it has been on a constant growth over the last decade.
    It is however clear that there is little business sense in the plans described above as “China-based investors are proposing two huge hotels, a new airline, golf courses to be built in the mountains, horse riding, and hot air balloon rides. And all of this is going to happen year round.” Golf courses in the mountains will obviously only be open in the summer months and hot air balloon rides will be severely hampered by wind many days of the year.

  • Óskar Gudlaugsson

    Why China would be interested in Icelandic water is beyond me. If they’d want fresh water from remote, boreal regions, wouldn’t it make more sense to go to Eastern Siberia?
    Nitpick: Weather in Iceland generally isn’t as miserable as is claimed here but I might agree that it’s miserable 80% of the time in the particular area Huang Nubo wants to develop (Grimsstadir). That’s precisely what baffles Icelanders about the choice of location, as they know how inhospitable it is.
    You hit the nail on the head though, that by wanting to build golf courses and five star hotels in an inappropriate location, Huang Nubo sends a confusing message to Icelanders which leaves his intentions open to speculation and suspicion. Anyone who really understood Iceland wouldn’t come up with such a plan.

  • Donzelion

    “Everyone wants to know why the Chinese investors need 300 square kilometers of land…” Smells like hot money to me.
    Q: What’s the value of 300 square kilometers of land? A: whatever the market will pay for it (at a certain time). Q2: If the market will pay $X billion for so much land in Iceland, can it be used as collateral for other investments? A2: Only if the owners are really, really large entities – with sufficient clout to influence creditors.
    From my vantage in the Middle East, I see a few of these “biggest ever” schemes put forward – which can be hard to make sense of economically, but which make far more sense politically (and eventually, legally, as regs can change over decades).

  • SteveLaudig

    “Anyone who really understood Iceland wouldn’t come up with such a plan.” This might explain its [the plan's] essential “innocence” in a couple of senses of the word. Innocence as in naivete’ and innocence as in well-meaning but unwise. Innocence as in goofy. There’s lots of large, expensive, goofy things being built in China everyday. The “Window on the World” franchise is one that comes to mind. Dopey, [to me the oh-so-sophisticated-to-the-point-of-jadedness-Westerner]. And why should this throwing of money into what appear to be foolish [ad]ventures not be exported? There’s a slightly darker possibility [at least looking at what the seller may have been engaged in] in that the Chinese buyer had been totally misled about what he was buying. But Western-style due diligence is still something new to 中国.. Praps he has more money than sense in this particular field. And never underestimate the essential racism of the West’s rightwing noise machine which will gin up a fight by creating a frightening “other”. Anything to sell “news”.

  • Marius

    “Free beer for the workers when the Chinese revolution comes!”

  • TonyHuang

    If a French or American investors want to buy the same land, would it cause the same negative sentiment? Is it the particular investment or is it where the money coming from that annoy the locals?
    Also, from what I understand, it is probably better to called him Mr. Huang, instead of Mr. Nubo, since Huang is his last name.
    Out of curiosity, I also checked the Chinese media to see what they said about this issue. http://www.infzm.com, a good newspaper in my opinion, used the title “Barbarian’s Iceland journey” to report this news. It actually said “according to a survey in Iceland, 65.6% of participants support the land deal”…interesting, though not quite sure if the source of the survey is reliable. Other interesting “gossip” includes: Mr. Huang’s good friend’s wife is the (former) “minister of foreign affair”(not quite sure the exact title in that administration system) in Iceland…

  • Neil Holdsworth

    Tony, it is true that public opinion is in favour of Mr Huang (thanks for the heads up re the name) investing in Iceland, but not necessarily the deal as it is currently presented, which I think was reflected in a recent opinion poll. There are also a vocal minority who detest China and everything it stands for, and the very idea of Chinese tourists coming to Iceland.
    SteveLaudig, The idea that Mr Huang was misled in some way, is an interesting one. As pointed out in some of the comments, he has long connections with social democratic politicians, and claimed recently that they suggested the deal. See:
    http://www.grapevine.is/Home/ReadArticle/Huang-Nubo-Was-Invited-To-Invest
    As for my comment about the weather being miserable 80% of the time, I wouldn’t get too hung up on that. It’s a bit of an exaggeration. The main point about the weather in Iceland is that is highly unpredictable and in consequence it has been difficult to develop tourism outside the summer (by which I mean mid-June to mid August) months.
    Thanks to Steve and Dan for uploading the post.
    Neil

  • Andeli

    I really wonder why the Chinese investors didn’t get a local partner in on this deal. Almost every foreign company in China has a Chinese partner in some sense. I helps clam the nationalists. I think Chinese companies need more FDI training before taking steps like this.
    And why so openly discuss this deal in the media? Mr Huang should have held a low profile if he had really wanted this deal to work.

  • Neil Holdsworth

    Andeli – on the foreign partner issue – out of interest – are there other examples of successful Chinese/foreign JV’s in other parts of the world, particularly in the tourism industry?
    As for the media circus, the deal was inevitably going to be made public at some point because approval was needed for the land purchase from the Icelandic government. It was all kept under wraps until then. There was some evidence of a hastily assembled PR campaign (hence Mr Huang’s public profile), but not much in the way of detail as to what the various proposals are going to actually entail and why so much land is needed, hence the reaction.
    Neil

  • Andeli

    Neil Holdsworth – The Chinese tourism industry is still very underdeveloped when it comes to large deals focused on outbound tourism outside of China. I only know of a few small private travel agents in Africa and Europe, where one could say it was a J.V.
    Caissa Travel could be see as a J.V because it has Chinese / German owner structure. That is Chinese moving to Germany and becoming german citizens and than creating a travel agency there and creating a sister company in China.
    CITS have a few office around the world, but they are not yet set up to support large scale tourism FDI. Strange as Chinese tourism FDI is an ideal place to start. Tourism was never as sexy to European governments as medical or IT investments, eventhough it creates more jobs and benefits a larger segment of the economy.
    The CNTA (Chinese National Tourist Administration) has been somewhat critical of the stateowned travel agencies for not reaching outside China. Still with regards to being able to fill the hotel and resort in Iceland I would think it possible. The Iceland tourist part would be ideal for a round trip including Denmark, Sweden and Norway. In that sense this is not a bad idea.
    The most important thing in this deal is price and numbers. I would think they could dump the products on the local market and if Iceland is a tax free zone (which It should be) I would guess the deal is set.
    Still what was a potential good idea got lost on a bad pitch and bad PR. Yes the media circus was going to come, but as you point out they should have been better prepared. In Europe unlike in China one needs to win over public opinion not the administrative system. The Chinese FDI investors are going to learn that making money in the EU is not as easy as in China. Still they will adapte and make it work at some point.

  • Chris

    I’d suggest that if China wants to use FDI to building up good will amongst the rest of the world, they should stop behaving like an oppressive dictatorship and become a democracy accountable to its people.

  • Twofish

    Indeed, the most believable analysis I have heard of the project itself is that China wanted to help Iceland out and so it sent over a property developer/poet/cat lover/arctic explorer with connections to the Icelandic Social Democratic party to invest in the one area of Iceland’s economy where foreign investment is tolerated
    That’s assumes that the Chinese government is more organized and coordinated that it really is. One problem with this sort of speculation is that it’s a bit contradictory. The Chinese government is at the same time this well-oiled machevellian conspiracy, while at the same time a set of incompetent Keystone cops.
    It also makes no sense that “China” wants to bail out Iceland while at the same time publicly making it clear that it has no interest in bailing out European banks.
    Now you could argue that different people in China are working at cross purposes and maybe Huang Nubo hasn’t gotten the memo.
    Exactly…..
    Any time someone says “China wants”, it needs to be pointed out that China is a country of 1.3 billion people and not an individual, and more often than not, people within China, and even people within the Chinese government want different things.

  • Neil Holdsworth

    Twofish,
    The points you are making are pretty much valid for every government, everywhere, I think.
    I think the analysis I am putting forward is believable in the context of Sino-Icelandic relations, which have its own characteristics and is very different to China’s relationship with the rest of Europe. I certainly think it is possible that some part of the Chinese government helped put together this deal. Particularly because of the known close co-operation between government and businesses (particularly very large businesses), which is a fact of life in China, for the reasons sometimes discussed elsewhere on this blog.
    Like Norway, Iceland has been and continues to be a vocal critic of China’s lack of democracy and human rights record. Yet whereas Norway gets its salmon impounded and left to rot in customs warehouses outside Beijing, Iceland gets trade delegations, state visits, a huge new embassy and now golf courses and five star hotels. Are you really saying this is all completely coincidental?
    Neil

  • Twofish

    Holdsworth: . I certainly think it is possible that some part of the Chinese government helped put together this deal.
    The Chinese government is a big sprawling bureaucracy and most of the people in it have no real power.
    Holdsworth: Particularly because of the known close co-operation between government and businesses (particularly very large businesses), which is a fact of life in China, for the reasons sometimes discussed elsewhere on this blog.
    The close cooperation between government and businesses in China has been vastly overstated.
    Different businesses and different parts of the Chinese government each have their own interests, and the conflicts of interest between businesses and government are as severe in China as they are in other parts of the world. The one difference between China and the United States is that China is a one party system so that the conflicts between business and government tend to take place “behind the scenes” more than they do in the United States.
    Also this is much, much too high profile for me to believe that you really had much real official involvement. Government bureaucrats like to keep things quiet. Big business people just crave the limelight and press attention.
    Holdsworth: Like Norway, Iceland has been and continues to be a vocal critic of China’s lack of democracy and human rights record. Yet whereas Norway gets its salmon impounded and left to rot in customs warehouses outside Beijing, Iceland gets trade delegations, state visits, a huge new embassy and now golf courses and five star hotels. Are you really saying this is all completely coincidental?
    1) Part of it is the “media lens”. The media reports dramatic events that are part of a story, and a lot of less dramatic events get missed. Also Iceland is small. If a Chinese oil company does a major joint venture with the Norwegian state oil company, no one notices because Norway has a population of 5 million. Iceland has a population of 320,000.
    2) Sometimes it is coincidental. Iceland is small enough so that the it makes more sense to me that Huang Nubo just woke up one morning with a taste for Icelandic yogurt. Huang Nubo is a major “character” and is known for putting large amounts of money into odd projects just because he feels like it.
    It matter a lot who is behind the deal….
    If this has the full backing of the Chinese government, then you can count on the money eventually coming in. If this is just Huang Nubo’s pet project with no government interest or backing, then you shouldn’t be surprised if it blows up.