By William Underhill
Newsweek International

Oct. 16, 2006 issue - The battlements are authentically medieval, the food distinctively Tuscan. But wander into the industrial district of Prato and the culture switches abruptly. The language of the cafés isn't Italian, it's Chinese. So too for many street signs and newspapers. In the past few years, the city's Chinese population has surged from just a few hundred to some 10,000. More than 2,000 Chinese-owned enterprises have helped revive Prato's flagging textile industry.

A thousand or so kilometers north, the Swedish town of Alvkarleby awaits a new landmark. Near the main highway, a Chinese entrepreneur is building a €10 million business and tourism center, complete with pagoda and outsize Buddha. The purpose: to provide a meeting point for Swedes planning a foray into China, or a base for Chinese investors looking to launch in Europe. Smart idea. In the past four years, Chinese investments in Sweden have climbed from zero to more than 50. By the end of the year, China could overtake Germany as the country's largest investor.

In the latest twist to globalization, the Chinese are coming to Europe. Last year the European Union replaced the United States as China's largest trading partner, and business is often ready to overlook political differences as economic ties multiply. "It's been overwhelming, especially in the last 10 months," says London banker Ying Fang, who helps raise money for capital-hungry Chinese companies. "When I tried to start a Chinese economic association here 10 years ago, no one even seemed to know where China was. Now everyone wants a slice."

Check out the investment figures. Sure, the absolute numbers remain small. (Little Taiwan is still a bigger player in Europe than mainland China is.) But the growth curve tilts steeply upward. According to the consultants Ernst & Young, the total number of Chinese projects in its annual accounting of foreign investors in Europe has risen fivefold since 2000. Among recent announcements: everything from a joint venture to assemble bicycles in the Czech Republic to a first move into the European market by the giant China Telecom. Hamburg alone is now home to more than 350 Chinese companies, many of them representing larger concerns back home. Says Nigel Wilcock, an investment specialist at E&Y: "If you follow the logic, you could expect Chinese investment in Europe to follow the same pattern as with Japan." That's some prospect. For the past 10 years, the Japanese have consistently rated among Europe's keenest outside investors, behind only the United States.

Europeans have worked hard to grab their share. Four years ago, only the British ran an office in China to lure investors. Today almost everyone does. Prime Minister Romano Prodi, who recently led a 700-strong delegation to Beijing, talks of making Italy "a gateway to the East." In London, the No. 1 destination for Chinese investment in Europe, city leaders talk of creating an entirely new Chinese business quarter just to the east of the capital's main financial district. In Austria, the government will help pay the €100 million needed to establish a new Chinese Technology Park outside Vienna.

The enthusiasm is clearly mutual. For the past five years, Beijing has been prodding its businessmen to look overseas, build global brands and tap into foreign know-how. Last year China's outward investment climbed 25 percent. According to press accounts in Germany, the Chinese Trade Ministry has produced a country-by-country shopping list of promising markets. Europe tops the list. When Chinese Prime Minister Wen Jiabao visited last month, he was accompanied by a clutch of business dignitaries that included the chiefs of the FAW group, China's leading automaker; Bao-steel, one of the world's largest steel concerns, and Cnooc, the fast-growing petroleum and gas company.

In some cases, the Chinese have targeted big-name enterprises that have fallen on hard times. The venerable Rover car company in Britain is now in the hands of the Nanjing Automobile Corp. China's Qianjiang Group, the country's largest motorcycle manufacturer, last year took charge at Benelli, the 95-year-old Italian company famous for its distinctive scooters and motorcycles. Elsewhere, it's the smaller specialized businesses that appeal. In Germany, for example, the Chinese have been snapping up companies from the Mittelstand, the raft of smaller niche manufacturing businesses that have traditionally been the nation's economic mainstay. Small to medium-size Chinese companies are also getting into the act, according to Michael Charlton of Think London, the capital's foreign-investment agency. "The more Chinese companies establish offices here, the more they discover new markets," says Li Niu, business coordinator for Mindray, a Chinese medical-equipment company that this year set up its first European office in London.

Depending on the line of business and its markets, European countries each possess their own particular charms. Britain scores high for the English language, for example, and companies seeking to raise the big money needed for expansion are drawn to London's capital markets. In the past five years, six Chinese companies have chosen a listing on the London Stock Exchange, while an additional 42 have opted for the smaller Alternative Investment Market. Naturally the authorities are keen to smooth their path. A team from the City last month accompanied Lord Mayor David Brewer on a swing through China offering explanatory seminars on the intricacies of raising capital.

At the microlevel, Britain's allure is very different. It's easy enough for would-be settlers to hide from the tax or immigration authorities, say, in a Chinese community that ranks as the largest in Europe. According to official figures, the number of Londoners born in China has doubled in the past five years. Some are legal; many are not. Thousands of Chinese students are currently studying in Britain, and often they choose to stay on after graduation, finding work in the no-questions-asked economy even when their visas have lapsed. Ireland, too, appeals powerfully, thanks to a freewheeling business culture, low corporate taxes and a generous distribution of work permits. Result: a Chinese population that may have topped 150,000. "It's easy to make money here," says Paddy Song, originally from northern China, who arrived in Ireland six years ago after stints in France and Sweden. "It's easy to make money here." He should know. His own Shining Emerald Group includes property, an accounting service and a Chinese-community newspaper.

Elsewhere, the Chinese have flourished where they have a found a familiar culture of family-run microbusinesses. In practice, that's often meant Spain—watch for the Chinese-run convenience stores of Madrid—or Italy. "The latest move is to see what we can offer China," says Romeo Orlandi of Osservatorio Asia, a Bologna-based think tank. Though most Chinese investors have stuck to the country's industrial north, many have headed to the less-developed south. Sicily alone is now home to more than 1,200 Chinese-run businesses, many of them small trading companies that have sprung up in the past two years.

The EU's new member states in Eastern Europe offer a cheap base and an easy route into the continent's markets. Take the case of Wei Xiang, who moved to Budapest in 1990, he says, in order to paint. Then came an opportunity to make money—designing shoes for Hungary's emerging consumer class and manufacturing them in China. Today he employs 70 people and sells 3 million pairs of Wink brand shoes a year across Eastern Europe. Like others, he's convinced that his future lies in Europe, not in America, once the magnet for Chinese emigration. He is sending his teenage children to Budapest's American school and wants them to go on to study in the United States. But he is himself happy to stay in Hungary. "The U.S. is far from here, and we know much more about the European customers and the shoes they want," he says.

Xiang's success worries some Europeans. A prosperous Chinese community—entrepreneurs or investors—means rising competition. Locals in Prato see that firsthand. Though the newcomers employ some Italians, they prefer their fellow Chinese, partly because they are so much cheaper. As for that famous label inside the clothes, it soon may need amending. "Made by China in Italy" perhaps?