China's outbound direct investment (ODI) has failed to keep pace with the blistering growth of its economy, but things are changing as companies seek to acquire the brands and technology that will keep them ahead of cut-throat competitors at home.

Annual ODI outflows to Europe tripled from 2006 to 2009 before tripling again last year to $10 billion, according to the Rhodium Group, a New York-based economic research firm. The number of deals worth more than $1 million doubled to almost 100 in each of the years 2010 and 2011.

And Rhodium expects the trend to continue: it projects $1 trillion to $2 trillion in global Chinese ODI between 2010 and 2020.

That would equate to $250 billion to $500 billion cumulatively in new Chinese investment - either mergers and acquisitions or green field projects - if Europe can avoid the collapse of the euro and sustain the 25 percent share of ODI it captured in the 2000s.

"Even if Chinese outflows underperform and Europe ceases to attract as big a share, an annual average of $20-30 billion would be expected for the coming decade," the report, written by Thilo Hanemann and Daniel Rosen, said.

Some policymakers have called for a bilateral investment treaty to promote deal flows, but Hanemann said the priority for Europe should be to make its market more attractive by improving its competitiveness.

"Most Chinese firms invest with a long-term perspective. So the most important thing that Europe needs to do to sustain Chinese investment is to face its structural problems," he said in a telephone interview.

The study estimated that current Chinese investment supports 45,000 jobs in the 27-member European Union and concluded that firms are venturing overseas overwhelmingly for commercial reasons - either in response to pressure they face in their domestic market or because of attractive deals in Europe.

But it acknowledged the potential for negative economic consequences from rising investment.

For instance, Europe could be exposed to greater volatility in the event of severe economic disruption in China and Chinese firms could repatriate high-value activities after making acquisitions.

What's more, Beijing could try to mix money with politics, as it has done with Japan over rare earths. And, as a one-party authoritarian state with values at variance with those of the West, burgeoning Chinese investment was likely to stoke national security fears, Hanemann and Rosen said.

"Europe's current model of openness will be seriously tested in the future when inflows from China reach first-tier volumes, not all acquisitions are friendly, and EU austerity is in full swing," they said.

They recommended that the EU keep the door open to investment by putting in place a common approach to vetting deals. This would address potential national security concerns in a non-discriminatory way.

Among other proposals, they said worries about domestic distortions in China, such as subsidized loans for state-owned firms should be dealt with by internal EU processes, including competition policy reviews, and not by imposing "economic security" demands.

(Reporting by Alan Wheatley; editing by Ron Askew)

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