AFTER years of being resolutely focused on investing in 'familiar markets', such as the United States, or within their own continent, European firms are beginning to show a greater awareness of the investment potential of China. The handover has played no small role in this, highlighting the opportunities which exist in China and sparking a long-dormant interest, albeit tinged with caution. Uncertainty over the future, particularly with regard to China's rule over the territory, has led to circumspection in European companies, where investors still prefer to wait and see before plunging headlong into China. 'We do not know necessarily what we are dealing with,' said one director of a financial services company. 'While there are evidently potential opportunities in China, there is also a lot of potential downside too. If you do not know the right people, you can end up chasing a dream.' Gail Silcock, director of management technology consultancy LionHeart WorldWide, senses 'the political feeling', particularly in Britain - 'there seems to be a move towards shrinking back, and temporarily investing elsewhere.' China's reliance on guanxi rather than merit as a basis for doing business worries investors who wonder if Hong Kong might end up going down the same track. Corrado Letta, an independent consultant on investing in Asia, argues that European attitudes to Hong Kong are actually suffering from a more deep-seated malaise towards the whole of Asia. 'As every action implies an opposite reaction, how is Europe responding to Asia's booming confidence? With a booming uncertainty?' he says in a new book, Listen to the Emerging Markets of Southeast Asia. Compared with the US whose investment in Asia reached US$39.4 billion (HK$304.5 billion) between 1980 and 1993, or an annual average of US$4.2 billion, and Japan with a total investment of US$30.8 billion or US$2.4 billion annually, Europe has only invested an annual average of US$2.2 billion, he says. The United Nations Conference on Trade and Development (UNCTAD) noted in a report, 'Sharing Asia's Dynamism', that there was a picture of 'mutual neglect' between Europe and Asia. It said Europe, which is the largest single source of foreign direct investment (FDI) in the world, puts only around 3 per cent of this into Asia, even though the argument for more was compelling. The report states: 'European economies are highly industrialised, and their firms are experienced overseas investors. Asian developing economies are relative newcomers in the industrial and FDI fields, with a smaller, narrower base of advantages that they can exploit, and much less knowledge of what international production involves and what it means to operate abroad, let alone in more developed economies. 'Thus, while - as far as FDI is concerned - it may be appropriate to describe European firms as neglecting Asia, Asian firms are beginning to discover Europe. 'European firms have failed so far to build upon a long-standing base in Asia; Asian firms are just at the beginning of their entry into Europe.' Such comments have prompted howls of complaint from countries that say they have discovered Asia. Particularly Britain and France - who are the principal beneficiaries of their colonial past - with their 'long-standing base in Asia' to which UNCTAD refers. In fact, Hong Kong is Britain's 12th-largest market in the world, with exports worth GBP2.9 billion (HK$36.5 billion) in 1996, of which over 40 per cent were shipped through Hong Kong to China. Britain is also the leading European investor in China, with approximately 1,700 British-backed joint ventures on the mainland. Imperial Chemical Industries, the British industrial chemicals group, aims to derive 25 per cent of its turnover from Asia by 2005, compared with around 17 per cent now. And officials say they are still in expansive mode. In China the company has plans for a US$400 million investment in a polyurethane joint venture in Shanghai, and is expected to increase its Chinese workforce from 500 to 2,000 by the end of the decade. And throughout the rest of Europe, there is a clear trend to invest in China, despite the words of caution. For the Swedish telecom group Ericsson, China, together with Hong Kong and Macau, constitute the company's second-largest market after the United States. Last year, its turnover in China amounted to US$1.5 billion, and officials there also stressed there was no question of a reluctance to stay. But studies have shown that where there has been a significant shortfall has not been among the larger European multinationals, but among the smaller and medium-sized enterprises. These make up the powerhouse of European industrial production, and they are only now beginning to wake up to the opportunities in China. Analysts say their failure to notice China earlier appears to have been principally driven by the preoccupation with the emergence of a single European market and a planned single currency. The prospect of having unhindered access to a developed market, with a relatively wealthy population of 300 million people on their doorstep, has proved too enticing to ignore. The fact that this market is also culturally similar, and expanding all the time as the eastern European countries become members of the European Union, has been enough to divert attention away from China. Indeed the eastern European countries were also seen as having a similar dynamic to the one that has seen Asia grow so strongly over the last decade. Freed from the shackles of a more heavily interventionist planned economy, eastern European countries suddenly took on growth rates which doubled western Europe, and offered tantalising prospects of rich returns. In the event this has largely proved flawed, with eastern Europe's economic emergence less certain than countries in Asia with a similar economic profile. So now companies, disappointed by Europe's performance, have begun looking further afield towards countries such as China, where the investment prospects look better. The Singaporean initiative that sparked the Asia-Europe Meetings (ASEM) is also helping to foster more European investment in China. ASEM has already set up a Euro-Asia Business Forum and an on-line Euro-Asia training and technology exchange to promote inter-regional co-operation. In addition, there is a Singapore-based Asia-Europe Foundation to promote East-West academic and cultural exchanges, and a new Europe-Asia Environment Technology Centre. Such institutional infrastructure is acting as a catalyst to growth and trade ties between Europe and China, and boosting investment. In addition, the frequent visits made to western European capitals by Hong Kong government officials in the run-up to the handover has been acknowledged as a valuable exercise in public relations. High-level assurances have gone down well, and while there is always likely to be a wait-and-see lobby who want the jury to stay out, there is also an increasing body of people who see China as the next large unexplored and lucrative market, with Hong Kong as the doorway.