The Chinese Are Coming; Expanding Chinese companies have finally discovered the Old World.

Byline: William Underhill (With Jessica Au in London, Jacopo Barigazzi and Barbie Nadeau in Rome, Mike Elkin in Madrid, Peter Green in Budapest and Stefan Theil in Berlin)

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 cafes 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 [euro]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 [euro]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.