Drop driven by domestic Chinese policy shifts and new investment screening regulations, investment in the US fell by 83% but in Canada grew by 80% compared to 2017. Total investment in Europe was down but grew in France, Germany, Luxembourg, Spain, Sweden, and Central & Eastern Europe. Automotive, Financial services and ICT top sectors for Chinese investment in Europe but among the most impacted in the US by regulatory tightening.

Investment in North America concentrated on basic materials and healthcare. Investment screening rules hit hard, with at least 21 Chinese acquisitions canceled by foreign regulators in 2018 (7 in Europe, 14 in North America). A record $23 billion of divestitures by Chinese companies in the two regions, leading net Chinese FDI inflows to North America to turn negative by $5.5 billion

Completed Chinese Foreign Direct Investment (FDI) into Europe and North America fell sharply in 2018, dropping from $94 billion in 2016 and $111 billion in 2017 to $30 billion in 2018, according to the latest analysis from Baker McKenzie in partnership with leading research provider Rhodium Group.

After declining from a peak of $48 billion in 2016 to $31 billion in 2017, Chinese FDI in North America took another dive in 2018 to just $8 billion (down 75%). The US was responsible for the majority of this, falling from a peak of $45.63 billion in 2016 and $29 billion in 2017 to just $5 billion in 2018 (down 83%).

This was the result of continued restrictions on outbound transactions in China, tighter US foreign investment reviews, and a tense bilateral relationship between the two countries. In contrast, Canada saw an uptick of Chinese investment this year, up from $1.5 billion in 2017 to $2.7 billion in 2018 (up 80%) due to several large mining acquisitions. Net of divestitures, Canada received more Chinese investment than the US in 2018.

Chinese FDI in Europe also fell in 2018 but overall held up better than in the US. The total value of completed deals was $22.5 billion in 2018, 70% down from the $80 billion in 2017. The bulk of 2017 investment came from ChemChina’s acquisition of Syngenta for $43 billion. Stripping out this deal shows an underlying 40% decline in Chinese investment into Europe in 2018. Large economies including France, Germany, Spain, and Sweden saw increased investment in 2018.

In 2018 there were at least seven canceled deals in Europe worth $1.5 billion (same number as 2017; up 200% in value) and 14 canceled deals in North America worth $4 billion (up 17% in volume, down 65% 

The first half of 2018 saw a surge of regulatory interventions in North America, mostly due to policy adjustments in the US. This then slowed in the second half of the year as Chinese companies increasingly stayed away from potentially problematic deals.

“There may have been an overcorrection in the market, perhaps caused by confusion of the trade conflict with investment policy. US investment regulation remains exclusively focused on national security, and CFIUS has continued to approve Chinese investments even in the technology space,” said Rod Hunter, international trade partner in Baker McKenzie’s Washington, DC office.

In Europe, the number of canceled deals increased in the second half of the year as several European governments increased regulatory scrutiny and financial conditions in China further tightened.

France, Germany, Hungary, Italy, Latvia, Lithuania, the US, and the UK have all strengthened or are in the process of strengthening their investment screening regimes, while Belgium, the Netherlands, the Czech Republic, Greece, Slovakia and Sweden are considering setting up or strengthening investment review mechanisms. The EU is also in the process of establishing an overall investment screening regulation.

Chinese companies divested assets at an unprecedented pace in Europe and North America in 2018. They completed asset sales worth $5 billion in Europe and $13 billion in North America. A further $12 billion of assets is up for sale in 2019.

This is driven by China’s financial clean-up and tightening campaign, which has forced a handful of prominent investors that were driving much of the 2015-2016 FDI boom to sell their overseas holdings. The wave of divestitures is mostly hitting the US, and consists of mainly real estate, hospitality, and entertainment assets. Accounting for the completed divestitures, net Chinese FDI inflows to North America were negative to the tune of $5.5 billion in 2018. For all of North America and Europe, net Chinese FDI would only be $13 billion on a net basis.

In 2018 there was another stark divergence between Europe and North America in terms of the type of Chinese investor. In North America, the share of private investors dropped sharply from 91% in 2017 to 62% in 2018, meaning State-Owned Enterprises accounted for a larger share of investment. In contrast in Europe, the share of private Chinese investment jumped from 14% to 60%.

A number of countries saw increased Chinese investment. Chinese investors made acquisitions worth $1.83 billion in France (up 86% compared to 2017), $2.52 billion in Germany (up 34%), $1.17 billion in Spain (up 162%) and $4.05 billion in Sweden (up 186%). Investment in Luxembourg spiked from under $100 million in 2017 to $1.87 billion, while in Denmark it grew from $200 million to $1.1 billion.

In Central & Eastern Europe investment increased almost across the board, albeit from a low base. It grew by 185% in Hungary, 355% in Croatia, 162% in Poland and by more than 1,000% in Slovenia.

The UK still received more Chinese investment than any other country in Europe ($4.94 billion), but this declined 76% in the absence of the megadeals seen in 2017. Similar falls were seen in The Netherlands (down 76%) and Switzerland (down 99%). Italy was relatively stable, down 21% to $800 million.

The industry composition of Chinese investment in both Europe and North America continued to shift in response to new political and regulatory realities.

In 2018, the absence of mega deals kept the industry composition in Europe diverse. No single industry made up over 20% of total Chinese investment. The top sectors were automotive, financial and business services and ICT. Financial services and ICT investment in particular showcase the divergence between North American and European patterns: these two industries have taken a hit in the US due to regulatory tightening, but they remain top sectors in 2018 for Chinese investment in Europe.

In contrast, the industry mix of Chinese investment in North America was concentrated in a few big sectors. Several sizable mining deals in Canada made basic materials the number one sector for Chinese FDI in North America in 2018. In the US investment in sectors such as real estate and transport and infrastructure that dominated investment in 2016-2017 largely disappeared due to Chinese and US policy restrictions. Healthcare and biotechnology was instead the top industry in the US.

The pipeline of pending transactions suggests a continued divergence in 2019. Chinese investment looks to be robust in Europe in the first half of 2019, with more than $20 billion of pending transactions at the beginning of the year. The pipeline in North America remains weak with less than $5 billion of pending deals.   

 Contributed by Magdalena A K Muir

Reference

https://www.bakermckenzie.com/en/newsroom/2019/01/chinese-fdi