For or Against China?

By Baker Mckenzie

Chinese businesses continue to seek access to markets, natural resources and foreign knowhow; and, of course, opportunities to drive returns on financial investments. But slowing domestic economic growth and tightening regulation – at home and abroad – are changing the global environment for outbound Chinese investment. As the world interacts with China, agile and imaginative firms that apply the right strategies to emerging opportunities will see the greatest success.

Despite deal volumes holding steady, investment levels in 2018 continued the steep fall seen the previous year. Having reached record highs in 2017, these are now at their lowest ebb for six years. Deal numbers have been stable in Europe for the last five years and dropped only slightly in North America. But tightening controls in China, and growing regulatory scrutiny in key investment destinations, dampened transaction values in 2018. Overall levels of FDI into the two regions have fallen as a result.

Deal volumes have been broadly stable in Europe during the past five years. In North America, they were down 20% last year from 2014 levels but recovered slightly in 2018. Average deal size has fallen in both regions:
Europe: from $512 million in 2017 (inflated by the ChemChina-Syngenta mega deal), to $130 million in 2018
North America: from $207 million in 2017, to just $44 million in 2018
Overall investment into the two regions fell from $111 billion in 2017, to just $30 billion in 2018. Similarly low levels were last seen in 2013 and 2014.

Chinese FDI into Europe far outweighed investment in North America in 2018. Flows into the US took another sharp plunge, while Europe saw a more modest – but still significant – fall. Investment into the US has been hit by a combination of , persistent tightening of Chinese regulatory scrutiny of outbound capital flows changing US policy on Chinese FDI (e.g., tighter foreign investment reviews) a deteriorating economic relationship between the two countries Europe also saw a steep year-on-year drop in absolute terms, though the 2017 figures were inflated by ChemChina’s USD 43 billion acquisition of Syngenta.

This disparity is partly because the types of deal likely to be approved by China are concentrated in sectors where Europe – and Germany in particular – has a major presence (e.g., advanced manufacturing). Industries where the US is strong are more tightly monitored. For instance, high tech is subject to US inspection, while entertainment and real estate are coming under Chinese scrutiny.
Chinese FDI into North America plummeted by 75% in 2018, to just $8 billion. The US experienced most of the downturn; investment plunged from $29 billion in 2017, to just $5 billion in 2018. In contrast, Canada saw an uptick in investment, from $1.5 billion in 2017 to $2.7 billion in 2018. This was the result of several major acquisitions in the basic materials sector.

Europe saw $22.5 billion of Chinese investment in 2018. Taking out the ‘Syngenta effect’, this represents a 40% drop from the previous year. As well as restricting outbound investment, tightening financial conditions in China have driven some significant divestments among Chinese firms. Some of China’s most acquisitive investors of recent years have divested foreign assets at unprecedented rates in 2018. Sales mainly involved real estate, hospitality and entertainment assets.

In 2018, Chinese firms sold $13 billion of North American assets, and $5 billion of European holdings. Combined with slowing outbound investment, these sales pushed Chinese FDI in North America $5.5 billion into the negative during 2018. Chinese firms announced another $12 billion of divestments across Europe and North America last year – sales which are due for completion in 2019

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