• Drop driven by domestic Chinese policy shifts and new investment screening regulations
  • Investment in US fell by 83% but in Canada grew by 80% compared to 2017
  • Total investment in Europe 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 in basic materials and healthcare.
  • Investment screening rules hit hard, with at least 21 Chinese acquisitions cancelled by foreign regulators in 2018 (7 in Europe, 14 in North America)
  • 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. 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.

Investment screening

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

"Some deals are still getting done despite new investment screening regulations, trade tensions and Chinese investment controls," said Michael DeFranco, global head of M&A at Baker McKenzie, but all parties in a prospective transaction need to conduct plenty of due diligence and take in-depth regulatory advice to assess if a deal is viable. By contrast, despite the fall in FDI, Chinese issuers are continuing to go public via IPOs on US exchanges at record levels."

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 over correction 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.

“The recent US legislation included a number of 'good government' reforms to ensure a more predictable CFIUS process — for example, clearer timelines and staffing increases funded by users fees.

"The big legal change is the imposition of mandatory declarations for certain foreign investments — for instance, in critical technology. While this new requirement will initially create uncertainty, expedited declaration procedures will make it easier for foreign investors and US businesses to navigate with confidence over time.”

In Europe the number of cancelled 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.

Divestiture spike turns net US flows negative

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%.

Chinese investment in Europe shows resilience

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.

"It's very clear from the numbers that underlying Chinese investment in Europe is quite resilient for straightforward commercial reasons," said Thomas Gilles, chair of Baker McKenzie’s EMEA-China Group. "We are seeing what we expect to be sustainable levels of investment into a healthily diverse set of industries in Europe by mainly private Chinese investors at the moment. China's economy continues to grow and it is entirely normal for Chinese businesses to continue to internationalise over the long term."

Sector stories diverge

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.

Stronger outlook in Europe

The pipeline of pending transactions suggest 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.

"In terms of the outlook there's still a healthy pipeline of M&A in Europe, particularly in the mid-market space and a possible upside in North America if talks can move towards resolving trade conflict as well as concerns over the CFIUS process ease," said Bee Chun Boo, M&A partner in Baker McKenzie's Beijing office. "Here in China, we don't see any significant regulatory or financing impediment for outbound investments that are aligned with China’s strategic objectives."