• Europe sees fall of 26% year-on-year to $9 billion; lowest H1 total since 2015
  • Chinese FDI in US increased by 19% from low base to $3.3 billion
  • Consumer and automotive sectors dominate with more than 75% of investment due to lower levels of scrutiny
  • Globally, the value of all newly announced global M&A by Chinese companies dropped by 60% in H1 2019 to only $20 billion
  • Finland sees most investment; Sweden, UK and Italy down but active; investment in France and Germany slows substantially
  • State-owned enterprises desert market; 94% of investment from private sector

New data from Baker McKenzie in partnership with Rhodium Group reveals that Chinese companies invested just $12.3 billion in the advanced economies of Europe and North America in the first half of 2019, down 18% on the same period last year and the lowest activity level since 2014.

After a strong start to 2019 driven mainly by the completion of two mega deals that were already in the pipeline from 2018 (Shandong Ruyi-Lycra and Anta-Amer), activity quickly levelled off in both regions. There were $12.3 billion of completed Chinese FDI transactions in both regions combined -- $3.3 billion in North America and $9 billion in Europe. Chinese investment peaked in Europe in H1 2017 at $53.9 billion and in North America in H2 2016 with $28.4 billion.

North America and Europe are not the only regions seeing further declines of Chinese investment. China’s global outbound investment dropped further in the first half of the year, with newly announced global M&A transactions by Chinese firms down 60% to $20 billion, as capital controls remain firmly in place at home amidst macroeconomic pressures and political and regulatory scrutiny abroad at elevated levels.

Europe still receives three times more investment than North America. While the downward trajectory is similar, Europe's higher level of investment reflects an asset base that is a better match for Chinese outbound policy, as well as lower political and regulatory scrutiny. North America however did see an increase of 19% from the exceptionally low base of last year. All the 19% increase was in the US as investment in Canada was flat on the year.

"With a turbulent geopolitical backdrop, Chinese executives have become more selective in their deal-making and foreign investments," said Tracy Wut, head of M&A for HK/China at Baker McKenzie. "We have seen various new strategies in play, including a greater focus on multilateral investments, partnering with PE investors, and increasingly looking at opportunities in markets closer to home. Many are also simply playing the long game. There is still plenty of Chinese capital looking for a home globally, but what Chinese investors are not looking to do is buy political and regulatory risk in an uncertain external environment."

Type of Chinese investor and deal size changing

State-owned investors are staying home entirely: their activity in Europe and North America has dropped significantly, with privately owned firms accounting for 94% of combined investment in both regions. In Europe, the share of state-owned investors in total investment has dropped to 6%, after accounting for more than half of all Chinese investment in the past five years. In North America, the share of state-owned investment has dropped to 8% in H1 2019.

“While the major drivers for lower levels of China outbound investment are Chinese domestic policy and economy, regulatory policies across advanced markets are having effects," said Rod Hunter, international trade partner at Baker McKenzie in Washington, DC. “The US/China trade disputes weigh on the market as Chinese and other market participants struggle to separate the noise from real policy change. In truth, US investment policy has remained relatively constant, and the main changes involve greater visibility for the US government regarding technology investments. Scrutiny of European regulators is also increasing. That said, we should all realize that China has low levels of outbound direct investment for an economy its size, and we should expect a return to larger investment flows over time.”

The average size of Chinese FDI transactions ballooned in 2015-2016, but collapsed just as quickly in the past two years. In North America, transactions are still well below the average before the 2015-16 boom, with average deal size $35 million in 2019 and $29 million in 2018, just a third of the average size in 2015 of $90 million. The average deal size in Europe was $143 million in H1, similar to $149 million in 2015 before the 2016-2017 boom.

What were the deals that got done and where were they?

The biggest deal in North America was Shandong Ruyi Group’s acquisition of Invista’s apparel and advanced textiles business for an estimated $1.6 billion.

The biggest deals in H1 2019 in Europe were Anta’s acquisition of Finland’s sporting goods company Amer ($5.2 billion - the biggest Chinese investment of the year to date in both regions), Evergrande’s acquisition of 51% in Swedish electric car maker NEVS ($930 million), Ant Financial’s acquisition of UK payment company WorldFirst ($700 million), and Haier’s acquisition of Italian home appliance company Candy ($547 million). This meant the Nordics countries were the only places with major activity levels, with Finland and Sweden both seeing large deals. France and Germany were notable in seeing significantly lower investment, falling 97% and 75% by value respectively.

"Investors clearly focus on transactions in sectors with lowest regulatory concerns, but the data shows that deals in potentially problematic sectors – like electronic payments or electric vehicles – can also get done if investors do their homework,” said Thomas Gilles, chair of Baker McKenzie's EMEA -China Group.

Move to less problematic sectors

In H1 2019, consumer products and services and automotive accounted for three quarters of total deal value in both Europe and North America, underscoring that regulatory scrutiny is pushing firms out of sectors scrutinized by domestic (real estate) and overseas (ICT and other high tech) regulators.

Automotive was the second highest sector receiving Chinese investment in both regions in H1 2019, mainly due to two large deals: In Europe, Evergrande acquired 51% in electric car maker NEVS for $930 million. In North America, Envision Energy acquired Nissan’s electric battery operations in Tennessee.

Other prominent industries attracting Chinese capital in Europe in H1 2019 were financial and business services and transport and infrastructure. In North America, health and biotech continued to fare well in the US, and basic materials was the top areas in Canada.

"Chinese investors are focusing on a few sectors with low regulatory and political scrutiny," said Michael DeFranco, Global Head of M&A at Baker McKenzie. "Some deals are getting done in the consumer products and automotive sectors, which account for more than 75% of investment value in both regions in 2019 to date, showing that Chinese investors are staying away from sectors with heightened regulatory scrutiny at home and abroad."

An uncertain outlook

 

Looking forward, the deal pipeline does not give rise to much optimism for H2 2019. Chinese investment in Europe and North America is likely to stay at current low levels, with no major turnaround expected in H2 2019. As of June 2019, we only record $4.6 billion of pending M&A transactions in North America and $2 billion of pending transactions in Europe.

The number and value of abandoned Chinese transactions in Europe and North America continued to decline, which is a result of the overall lower deal activity but also growing caution by investors to stay away from sensitive transactions. Recent action by the Committee on Foreign Investment in the United States (CFIUS) to force two Chinese companies to divest already acquired assets (dating app Grindr and health diagnostics start-up PatientsLikeMe) highlight the growing concerns of US regulators over personal information.

Fundamentally, policy and politics remain as critical as economics for the outlook for Chinese investment in Europe and North America. Chinese policy on capital controls over the next six months will be significant, with any further toughening of the existing stance impacting on the level of potential investment into the rest of the world.

For the US, Rod Hunter explains: “The coming year will see major regulatory changes that will shape capital markets. The United States will extend pre-investment vetting procedures to US businesses handling ‘sensitive’ personal data, and require licensing for the transfer to China of certain emerging technologies. Meanwhile, the United States could prohibit the use of certain components from Chinese sources by businesses operating in the United States. Meanwhile, trade disputes and uncertainty in the broader US-China relationship could also further escalate."

On the European picture, Thomas Gilles concludes: "As Europe moves to continue to implement new guidelines on FDI screening, Chinese investors will likely face greater scrutiny. Many of the criteria laid out in the EU’s new framework could be especially challenging for Chinese investors, including special scrutiny for state-supported investors. The broader approach to China policy under the new EU Commission after it takes office in the autumn is another important factor that could impact future investment."