- Sixth annual survey reveals Chinese investment in Europe fell 40% and in North America 27% in 2019 to total $19 billion, the lowest since 2010 and 83% down from the 2017 peak of $107 billion. Europe received more than twice the amount of investment ($13.4 billion) compared to North America ($5.5 billion).
- Europe and North America see largest relative declines amid the global drop in Chinese outbound M&A from $80 billion to $57 billion in 2019 due to Chinese capital controls, lower liquidity in the Chinese financial system and geopolitical tensions.
- Finland ($5.3 billion), UK ($3.8 billion), Sweden ($1.3 billion), Germany ($0.7 billion) and Italy ($0.7 billion) saw largest Chinese investments in Europe. Investment in Ireland also jumped more than 50%.
- British Columbia ($0.7 billion), Kansas ($2 billion), California ($0.7 billion), Tennessee ($0.4 billion) and Maine ($0.2 billion) saw largest investments in Canada and the US.
- Consumer products and services and automotive were among the top sectorwned investment declined to a 19-year low. In both Europe and North America, financial investors have almost completely disappeared in 2019.
- Easing trade tensions, steps to liberalize inbound FDI policy in China and more liquidity in the Chinese economy lay the foundations for a potential rebound in Chinese outbound investment in 2020.
Chinese investment in Europe and North America hit its lowest point in a decade in 2019 with just $19 billion of completed deals, according to the latest annual analysis from Baker McKenzie in partnership with leading research provider Rhodium Group.
Outbound investment continues to be weighed down by a number of factors including restrictions on outbound investment from Beijing, strengthened regulatory reviews in the US and Europe, slowing growth and lower liquidity in the Chinese economy, and geopolitical tensions between China and host economies.
Globally, newly announced Chinese M&A in 2019 totalled $57 billion, down 29% from $80 billion in 2018 and the lowest level in six years. This further slowdown in Chinese outbound M&A is a global phenomenon. With the exception of Latin America, all regions of the world saw further decline in Chinese activity in 2019 compared to 2018. However, compared to the peak, Europe and North America saw the biggest relative declines, with Asia and Latin America holding up the best.
While a fairly weak pipeline of just over $10 billion of announced deals by Chinese acquirers in Europe and North America indicates a slow start to 2020, a number of factors point to a potential uptick in Chinese outbound investment.
Trade tensions are set to partially ease with China and the US expected to sign a limited trade deal on 15 January. In terms of monetary policy, China’s central bank last week signalled its determination to boost liquidity and reduce borrowing costs for companies in 2020 by trimming the amount of cash that lenders must hold in reserve.
The drop in outbound M&A also stands in stark contrast to flows in the other direction. After years of anemic activity, foreign M&A targeting assets in China has ticked up in past two years, with inbound M&A to China reaching $43 billion in 2019, up nearly 30% in two years.
"Reciprocal market access is vital for sustainable levels of cross-border investments between the world's largest economies," said Michael DeFranco, global head of M&A at Baker McKenzie. "Several rounds of policy liberalizations by the Chinese government have abolished previous equity thresholds for foreign investors and driven deals in sectors such as automotive and financial services. This in turn helps set the scene for the return of higher levels of Chinese outbound investment in the coming years."
Regulators forced divestitures rather than cancelling deals
In 2019 the Committee of Foreign Investment in the US (CFIUS) was less active than recently in cancelling proposed deals but forced a number of divestitures relating to previously closed transactions. These included iCarbonX’s sale of stakes in PatientsLikeMe, Beijing Kunlun Tech’s sale of Grindr, and Cosco’s sale of a subsidiary’s interest in Long Beach Container Terminal. CFIUS is also currently reviewing Chinese ownership of app TikTok, a deal completed more than two years ago.
“US foreign investment regulation continues to pose challenges for Chinese investors,” said Rod Hunter, a partner in Baker McKenzie’s Washington, DC office. “Recent divestiture orders demonstrate the increased CFIUS focus on personal data. This year will see further regulatory activity as CFIUS finalizes rules for technology, infrastructure and data businesses, a welcomed development that will offer greater predictability for investors.”
The biggest cancelled deal in Europe was China Three Gorges’ failed $10.3 billion bid for Portugal’s largest utilities company, Energias de Portugal, amid concerns about political hurdles. Another large cancelled deal was Fosun’s proposal to contribute a further $562 million to its investment in UK travel agency Thomas Cook (for a 75% stake in its tour operator business and 25% of its airline business). The rescue plan did not go through due to resistance from creditors, although Fosun has since acquired the Thomas Cook brand name and related intellectual property.
In 2019, Chinese investors only completed $5.5 billion deals in Canada and the US, down again from $7.5 billion in 2018. This is the lowest annual investment since 2009.
Most of the investment into the US in 2019 comes from just a handful of deals. The top transactions were Shandong Ruyi’s acquisition of Invista’s apparel and advanced textiles division for $2 billion, Envision Energy’s acquisition of Automotive Energy Supply Corp’s US manufacturing asset, for an estimated $800 million, and Xtep International’s acquisition of E-Land Footwear USA for $260 million.
Investment into Canada slid from $2 billion in 2018 to $1 billion in 2019. The majority of this still came from deals in the basic materials sector: CITIC in Ivanhoe Mines ($459 million) and Zijin Mining Group’s acquisition of additional stakes in Nevsun Resources.
The average deal size in North America continued to be low at $28 million (compared to $29 million in 2018, down from $200-300 million in 2016-2017).
In terms of geographic breakdown, Chinese investment in North America was largely dominated by the US in 2016-2017. In 2018-2019, the US’s share has come down as overall investment declined, but it still received more investment than Canada in the past two years. States such as California and New York were top recipients in 2016-2017 as they often hosted mega M&A deals in real estate and hospitality. In 2018-2019, they gave way to other headquarters states as those mega M&A deals in real estate fell away.
The top states targeted by Chinese investment in 2019 were Kansas (Shandong Ruyi’s takeover of INVISTA’s textile unit), California (Xtep’s acquisition of E-land USA, other real estate and consumer-related deals), and Tennessee (Envision Energy’s acquisition of Automotive Energy Supply Corp’s US manufacturing asset). British Columbia, New York and Pennsylvania saw declines from hosting large deals in 2018.
Chinese FDI in Europe also dropped further, completing deals worth $13.4 billion in 2019, which represents the lowest level since 2013.
Chinese FDI in Europe in 2019 came from a diverse range of deals in various sectors: Top deals included Anta’s $5.2 billion acquisition of Amer Sports, Shagang Group’s additional $2.2 billion investment in Global Switch, Evergrande’s acquisition of 51% stake in NEVS for $930 million, Alibaba’s $700 million takeover of World First UK and Qingdao Haier’s acquisition of Candy for $547 million.
One major Chinese investment in Europe that was not officially included in the headline number is BAIC’s $3 billion acquisition of a 5% stake in Daimler (which falls under the 10% threshold to qualify as FDI).
The average deal size in Europe recovered slightly to $132 million (compared to $130 million in 2018, which was down from $267 million in 2016 and $526 million in 2017).
"Chinese FDI in Europe is holding up at more than twice the level seen in North America and is taking place in a much greater variety of sectors," said Thomas Gilles, chair of Baker McKenzie’s EMEA-China Group. "The pipeline looks reasonably strong for 2020 in major economies such as France and Germany after a relatively quiet 2019."
The top countries targeted by Chinese investment in Europe in 2019 were Finland (Anta’s acquisition of Amer), UK (Jiangsu Shagang’s additional investment in Global Switch) and Sweden (Evergrande’s acquisition of a 51% stake in NEVS). Finland registered the biggest year-on-year growth in 2019.
Regarding Brexit, Chinese investors have remained relatively attracted to the UK throughout the process to date. Now, as the UK leaves the EU, it is expected to actively seek greater foreign investment from China in 2020 to offset the more negative economic aspects of Brexit.
Another country that saw significant growth was Ireland (up over 50%), mostly due to greenfield investments (Wuxi Biologics and Eurbest). In Eastern Europe, investment into Romania jumped up to $238 million due to CEE Equity Partner’s acquisition of 15 grain silos and logistics hubs, CGN’s new joint venture company with Nuclearelectrica, and Sinotrans’ acquisition of KLG Europe assets in Romania.
Meanwhile, Chinese investment in France dropped from $1.8 billion in 2018 to under $100 million in 2019. Chinese investment in Germany also dropped from $2.5 billion in 2018 to just $0.7 billion in 2019. One of the biggest decreases in terms of percentage was Luxembourg (down to $50 million from $1.9 billion in 2018 due to a one-off big deal, Legend’s acquisition of BIL).
During the Chinese outbound investment boom in 2016-2017, Chinese investments in Europe and North America were concentrated in just a few industries correlating to mega deals, including real estate and hospitality in North America, agriculture (ChemChina’s acquisition of Syngenta for $43 billion) in Europe, and transport and infrastructure in both regions. Since the drop in overall investment in 2018, the industry distribution of Chinese FDI in Europe and North has changed markedly, now more evenly spread over a number of consumer-related industries, including consumer products and services and automotive in both regions, basic materials in North America and ICT in Europe.
State-owned and financial investors disappear from investment landscape
Europe traditionally saw more state-owned Chinese investors due to its relative openness to foreign investment in industries such as infrastructure and energy and basic materials: State-owned investment made up more than 50% of the total in Europe in 2014-2017. However, this number markedly dropped in 2018 and 2019. In North America, the share of state-owned investors has generally been lower than compared to in Europe, and occasional upticks were often associated with large energy and mining deals in Canada (such as the case in 2018 and 2019).
From barely any before 2012, financially motivated investments (those made purely for financial gains) grew to account for 30% of the total investment in 2015-2018 in both Europe and North America. As overall investment level dropped, however, the value of financial investments has also been declining since 2018. In 2019, we saw a sharp crash in Chinese financial investment in both Europe and North America.
One of the goals of Beijing’s interventions since 2016 was to curb speculative financial investments. This action has substantially decreased the share of financially motivated investments in both regions in past three years.
In 2019 we recorded a further sharp drop, resulting in almost all Chinese FDI in Europe and North America now being strategic investments made in the investor’s core area of business. The share of financially motivated investment has fallen to under 5% in both regions.
Outlook for 2020: Seeking bamboo shoots
"A combination of market and policy forces continue to weigh on Chinese outbound investment to Europe and North America," said Tracy Wut, Baker McKenzie's head of M&A for Hong Kong and China. "However, we see grounds for a degree of optimism as there are a number of variables showing change in the right direction, which could propel Chinese outbound investment to bottom out and return to modest growth in 2020."
These variables include:
- More liquidity: The liquidity conditions in the Chinese economy have somewhat improved throughout 2019 and offshore bond raising activity has been solid, which puts some companies in a better position to invest. However, China’s financial sector outlook remains fragile amid defaults and volatility.
- New investment screening rules bedding down: A rational and transparent implementation of new regimes in the United States and Europe could help reduce risk perception and increase appetite for overseas investment, especially new CFIUS rules in the United States.
- More access to Chinese markets: China’s latest efforts to reform the inward FDI regime and create a more level playing field could help to somewhat ease foreign concerns about the lack of reciprocity in market access.
- Geopolitical tensions easing: A “Phase 1” deal between China and the United States could help put both countries back on a more rational track of economic relations and in turn diffuse investor concerns about worst case outcomes.