A China Business Law Journal survey of law rms around the world shows a protracted US- China trade war and a bevy of international and domestic political developments have dealt a blow to Chinese outbound investment.
While there is a consensus about a slowdown in China-related work across regions, Europe seems to have seen the most impact. The e ect of the trade war has been compounded by a surge in protectionism and increased scrutiny of inbound deals in Europe. "The trade war has added additional uncertainties for Chinese investors ... it began at a time where European [including German] legislators tightened their thresholds for approving foreign investment, in particular with regard to high-tech industries," says Mark-Alexander Huth, a partner at German law rm Schulz Noack Brwinkel (SNB).
"To make things worse," he adds, "the Chinese foreign exchange regime added further di culties to Chinese outbound investments with regard to their nancing. This all seems to have had a negative impact on the motivation of Chinese investors, and resulted in an immediate slowdown of German-Chinese M&A transactions this year." This view is echoed by Zhu Yifan, a senior associate at Germany-based law rm Noerr. "We have recently seen a slowdown of outbound Chinese investment," says Zhu. "One of the reasons is that Chinese investors are getting more strategy-oriented and thinking more cautiously and rationally about their outbound strategies; another reason is that the [central] government is carefully adjusting its management of cross-border capital ows to respond to changing economic conditions. "However, it also plays an important role that the German government is looking more cautiously on foreign direct investment [FDI] and has tightened the applicable regulations this year again," he says. "The rules governing Chinese M&A in the EU are changing," notes Zhang Shaohui, a partner and head of the Europe-China desk at Dentons Luxembourg, adding that "legal risks and
challenges for Chinese investment in the EU have increased signi cantly and are threatening the security of those investments".
"In Europe, due to the rapid growth of Chinese investments, especially because of the particular focus on strategic sectors, the role of state-owned enterprises [SOEs], and the uneven playing eld for foreign investors in China ... Chinese investment is seen as a challenge," says Zhang. "In certain circumstances, it is even viewed as a potential threat to the EU. Consequently, the EU has now decided to increase its scrutiny of FDI from third countries, including China, by establishing a screening framework at an EU level."
Huth says another factor that is a ecting Chinese investment is historically low interest rates in Europe, which has increased the prices of strategic assets.
Quick on the feet
Hermes Pazzaglini, a Shanghai-based partner of Italian law rm NCTM, while admitting to the trade war's signi cant impact on their Chinese business, is more optimistic. He believes that "the [central] government will restructure the PRC economy to nd alternative markets within or outside China".
"We are also con dent that the current trade war with the US can become an opportunity to develop the Belt and Road Initiative and strengthen relations with the EU," he says.
Ashurst's Germany-based partner, Matthias von Oppen, is another lawyer who believes that Chinese investments "will continue to play an important role in the future because the number of investment transactions remains relatively large".
"The slower growth of the Chinese economy may further drive the need to nd new growth opportunities through acquisitions or joint ventures overseas," says von Oppen. "Although there is capital control, strategic outbound investments are supported by the [central] government. China's enterprise outbound investment regulations, which took e ect in March 2018, can simplify and formalize administrative procedures for FDI.
"As the `Industry 4.0' and `Made in China 2025' initiatives show, German industry is particularly attractive for China."
SNB's Huth also expects the buzz around Industry 4.0 and arti cial intelligence (AI) to be drivers for China-EU deals.
Jaap Jan Trommel, managing partner of Dutch law rm NautaDutilh, says, "Chinese investors are inclined to evolve from massively large-scale deals to quality-oriented growth in the coming years.
"We are aware that China has been one of the world's largest outbound investors and we do not think that Chinese investors will stop with their overseas expansion," says Trommel. "Now is likely to be the phase that Chinese investors and the government reassess their strategies and policies of the outbound investment."
He says there is Chinese interest in sectors that The Netherlands is famous for, such as agriculture and food, energy and natural resources, healthcare, technology, media and telecommunications, and transport and logistics.
Antonio Snchez Cerbn, a partner at the Beijing o ce of Spanish law rm Uria Menendez, says, "Energy, particularly renewable energy, is the sector attracting the most interest from Chinese companies in Spain, Portugal and Latin America this year.
"Agribusiness and infrastructure are the other two sectors where we have detected a heightened appetite in Chinese investors," he says.
Given the Chinese focus on the technology sector, Israel is a market of great interest for Chinese businesses, and is seen as an alternative source for cutting-edge technologies. Israeli rms continue to see enquiries from Chinese companies keen on entering the country's vibrant technology sector.
"We're seeing increased Chinese interest in the Israeli tech sector as tensions rise between China and the US," says Eli Barasch, a partner at Israeli law rm Gross Kleinhendler Hodak Halevy Greenberg Shenhav & Co. (GKH).
He says that even though Israel doesn't have a comprehensive foreign investment regulatory scheme like the US, EU and Canada, Chinese investments into the country are increasingly at the risk of restrictions under pressure from the US administration.
"However, Chinese investors face uncertainty due to reports that Israel will soon adopt a foreign investment regulatory regime that could restrict Chinese investment in Israel," says Barasch. "Reports indicate that the Trump administration is pressuring Israel to adopt a foreign investment regulatory regime, which would apply to all foreign investment but is clearly aimed at China.
"China has come to see Israel as an alternative source for cutting-edge technologies, and the US sees that too, and reports indicate that it is using its in uence over the Israeli government to push Israel to restrict Chinese investment and technology transfer." Simon Weintraub, a partner at Israeli law rm Yigal Arnon & Co., says there has been a de nite decline in Chinese outbound investment into Israel in 2019 because of capital control restrictions in China, and, "because of the trade war with the US, as most Israeli companies, especially in the technology space, have deep connections to the US markets as well as a US investor base. "We are still receiving some requests for investments into Israeli companies," says Weintraub. "Many have come from Chinese corporates, many of which have funds located o shore. We are also being approached regarding potential business collaborations/JV arrangements with Israeli companies."
He says most of the interest is coming in sectors such as medical technology, agriculture technology and automotive technology.
Exceptions to the rule
Ireland, meanwhile, is a European country that seems to have bucked the trend and bene tted from the trade war. "From a Chinese perspective, Ireland has gone from a little-known small country in Europe to being home for some of the largest and most successful Chinese businesses," says Marie O'Brien, partner and head of China business group at Ireland's A&L Goodbody.
The US-China trade war and Brexit have catapulted Ireland's pro le in China to a new level of recognition.
"Initially, much of the investment by Chinese companies into Ireland was focused on the aircraft nance and leasing business, as Ireland is the leading jurisdiction in this area," says O'Brien. "We have, however, seen a change in the number of industries and sectors now attracting Chinese investment. In addition to continued investment in aircraft leasing, the key areas now include ntech, biotech, agrifood, renewable energy, investment funds and medtech."
Another market that may hope to bene t from the trade tensions is Canada. Though not always the rst choice in all sectors for Chinese investors, it remains an attractive country for outbound investment, says Jack Yong, a partner at Lawson Lundell.
"Historically, mining, energy and forestry sectors attracted interest from SOEs," he says. "In recent years, private enterprises have been the more active players, with particular attention to real estate, life sciences, high tech, consumer products, agriculture, education and tourism/hospitality."
New markets, old sectors
Even as high-end technologies emerge as a theme in Chinese foreign investment, certain markets such as Central and Eastern Europe (CEE) and Africa continue to attract Chinese investment in conventional sectors such as infrastructure and energy, which seem to have been less a ected by the trade tussle.
Rita Pang, an associate at Czech Republic-based law rm Kinstellar, says, "In the CEE, many Chinese companies are looking at infrastructure projects. In general, Chinese business in the CEE and Central Asia is promising.
"The market is active," she says. "Chinese companies, especially SOEs, are reviewing the market and the potential opportunities. The impact of the trade war can be seen in the private sector. However, the process is long and unstable due to political factors."
Vassil Hadjov, a partner at Bulgarian law rm Spasov & Bratanov, says Chinese investors have recently become more interested in Bulgarian opportunities. "We have not detected any slowing of Chinese investment intentions as regards Bulgaria," says Hadjov. "This may be because such activities and investment levels are coming from a very low base.
"For example, China National Nuclear Corporation is one of the leading bidders in the tender for completing the construction of Bulgaria's largest power plant NPP Belene. Also, Huawei, CHINT, BYD and several other leading Chinese-based internationally operating companies are increasing their trading and investment activities in Bulgaria."
Chinese investment in African countries remains robust and has been less a ected by the trade war, or protectionism, and several African countries count on Chinese investors to grow their core sectors like construction, infrastructure, oil and gas, and energy.
"Overall, the outlook remains positive and we expect China to remain one of Africa's biggest economic partners," says Paras Shah, a partner in the Kenya o ce of South African law rm Bowmans.
"Commitment remains strong on both sides to further strengthen the economic relationship between Africa and China. For example, in 2017, at the China-Africa summit, President Xi Jinping pledged a further US$60 billion in new development nancing for Africa in support of the Belt and Road Initiative."
Shah says substantial Chinese investment is expected to drive the achievement of Kenya's "Big 4 Agenda", which is a government plan to ensure food security, a ordable housing, healthcare coverage and enhancing manufacturing. "Kenya's relationship with China is deepening with more private enterprises setting up locally," he says.
"We continue to see more Chinese construction companies setting up in Kenya with a view to participating in the endless opportunities presented by a focus on infrastructure and real estate. These rms are employing Kenyans at all levels and continue to play a role in bringing down unemployment."
In Nigeria, Adedolapo Akinrele, the managing partner of Lagos-based law rm FO Akinrele & Co, says, "The outlook is positive as the general investment and trade between Nigeria and China has risen to US$20 billion in 2019 from US$9.5 billion in 2016.
"The increasingly popular sectors for Chinese investment are oil and gas, construction, iron and steel, mining and manufacturing, agricultural, energy and free trade zones."
Bowmans' Shah, however, adds, "As geopolitical and economic risks around the world increase, we would expect Chinese companies, especially those involved in the infrastructure space, to be more selective and take a more cautious approach when investing in projects in Kenya.
"Due to historic investments that have been made, there is now an increased awareness and understanding of the risks of doing business in East Africa, as well as an appreciation that more detailed feasibility studies are required before certain projects can be approved."
In South America, Chinese investment activity has been tepid due to a mix of international and local issues, and may not necessarily be a China-speci c issue, say lawyers from the region.
"Due to internal factors [political and economic], foreign investors in general have been more cautious lately when investing in Peru," notes Fernando Hurtado De Mendoza, an associate at Peruvian law rm Rodrigo Elias & Medrano Abogados.
"The trade war and the slowing down of Chinese investment on an international level have certainly had an impact with regard to new investment, which has added to the general deceleration of the local economy," he says. "However, the existing investments that were already underway in Peru have remained, and Chinese businesses that were already established here seem to be looking to solidify their position in the country."
Fernando Aguirre Bastos, a senior partner at Bolivian law rm Bufete Aguirre Quintanilla Soria & Nishizawa, points out that China is among the ve main creditors of the Bolivian state, accounting for at least one-third of the total nancing.
"Most of the signi cant Chinese presence in Bolivia are companies hired to carry out infrastructure projects for Bolivian state entities," he says. "FDI from China is mainly in the mining sector. This panorama is unlikely to change in the near future."
Cerbn, from Uria Menendez, says, "We are seeing outbound Chinese investment shifting to regions such as Latin America, which remain open and friendly to Chinese investors. We are seeing increased demand for services in the areas of nance and dispute resolution from Chinese companies with a presence in Latin America."
While political tensions may be making dents in broad investment trends, resourceful entrepreneurs are nding new markets and avenues of opportunity, and the long-term prospects for Chinese investment remain bright.
Zhang, of Dentons, says Chinese bankers have chosen Luxembourg as a gateway to the EU, and a number of Chinese groups have followed the bankers and their business model by setting up a branch or subsidiary in Luxembourg, enabling them to expand their business in the region.
"From a professional point of view, I believe that Luxembourg is the ideal gateway for Chinese companies looking to realize their investment projects in the EU," says Zhang. "There are no really signi cant challenges, except that no direct ights currently exist between Luxembourg and China; also, the local market is quasi-non-existent."
O'Brien, of A&L Goodbody, says, "My experience in travelling to China regularly in the past 10 years has been one of seeing great evolution and development in China's ambition for going global. I do not see this trend slowing, but I do see China focusing its outbound investment on areas that will bring real value to Chinese business and China."