As the Trump administration moves to limit Chinese inbound deals and the Committee on Foreign Investment in the United States (CFIUS) has become ever more stringent, China has turned its dealmaking attention to Western Europe.

Between the beginning of 2018 and mid-October, there have been 61 Chinese outbound M&A deals in Western Europe, worth US$45 billion—up from US$35.93 billion in the whole of 2017. China’s global outbound M&A total is US$77.56 billion, meaning dealmaking into Western Europe makes up 58% of all value.

M&A activity by value 2010 – 2018 [YTD] Target location: Western Europe Bidder location: China Sectors: All Sectors

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Contrast this with Chinese outbound M&A into the US, which amounts to only US$2.5 billion for the same period in 2018, down from US$8.4 billion for the whole of 2017 and US$57 billion in 2016. The decline in Chinese M&A and other investment into the US reflects a worsening in relations between the two countries’ governments.

Deals between China and Europe have not been limited in terms of countries and sectors. So far there have been 23 deals in industrials and chemicals, ten in consumer, seven apiece in business services and energy, mining and utilities, and five in technology, media and telecoms. Major deals in 2018 include the purchase by China Three Gorges Corp., a power producer, of a 76.7% stake in Energia de Portugal for US$27.5 billion, and the acquisition by Orient Hontai, a private equity house, of a 53.5% stake in Spanish TV and content producer Imagina for US$1.5 billion. Sizeable deals in 2017 included the US$13.8 billion purchase of LogiCor Europe Ltd., a UK-based company that owns logistics assets across Europe, by China Investment Corp., a sovereign wealth fund.

Infrastructure investment

The investment in LogiCor reflects particular Chinese enthusiasm for buying into infrastructure in Europe, through both M&A and direct investment. This is in line with the Chinese government’s One Belt, One Road goal of funding infrastructure in Europe, Asia and Africa to build an efficient trading network radiating out of China.

The interest in infrastructure investment also reflects a commercial opportunity: Many governments lack the money to pay for infrastructure, so they are looking for outside investors. A good illustration is the 2016 purchase of a 51% stake in Piraeus Port Authority by Chinese shipping company Cosco, which is funding a €385 million upgrading of Greece’s largest port.

Unease in some countries

In Europe’s largest economy, Germany, a Chinese investor in August 2018 dropped its attempt to acquire German toolmaker Leifeld ahead of an expected veto by the German federal government, which had indicated its intention to block the transaction but had not yet issued its veto. Had the investor not withdrawn, this transaction would likely have been the first ever prohibited under the revised AWG/AWV, which raised the bar transactions must clear to gain approval, although the German government threatened a veto against at least one other inbound deal in 2016, even before revising AWG/AWV.

In France, the government already has the power to block foreign takeovers of assets in some sectors, including defense and energy. It intends to add further areas, including artificial intelligence and finance. Italy and the UK are also planning to tighten their screening of foreign takeovers. All these plans could well affect Chinese purchases.

And it is possible that Chinese perceptions of European resistance to investment in strategic sectors is already having an effect: Chinese M&A in Europe fell to only US$6 billion in Q3, compared with US$34 billion in Q2.

Opportunities remain

Not every European country is as wary. For this reason, a push by Germany, France and Italy for an EU-wide investment screening mechanism looks unlikely to succeed. In particular, Greece, Portugal and Cyprus oppose it, saying that it would hamper their countries’ ability to attract much-needed capital. These three countries were all hit badly by the Eurozone debt crisis and have reacted by welcoming Chinese investment.

The case of the US shows that Chinese investors are sensitive to perceived government resistance, and are responding by looking elsewhere. But in Europe, politicians’ rhetoric has been far less hostile towards China than that coming from the Trump administration, and there is no trade war. Many European countries with weak fiscal conditions are likely to remain eager to attract M&A and other investment from China, and it looks unlikely that any EU-wide measures to restrict foreign takeovers will see the light of day.

Indeed, restrictions on Chinese M&A are likely to be limited to key infrastructure, technology and defense sectors, leaving ample space for Chinese investments into other industries. Given the current political atmosphere, Chinese investors face pressure to demonstrate from the outset that they are reliable partners with all internal approvals in place, and that they are assisted by sophisticated, reputable advisors who can professionally navigate the local legal landscape in target jurisdictions.