Chinese investment in Europe continues decline

Mar 18, 2019
Trend attributed to growing political and regulatory backlash against China’s western presence

As a gauge of the implications of arguments in Europe over Chinese economic influence, new research reveals that Chinese direct investment in Europe continued to decline in 2018.

This is the major finding of a recent report by New York-based research firm Rhodium Group and the Berlin-based think tank Mercator Institute for China Studies (Merics)

Though the decline was mainly a result of capital controls and lower liquidity in China’s financial system, a major factor has been the growing political and regulatory backlash against the Chinese commercial presence in many western economies, including an updated investment-screening mechanism in EU member states, notes the report.

Yet, paradoxically, for now the EU remains an attractive region for Chinese investors, highlights the report. At the start of 2019, more than €15 bn ($17 bn) worth of proposed transactions were pending. Nonetheless, the new European investment-screening framework, which was put forward in November 2018 and passed by the European Parliament last month, is likely to strengthen the current trend of falling Chinese investment in Europe, the report adds.

The new EU regulation encourages member states to review investment in sensitive sectors including technologies and infrastructure, as well as transactions by state-controlled entities or those backed by state-led programs, such as the Made in China 2025 strategy. The report estimates that 83 percent of Chinese mergers and acquisitions in 2018 would have fallen into at least one of these categories.

‘As current debates in Europe about the risk of economic engagement with China progressively extend beyond foreign direct investment (FDI) reviews, additional policy action in areas like export controls for dual-use and critical technologies, data security and privacy rules, procurement rules and competition policy is becoming more likely,’ states the report.

In 2018, Chinese firms completed FDI transactions worth €17.3 bn, a decline of 40 percent on 2017. The lion’s share of the investment continued to go to the three big economies in Europe, with the UK (€4.2 bn), Germany (€2.1 bn) and France (€1.6 bn) receiving 45 percent of Chinese investment in Europe. But this is down from 71 percent in 2017. Key to this is the fact that all three have updated their screening regimes in the last two years.

In addition, the absence of mega-deals led to a more balanced distribution of capital, with no single sector accounting for more than 20 percent of overall Chinese investment. Investment by state-owned enterprises (SOEs) fell to a five-year-low of €7.1 bn, while SOEs’ share of total Chinese investment fell to 41 percent from 71 percent in 2017, the second-lowest level on record.

One of the most consistent complaints from the EU is that while Chinese firms seek to invest in Europe, access to the Chinese market remains highly restricted for foreign companies.

According to Merics, the new China FDI law would be a sign to the US and Europe that Beijing is taking the necessary steps to open its markets to foreign investors. The speed at which this project has recently been ramped up seems to be in response to the trade dispute with the US, notes the report.

The law should bring ‘substantial improvements in market access’, and mark a step toward the ‘equal treatment of foreign and Chinese companies in China,’ the report adds. The law would pre-establish national treatment for foreign investments, improve the protection of intellectual property and prevent technology transfer as a prerequisite for investment.

At the same time, the government is defining criteria under which foreign companies can continue to be denied access to certain sectors. There will still be a so-called negative list of areas that remain closed to foreign investors.

Beijing also reserves the right to intervene directly where national security interests are concerned. In that spirit, the FDI law stipulates the establishment of a security review mechanism to examine foreign investments.

 

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