Date published

Chinese FDI in Europe in 2017

Rapid recovery after initial slowdown

An update by Rhodium Group (RHG) and the Mercator Institute for China Studies (MERICS)

By Thilo Hanemann and Mikko Huotari

Introduction

In 2017, China’s global outbound investment declined for the first time in more than a decade. According to China’s Ministry of Commerce (MOFCOM), outbound FDI by Chinese companies dropped by 29% (Figure 1).1 Other data sources that measure financial flows related to outbound investment record an even sharper drop, for example a 53% decline in SAFE figures on change in China’s FDI assets.2

This slowdown in global investment followed action by Chinese regulators to re-assert control over outbound investment flows. In late 2016, they had cracked down on informal “irrational” outbound investment to contain capital outflows, after the latter had grown to an average of more than USD 50 billion per month in 2016. In August 2017, these informal policies were codified through a new OFDI regime based on lists of encouraged, restricted and prohibited investments.3 Outbound investment was dragged down further by a campaign to reduce leverage in China’s financial sector. Regulators particularly targeted large private conglomerates, many of which had become aggressive overseas dealmakers in recent years.4

Chinese outbound investors also faced growing political and regulatory pushback around the globe, as major recipient countries of Chinese FDI beefed up their investment screening regimes to fend off perceived national security risks and, in some cases, economic risks.5

Figure 1

1. Chinese investment in the EU dropped by 17%

Following the drop in global Chinese OFDI, Chinese FDI in the 28 EU economies dropped to EUR 30 billion in 2017 (Figure 2). This represents a decline of 17% compared to 2016 but is still the second highest level ever recorded. Moreover, the decline is lower than the 29% drop in Chinese investment globally.  

The split between acquisitions and greenfield projects remained similar as in previous years, with acquisitions accounting for 94% of total investment. Beijing’s crackdown on highly leveraged private companies has changed the investor mix: the relative share of sovereign and state-owned players in total Chinese investment in Europe jumped from 35% in 2016 to 68% in 2017. The biggest Chinese takeovers in the EU in 2017 were CIC’s EUR 12.3 billion acquisition of Logicor, China Jianyin Investment and Wise Road Capital’s acquisition of NXP Semiconductors’ Standard Products business for EUR 2.4 billion, and Wanda Group’s EUR 855 million acquisition of Nordic Cinema Group.

Figure 2

2. Investment remains focused on biggest EU economies

After a period of large investments in Southern Europe, Chinese investors returned to the largest European economies in 2016 and 2017. In 2017, the UK, Germany and France accounted for 75% of China’s total EU investment, the highest share in ten years (Figure 3).6

An outlier in 2017 was the Netherlands, which jumped to sixth place due to the acquisition of NXP Semiconductors’ standard products business and two other big transactions. Chinese investment in Eastern Europe remained small in scale, despite China’s Belt and Road Initiative (which mostly generated construction projects, not direct investment).

Investment in Germany dropped significantly, from EUR 11 billion in 2016 to EUR 1.8 billion in 2017. However, this low headline figure is mostly due to the timing of large acquisitions. Germany remains a favorite investment destination, but several big takeovers were not completed in 2017 due to regulatory delays or other reasons (for example Creat Group’s takeover of Biotest). Moreover, some transactions were not included in our FDI dataset since the Chinese stake remained below the 10% threshold for FDI or because of their clear Hong Kong – not mainland China – origin.7

Figure 3

Figure 4

3. New Chinese investment rules change industry composition of FDI

Transport, utilities and infrastructure has become the top sector for Chinese investment in Europe in 2017 (Figure 5). State-owned entities accounted for the majority of investment. The biggest investments were CIC’s EUR 12.3 billion acquisition of Logicor, CIC’s acquisition of a stake in UK national grid’s gas distribution business, HNA’s investment in Glencore’s petroleum products storage and logistics unit, State Grid’s acquisition of a stake in ADMIE in Greece, and COSCO’s acquisition of a stake in Noatum port in Spain. Europe clearly remains open to Chinese investment in infrastructure assets, despite growing discussions about the need to better protect critical infrastructure. 

High-tech and advanced manufacturing industries also accounted for a significant share of total Chinese investment in 2017. ICT received EUR 4.8 billion of Chinese capital, including China Jianyin Investment and Wise Road Capital’s acquisition of NXP Semiconductors’ Standard Products business, the acquisition of LEDVANCE by a Chinese investor group, and Canyon Bridge Capital Partners’ acquisition of Imagination Technologies Group. Investment in industrial machinery dropped to EUR 0.4 billion (compared to a record EUR 5.6 billion in 2016) in the absence of large takeovers. Europe’s automotive sector continued to be a major attraction, receiving EUR 1.3 billion of Chinese investment. Technology investment could have been higher without the interference of the Committee on Foreign Investment in the United States (CFIUS), which derailed several acquisitions through its extraterritorial reach. Among others, CFIUS thwarted the purchase of a stake in Amsterdam-based mapping software company HERE Technologies by a group of Chinese investors.

Despite being included in Beijing’s new list of restricted sectors for outbound investment, real estate and hospitality was the third largest sector for Chinese FDI in the EU in 2017, with EUR 2.9 billion total investment. The biggest deals included Zhonghong’s acquisition of a stake in tour operator Abercrombie & Kent Group for EUR 366 million, Anbang’s acquisition of DoubleTree by Hilton at Amsterdam Centraal Station for EUR 350 million, Cindat Capital’s investment in Qhotels Group, and Beijing Capital Development’s investment in 30 Crown Place in London.

Figure 5

4. Outlook: Dealmaking rebounded in second half of 2017 and non-FDI investment is on the rise

After a period of slow dealmaking in the first half of 2017, Chinese outbound investment activity rebounded in the second half of the year. Large deals announced in Europe since the summer include CIC’s EUR 12.3 billion acquisition of Logicor, Geely Group’s EUR 3.25 billion stake in Volvo Group and its additional stake in Saxo Bank, and Legend Holdings’ acquisition of 90% in Banque Internationale à Luxembourg (BIL).8 As of January 2018, more than EUR 10 billion of Chinese acquisitions were pending, building a solid floor for Chinese investment in 2018.

Another important development that has gained more attention in early 2018 is the rise of Chinese non-FDI investment, including venture capital and portfolio investment stakes of less than 10%. The patterns of Chinese investment in Germany in the past three years illustrate this new trend, with large portfolio stakes in companies like Daimler or Deutsche Bank (Figure 6). These investments reflect the maturation of China’s economy and financial system, and they create additional opportunities for European business. However, as with direct investment, the special characteristics of China may raise new questions regarding transparency and governance, as well as potential security and economic risks.

Figure 6

In addition to strong commercial interest, the policy environment is still supportive of strong Chinese investment levels in Europe in 2018 compared to other regions. The stabilization of China’s balance of payments situation may allow Beijing to relax its outbound investment controls somewhat during the year, albeit we will unlikely return to the liberal regime seen in 2015 and 2016 since the fundamentals that triggered large-scale capital outflows have not changed. While the EU itself and several member states are making progress in tightening the security review processes in Europe for foreign acquisitions, we do not expect these to become serious headwinds for Chinese investors in 2018. This means that we could see a diversion of Chinese capital from the United States to Europe as a consequence of tighter US investment screening rules and a more confrontational US-China trade and investment relationship.9

Endnotes

[1] See Ministry of Commerce release, available at http://www.mofcom.gov.cn/article/ae/ag/201801/20180102699398.shtml.

[2] See State Administration of Foreign Exchange release, available at http://www.safe.gov.cn.

[3] See the Guiding Opinions on Further Direct and Regulate Outbound Investment Direction, available at: http://www.gov.cn/zhengce/content/2017-08/18/content_5218665.htm

[4] See http://finance.people.com.cn/n1/2017/0801/c1004-29441056.html.

[5] Examples for nations that have recently changed their investment screening frameworks or discussed changes include Australia, Japan, the United States, Germany, the Netherlands, France, Italy, Latvia, Hungary. Chinese investment has been the primary or only driver in some, but not all of these cases.

[6] Note that this trend is amplified partially by our method of logging transactions at the headquarters of target companies. We logged the entire value of the USD 14 billion acquisition of Logicor warehouse assets (which are spread across Europe) in the UK.

[7] See for example HNA’s 8.8% stake in Deutsche Bank, or more recently Geely’s purchase of a 9.8% stake in Daimler. The Cheung Kong takeover of energy metering firm Ista (EUR 4,5 billion) should for statistical and analytical reasons not be counted as mainland Chinese.

[8] Geely’s stake in Volvo Group only amounts to 8.2% of outstanding shares but it comes with 15.6% of voting shares. 

[9] http://rhg.com/notes/a-post-engagement-us-china-relationship