A report by Rhodium Group (RHG) and the Mercator Institute for China Studies (MERICS)
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Chinese foreign direct investment (FDI) in the European Union (EU) continued to decline in 2018. Chinese firms completed FDI transactions worth EUR 17.3 billion, which represents a decline of 40 percent from 2017 levels and over 50 percent from the 2016 peak of EUR 37 billion. This decline is very much in line with a further drop in China’s global outbound FDI, a trend that can be attributed to continued capital controls and tightening of liquidity in China as well as growing regulatory scrutiny in host economies.
The “Big Three” EU economies received the lion’s share of investment. The United Kingdom (UK) (EUR 4.2 billion), Germany (EUR 2.1 billion) and France (EUR 1.6 billion) continue to receive the most attention, but their share in total Chinese FDI declined from 71 percent in 2017 to 45 percent in 2018. Two newcomers made it to the top five list (Sweden and Luxembourg), propping up the relative shares of Northern Europe and Belgium, the Netherlands and Luxembourg (Benelux) in total investment.
Chinese investment was spread more evenly across a greater variety of sectors. With fewer mega deals Chinese capital was spread more evenly across sectors compared to 2016 and 2017. Investment declined in transport, utilities and infrastructure, and real estate. The biggest increases were recorded in financial services, health and biotech, consumer products and services, and automotive.
EU member states are modernizing FDI screening regimes, which has raised the bar for Chinese takeovers. Several European governments have updated or established their FDI screening regimes in 2017 and 2018, and several more are in the process of doing so. This strengthening of review mechanisms has already impacted Chinese investment patterns in 2018, including the first ever instance of a blocked Chinese acquisition in Europe and several delayed transactions.
A new EU-level screening framework will further catalyse the convergence of FDI review rules. The new regulation – a historic step in terms of breadth and speed of adoption – proposes guidelines for information exchange, coordination and empowerment for national screening. Many of its provisions remain on the liberal end of the spectrum in comparison with regulations in the United States (US) and other advanced economies. Yet the framework is more ambitious than anticipated and creates incentives for member states to put in place robust FDI monitoring mechanisms.
The new EU investment screening framework could particularly impact Chinese investors. The EU regulation encourages member states to specifically review statesupported investments in sensitive technologies and critical infrastructure. These criteria could cover a large share of Chinese Merger & Acquisitions (M&A) activities in Europe. We estimate that 82 percent of Chinese M&A transactions in Europe in 2018 would fall under at least one of those criteria.
Broader scrutiny of Chinese commercial presence in Europe will impact Chinese investors. More complex regulations for inbound investments are probably only the first step in a broader overhaul of Europe’s policy toward trade and investment with China. Current debates indicate that some European leaders would like/are considering reforms in other areas as well, including export controls for dual use and critical technologies, data security and privacy rules, procurement rules and competition policy. European convergence with efforts in other Organisation for Economic Co-operation and Development (OECD) economies would pose additional challenges for Chinese investors in Europe