March 2016

Reaching New Heights: An Update on Chinese Investments into Europe

Chinese investment is surging and here to stay

Chinese companies have expanded in the European market at a record pace in recent years. In 2014, annual investment by Chinese companies in Europe reached an all-time high of USD18 billion. Over the past four years, annual inflows averaging USD10 billion indicate that Chinese investment is not a one-time event triggered by crisis buying, but a long-term trend that is here to stay. New sectors such as food and real estate become favored investor choices, the unique report shows.

These companies are also investing in a wider range of industries, including food, commercial real estate, technology and financial services. While Chinese companies have traditionally focused on large-scale acquisitions in Europe's energy and materials sectors, they are increasingly targeting the food, commercial real estate, technology and financial sectors in transactions that have driven Chinese investment values to a record high. This shift has been largely driven by anticipation of structural reforms and liberalization of outbound investment rules in China.

The mix of investors is more diverse

In addition to the growing importance of private sector investors over the past five years, a notable trend is the rise of globally-oriented financial investors, including private equity funds, sovereign entities and insurance companies.

While acquisitions remain the primary vehicle Chinese investors use to enter the European market, they are increasingly investing in greenfield projects as their focus shifts from office operations to building warehouses, manufacturing facilities, research and development centers, and other commercial developments. They are also engaging in a greater number of small and medium-sized transactions and showing more willingness to acquire minority stakes in their targets instead of taking full control.

What are the main challenges?

Five years of significant Chinese investment now permit a first assessment of the problems that Chinese companies face in the European market. As one of the most open markets in the world, Europe is welcoming to Chinese investment and politicization of deals is rare. However, the differences in regulatory regimes and business cultures pose significant hurdles for Chinese companies entering and operating in Europe. Operative hurdles include:

  • Management & Corporate Governance
  • Cash-flow management
  • Stakeholder relationships
  • Compliance with laws and regimes that do not exist in the same form in China

 

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