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  • Announced Chinese M&A in first half of 2018 reached $22bn in Europe; $2.5bn in North America
  • Completed Chinese FDI down 92% in US to $2bn from $24bn in first half of last year; $12bn in Europe
  • Policy by Chinese and overseas regulators responsible for divergent patterns
  • Uncertainty over US-China trade friction to continue to weigh on investors’ risk appetite
  • Chinese companies divesting in both regions at record pace - $17.6bn completed or pending
  • Sweden, UK, Germany and France top European destinations for Chinese investment
  • 12 major Chinese investments cancelled due to regulatory and political hurdles in first half
  • Automotive, health, biotech, consumer products and services top sectors in both regions

Chinese outbound foreign direct investment (OFDI) has dramatically veered towards Europe over North America in the first six months of the 2018. The value in that period of newly announced Chinese M&A in Europe ($22bn) exceeded that in North America ($2.5bn) by a factor of nine, while the value of completed Chinese investments was six times higher in Europe ($12bn) than in North America ($2bn).

The numbers are revealed in new research from global law firm Baker McKenzie with leading independent research provider Rhodium Group.

Globally, the half-yearly value of newly announced global M&A activity by mainland Chinese companies has stabilised. It dropped from a peak of $145bn in 1H 2016 to an average of $70bn in 1H and 2H 2017. In 1H 2018 it reached $50bn – a further 32% drop compared to 2H 2017 but still significantly above the 6-month average of $39bn seen in 2013-2015.

North America’s small 1H 2018 investment total continued a downtrend that started more than a year ago. Chinese OFDI in the region peaked at $28bn in 2H 2016 before falling to $24bn in 1H 2017, $6bn in 2H 2017 and a nine-year low of only $2bn in 1H 2018 (a 92% year-over-year decline). Deal activity is depressed in both the United States and Canada.

Europe has also seen a drop in Chinese investment over the last year, but this decline came from a higher base and has been much less pronounced. Completed Chinese OFDI peaked in 1H 2017 (thanks to ChemChina’s $43bn Syngenta acquisition) before falling to $22bn in 2H 2017 and $12bn in 1H 2018. Excluding Syngenta, Chinese investment in 1H 2018 actually increased 4% year-on-year.

Sweden ($3.6bn) was the largest European destination for Chinese investment in 1H 2018, followed by the UK ($1.6bn), Germany ($1.5bn), and France ($1.4bn).

The industry composition of Chinese investment has also shifted remarkably in 1H 2018 in both Europe and North America. “Real economy” sectors such as automotive, health and biotech, and consumer products and services became top recipients for Chinese FDI in both regions. The real estate and hospitality sector lost its top spot but still remained a sizeable attractor for Chinese capital.

Chinese companies have also divested assets at an unprecedented pace in North America so far in 2018, with several prominent investors during the 2015-2016 boom forced to sell holdings as part of a financial clean-up and tightening campaign back home in China. In total there were $9.6bn of completed divestitures in North America by Chinese firms in the first half of 2018, with another $4bn pending. Similar to North America, Chinese companies started to divest assets in Europe, with nearly $1bn of assets sold in 1H 2018 and another $3bn pending.

"The scale and speed of the diverging trends revealed by these figures is remarkable," said Thomas Gilles, Chair of Baker McKenzie's EMEA-China Group. "At the same time, no-one should be surprised by the direction of travel - China is actively courting the EU with offers of reciprocal market access in an attempt to show foreign investment is not a one-way street, while trade relations with the US continue firmly on a downward path."

”After five years of similar investment levels in Europe and North America, Chinese investors are now clearly favouring Europe,” said Thilo Hanemann, director of Rhodium Group’s cross-border investment practice. “Regulatory hurdles remain lower, political relations are more predictable, and Europe offers a great base if industrial high-tech assets, which is a good match with Chinese regulators’ outbound investment priorities.”

"Policy is weighing on deal making," said Rod Hunter, international trade partner in Baker McKenzie's Washington, DC office. "For all the noise about CFIUS the past two years, we have recently seen more predictable reviews, and upcoming CFIUS legislation should not represent a major departure for Chinese buyers. Still, it is no surprise that escalating Sino-US trade disputes are impacting Chinese investments in the United States."

“China plays a vital role in driving the global economy and it's clear outbound investment is continuing at a more measured and sustainable pace, even if the geographic mix is changing," said Danian Zhang, Chief Representative of Baker McKenzie's Shanghai office. "What is important for Chinese investors is that the deals that do progress involve real economy sectors with sound business planning and objectives, that can be operated in a safe business and regulatory environment. It is normal that there is a mix of buying and selling activities for outbound investment projects as corporate health after all requires acquiring as well as disposing of assets."

Chinese and overseas regulatory policies responsible for divergence

The initial decline in Chinese OFDI was primarily caused by Chinese regulatory tightening over outward investments. Facing large capital outflows, Beijing began to crack down on outbound FDI in the second half of 2016.

This has been then compounded by the actions of foreign regulators. In the United States, Congress is in the final stages of toughening national security investment screenings and stricter scrutiny of outbound technology transfer developed in the United States. The Trump administration also strongly considered additional restrictions for Chinese investors in late 1H 2018 as part of the Section 301 investigation into Chinese intellectual property practices but backed off at the last minute.

Driven by concerns about Chinese acquisitions, Europe is also expanding its toolkit to review foreign inbound investments. Negotiations start in July on an EU-wide investment screening mechanism, with a view to agreement by December for a new mechanism for information sharing between EU member states on investments with potential national security impacts. Individual EU governments including Germany, Italy, the UK and France have also recently revised their investment screening frameworks or are in the process of doing so.

In the first half of 2018, eight deals were cancelled in the US due to regulatory and political hurdles (seven due to unresolved CFIUS concerns) and one each in Canada, France, Sweden and the United Kingdom.

Macro picture adds further headwinds

With more than $20bn of pending M&A transactions in Europe and only $2.5bn in North America, the divergent paths seen in the first half of 2018 look largely locked in for the year.

However, after a period of calm, China is also facing a complex macroeconomic environment that may draw Beijing into a more interventionist stand on capital outflows. China’s currency depreciated significantly against the US dollar and other currencies in June, and officials are holding down interest rates to stimulate a slowing economy while relaxing liquidity controls moderately.

With tighter monetary policy and higher rates in the US and elsewhere, conditions are ripe for encouraging greater capital outflows and hence pressure on China’s balance of payments. Stiffer capital controls could well follow, making Chinese OFDI even more difficult despite the inextricable logic of corporate desire for a bigger footprint abroad.

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