• Completed Chinese outbound M&A fell 45% globally to $29 billion in 2020, the lowest level since 2008.
• Seventh annual survey shows Chinese FDI in Europe fell 44% to $7.5 billion but rose by more than a third in North America to $7.7 billion
• Foreign M&A into China rebounded strongly in 2H 2020 and reached full-year levels similar to 2019
• 2020 likely to be the bottom for outbound Chinese investment as political and macroeconomic headwinds set to moderate for Chinese investors in 2021, leading to more potential deals
• EU-China Comprehensive Agreement on Investment (CAI) could set new tone for future growth
The global coronavirus pandemic has so far not triggered a Chinese buying spree of distressed assets but further slowed the pace of outbound acquisitions by Chinese companies in 2020.
According to Baker McKenzie's 7th annual analysis of Chinese outbound investment trends, conducted in partnership with Rhodium Group, completed Chinese outbound M&A totaled just $29 billion in 2020, down almost half from $53 billion in 2019 and a record high of $139 billion in 2017. This is the lowest figure since 2008. Worldwide, only completed Chinese acquisitions in Latin America in 2020 kept pace with the previous year.
Adding greenfield investment to completed M&A, North America and Europe attracted a combined total of $15.2 billion of Chinese FDI. Completed investment in North America outpaced completed investment in Europe for the first time in five years, fueled by the completion of several billion-dollar transactions. Investment in Europe was more fragmented and consisted of smaller transactions spread across geographies and industries.
All other regions of the world also saw declines in Chinese M&A activity in 2020 compared to 2019, except for Latin America where completion of a number of energy and utilities acquisitions announced in 2019 in Brazil, Chile, and Peru kept year-over-year activity flat compared to the previous year. Acquisitions in Asia fell by a third to $7.1 billion.
After the hurricane - political headwinds set to moderate
China’s reintroduction of outbound investment controls, increasing regulatory scrutiny in many parts of the world over Chinese investment, geopolitical tensions, and the COVID-19 pandemic have all created headwinds for investment in recent years. But improving political and macroeconomic conditions seem likely to change this downward trend for Chinese investors in this year. The M&A pipeline remains low in early 2021 but China’s favorable macroeconomic conditions, a more predictable regulatory setup abroad and a less contentious geopolitical environment could help increase deal appetite and support a rebound in Chinese deal making globally, as well as continued growth in investment into China.
The drop in completed Chinese outbound M&A in 2020 stands in contrast to M&A flows in the other direction. Foreign M&A into China rebounded strongly in 2H 2020 and reached full-year levels similar to 2019. China’s relatively early and rapid recovery from the impacts of COVID-19 have made it an attractive target for foreign investors looking for near- and intermediate-term economic growth.
"We think 2020 is likely the low point for Chinese outbound investment if political and macroeconomic headwinds moderate," said Michael DeFranco, global head of M&A at Baker McKenzie. "The commercial incentives for Chinese companies to invest in European and North America markets remain strong, and several variables - including higher sustained levels of investment by Western companies into China - are moving in a direction that is supportive of greater deal making in both directions in 2021."
North America: investment edges up
In 2020, Chinese investors completed $7.7 billion worth of deals in the United States and Canada, up from $5.5 billion completed in 2019. This came even as regulatory scrutiny and tensions with China were elevated in both countries. California, Ontario, Delaware, North Carolina, and Massachusetts were the North American regions seeing the most Chinese investment.
Entertainment, health and biotech, and natural resources were the top sectors in North America. Billion dollar deals like Tencent’s stake in Universal Music and Zijin’s stake in Canada’s Continental Resources drove high industry concentration in North America in 2020.
Canada accounted for a larger share of total Chinese FDI in North America than in previous years (17%), reflecting momentum in mining deals and persistently low US investment.
Chinese companies continued to make major asset divestitures in North America in 2020. For example, Platinum Equity agreed to acquire Ingram Micro from HNA for $7.2 billion in December 2020. And in September, PetroChina dissolved its Alberta shale gas joint venture project with Ovintiv after outing up $2.2 billion for a 49.9% stake in the project in 2012.
The United States attracted more greenfield investment from China in 2020 than Canada. However, total Chinese greenfield investment in the United States was still modest at around $700 million. The biggest greenfield deals in the US included expansions of existing US footprints for companies like Haier-owned GE Appliances, Fuyao Glass, and Geely-owned Terrafugia.
Chinese companies nearly halve investment in Europe
Completed Chinese FDI in Europe continued its downward trajectory in 2020 to $7.5 billion from $13.4 billion in 2019, registering a lower total than in North America for the first time since 2016. Compared to North America, Chinese M&A transactions in Europe targeted medium-sized targets across a broader spectrum of industries. Chinese greenfield activity in Europe in 2020 was more robust than in North America, with nearly $1 billion in completed investment during the year. There were more midsized transactions in Europe dispersed across industries such as real estate and hospitality, automotive, and energy.
As with investment in North America, outbound capital controls and increased scrutiny of Chinese investment in host countries presented headwinds, as did the coronavirus pandemic. For example, FAW Group discontinued talks to acquire Italian truck maker Iveco for €3 billion during the year, with FAW citing the pandemic as a factor in its decision.
Germany ($2.0 billion), France ($1.0 billion), Poland ($780 million), Sweden ($719 million), and the United Kingdom ($427 million) received the most investment. Investment levels in Germany reverted to the roughly $2 billion normal range typical before 2019. Chinese investment in France mounted a comeback in 2020 after falling precipitously in 2019 thanks to a few major completed acquisitions. Investment in Poland focused on a single major warehouse portfolio acquisition, while in Sweden there continues to be sustained Chinese investment above historical averages.
With the uncertainty of Brexit, persistent Chinese restrictions on outbound transactions in real estate and other service sectors, and increasing tensions with China, the United Kingdom fell to the fifth among European countries this year with only about $427 million of investment through a few smaller completed M&A deals like Jingye Group/British Steel. But a major billion-dollar Huawei greenfield R&D investment announced in June suggests Chinese firms are still interested in the UK and will bolster future totals if it comes to fruition. Levels of Chinese investment in Italy, Ireland and the Netherlands also fell to very low levels.
Compared to North America, Chinese M&A transactions in Europe targeted medium-sized companies across a broader spectrum of industries. The top deals by investment size included Germany’s Steigenberger Hotels AG (Huazhu Group, $780 million), France’s Asteelflash (Universal Scientific Industrial, $422 million), National Electric Vehicle Sweden (Evergrande, $380 million), and France’s Maxeon Solar Technologies (Tianjin Zhonghuan Semiconductor, $300 million).
There were also large multi-year greenfield projects announced during the year such as SVolt Energy Technology’s announced $2.4 billion battery plant in Germany slated to open in late 2023.
EU-China Investment Deal: not a game changer but sets a new tone from the top
The proposed CAI Deal will facilitate minor additional opening of the EU market to Chinese investors. The European market was already very open to Chinese and other foreign capital. The CAI commits the EU to further open its energy sector, with the focus on retail and wholesale, but excluding trading platforms.
The CAI will not limit EU member states in deploying defensive measures including FDI screening, legislation to address subsidy distortions in the Single Market, the adoption of a more restrictive procurement regime and its push to reduce risks related to 5G.
"While regulatory and political headwinds for Chinese investors in the EU will persist and the Comprehensive Agreement on Investment is not an instant game-changer, it does send a strong signal that Chinese investment is welcome in Europe, which is likely to positively impact investor psychology," said Thomas Gilles, chair of Baker McKenzie’s EMEA-China Group. "That, combined with potential political encouragement by Beijing, could help revive Chinese FDI in Europe and reverse the downward trend since 2017."
"Recent signals – most importantly the transition to a new US administration and a successful conclusion of the CAI – point toward a more constructive global environment for Chinese companies compared to the previous four years, which could help improve investor sentiment and risk appetite," said Tracy Wut, Baker McKenzie's head of M&A for Hong Kong and China.
Additionally, China’s current account surplus ballooned in 2020 as global travel halted Chinese overseas tourism spending while Chinese exports recovered before many other nations impacted by the coronavirus pandemic. This has put appreciating pressure on the renminbi and is creating an opportunity for China to allow more capital outflows, including outbound M&A.
Finally, Chinese investors will have more transparency on 'red lines' in overseas jurisdictions as new investment screening regimes are settling: "Tougher investment screening rules and related policies have substantially increased regulatory risks and uncertainty for Chinese investors, especially in data, technology, infrastructure, and related areas in recent years," says Sylwia Lis, an international trade partner in Baker McKenzie's Washington, DC office. "Additional uncertainties came through ad-hoc tightening of review criteria in many jurisdictions during the height of the pandemic. Looking ahead, while foreign investment review rules and practices will undoubtedly continue to evolve, some of the uncertainty around new regulatory regimes is easing as legislation has been implemented and regimes become functional."