- China’s global FDI held steadily in 2021 and Chinese outbound M&A reached $23.7 billion, a slight decline compared to 2020.
- Eighth annual survey shows Chinese FDI in Europe rose by 25% to USD 12.8 billion, while it fell by 34% in North America to just USD 5.8 billion
- Latin America continued to see significant Chinese investment, with USD 3 billion in 2021.
- Less politically sensitive sectors such as consumer products, entertainment, and online gaming continue to see significant interest
Chinese Outbound Foreign Direct Investment (OFDI) held steady in 2021 compared to the previous year, contrasting with a sharp rebound of global FDI flows. Completed M&A activity by Chinese companies dropped moderately to reach USD 24 billion in 2021, compared to USD 29 billion in 2020, according to Baker McKenzie's eighth annual analysis of Chinese outbound investment trends, conducted in partnership with Rhodium Group.
In the last five years, China’s OFDI has fallen steadily due to greater domestic hurdles for outbound capital flows as well as a more complicated regulatory environment abroad. The decline in mergers and acquisitions (M&A) has been especially acute and China’s strict pandemic measures have further weighed on outbound dealmaking in 2020 and 2021, contrasting with a strong recovery in global cross-border M&A during the same period.
Jannan Crozier, Global Chair of the Firm's Global M&A Practice Group, said, “"M&A is back with a boom: according to Refinitiv, global M&A hit USD 5.9 trillion last year, representing an impressive jump of 71% as compared with 2020 levels. These figures are underpinned by record deal-making in the technology sector, which alone reached USD 1.1 trillion in 2021.
"Chinese OFDI aligned with this global trend and displayed a slight uptick in growth, totalling USD 138 billion in 2021, compared to USD 134 billion in 2020 and USD 117 billion in 2019. Yet with increased foreign investment scrutiny from overseas regulators, particularly in the technology sector, many Chinese companies are also pursuing domestic options.
"Additionally, while Chinese OFDI to Europe, North America and Asia has not come close to its 2017 peak, it will be interesting to see how other markets such as Oceania, Africa and Latin America are shaped by Chinese investment in 2022, and how this will in turn influence Asia-Pacific domestic investment flows. What is certain, however, is that we can expect a dynamic and exciting year for both Chinese and global M&A activity."
Europe saw the most M&A interest in 2021 with over USD 8.4 billion worth of completed Chinese deals. Asia and North America were second and third with USD 5.4 billion and USD 4.7 billion. M&A in Latin America reached USD 3 billion in 2021, while acquisitions in Oceania and Africa totaled approximately USD 1.5 billion.
Less sensitive sectors like consumer products and services (USD 5.2 billion) and entertainment (USD 4.6 billion) were the top attractions for Chinese outbound M&A globally, accounting for almost half of total investment. Transport and Infrastructure (USD 3.8 billion), Financial and Business Services (USD 3.3 billion), Basic Materials (USD 1.8 billion), and Health (USD 1.2 billion) made up the rest of the top six.
Slowed deal making since 2017 has resulted in a situation where China is under-invested in the world compared to its economic footprint, which suggests substantial catch-up potential if pandemic restrictions and policy headwinds were to subside.
Hong Zhang, head of private equity for China at FenXun, Baker McKenzie’s Joint Operation platform partner in China, said, “Chinese investors remain strongly interested in overseas expansion, and growth of outbound investments by Chinese investors would have been stronger if not due to the continued disruption of the global pandemic in 2021. Desire for broader market entry, strategic synergy, access to resources and new energy, expansion of technology or product portfolios are all key considerations driving Chinese investors' interests in looking abroad. Besides these commercial considerations, deal certainties are important too, and therefore there has been a shift of ODI deals to LatAm in recent years where local regulators still mostly welcome Chinese investment.”
High-tech and Real Estate M&A in decline
Outbound high-tech M&A has shrunk as overseas regulators have upped scrutiny and China is focusing on building out domestic alternatives. FDI in the ICT sector by Chinese companies in Europe fell from USD 8 billion in 2016-2017 to USD 5.3 billion in 2018-2019 to USD 3 billion in 2020-2021. FDI in the same sector in North America fell even more quickly from USD 10 billion in 2016-2017 to less than USD 150 million in the following four years.
Overseas real estate investments have also slowed to a trickle and domestic financial pressures are accelerating property divestitures and asset restructuring. Chinese outbound investment in real estate has fallen from USD 150 billion in 2015 -2017 to just USD 8 billion in 2019-2021. Asset divestitures in real estate have totaled at least USD 10 billion over the past five years, and Chinese developers had to start conceding overseas projects to creditors in 2021 after defaulting on bond repayments.
Consumer products and Energy sectors on the rise
Less politically sensitive sectors such as consumer products, entertainment, and online gaming continue to see significant interest. Consumer products and services accounted for 41% of total Chinese global outbound M&A value in 2021, up from 18% in 2020. Online gaming has become a particularly attractive target, with several large deals by Tencent.
Emerging Chinese global champions are starting to expand globally through significant greenfield FDI projects, for example along the automotive supply chain. SVOLT Energy and CATL are spending USD 2.4 billion and USD 2 billion for EV battery factories in Germany. Envision is partnering with Renault to develop EVs in France for USD 1.2 billion. The total value of these and other automotive supply chain deals and construction could total over USD 14.5 billion in the next two years.
The energy sector has also seen a rebound in Chinese M&A interest, driven by new materials demand for electric vehicles (EVs) as well as clean energy transition. Chinese mining companies have made major purchases in developing countries in Latin America and Africa for lithium/cobalt mining and processing assets amounting to over USD 4 billion in the last three years. Chinese SOEs have also purchased energy utilities and clean energy assets for over USD 13 billion in Chile, Mexico, Brazil, and Spain.
Alejandro Mesa, who leads Baker McKenzie’s Energy Law practice in Bogota and serves as the Latin American Regional Coordinator of the International Commercial & Trade Practice Group, said, "Several factors have contributed to Chinese M&A activity in Latin America. First, devaluation in Latin American countries has reduced the value of assets in USD terms. Second, there are an important number of governments who have expressed interest in working with China as a business partner over more traditional partnerships with the US. Third, China has more appetite for long-term investment in the region, as it is likely that economies improve in the mid-term to long-term, thus creating a good moment for selling. In 2022, we expect China to invest heavily in telecommunications and infrastructure, apart from a continuation of more traditional investments in commodities."