China’s investments into US fell 35pc in 2017 due to outflow curbs and tighter screening of deals

Two-thirds of the cancelled deals worth $12 billion in North America and Europe were caused by foreign regulatory intervention, study shows

PUBLISHED : Wednesday, 17 January, 2018, 12:27pm
UPDATED : Wednesday, 17 January, 2018, 11:31pm

Foreign direct investment (FDI) from China into the US tumbled 35 per cent in 2017 to US$30 billion because of Beijing’s curbs on capital outflows, tougher deal scrutiny by US authorities and rising trade tension between the world’s biggest two economies, according to a joint study by law firm Baker McKenzie and consultants Rhodium Group.

The research tracked combined value of direct investment transactions by Chinese mainland companies, including greenfield projects and acquisitions that result in 10 per cent or above equity control.

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The fall in FDI is consistent with China’s official data, which shows that its global FDI flows declined by a third in 2017 – the first drop since 2006, according to the joint report issued on Wednesday.

Han Yong, a senior official at the Ministry of Commerce, said on Tuesday that Chinese companies invested a combined US$129 billion into 6,236 offshore companies in 2017, a decline of 29.4 per cent year on year as “irrational investment was effectively curbed”.

The Chinese government had imposed additional restrictions on outbound investment to address balance of payment concerns and mitigate perceived risks for China’s financial system arising from rapid overseas investment.

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Growing regulatory scrutiny in many host countries did not help either, “with the Committee on Foreign Investment in the United States (CFIUS) particularly active, impacting at least seven major deals”.

“Chinese investors cancelled or withdrew 19 announced deals worth more than US$12 billion in North America and Europe in 2017 … more than two-thirds caused by overseas regulatory intervention,” the report said.

The cancellation of aluminium giant China Zhongwang Holdings’ proposed US$2.3 billion acquisition of US-based Aleris in November after the CFIUS raised economic and national security concerns made it the biggest withdrawal of Chinese outbound acquisition last year.

“CFIUS is busier than ever,” said Rod Hunter, a Baker McKenzie partner in Washington.

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“Legislators are right to revisit CFIUS, which is straining under its workload, but should avoid handing CFIUS a broader technology control mandate, a role better filled by specialised agencies,” he said.

The strain on the committee was evident. In 2017 it handled nearly 250 cases and about half moved to the investigation stage, compared with 138 cases in 2007, when only 4 per cent of the cases were taken to investigation stage, said Hunter.

FDI from China in Europe jumped more than usual to US$81 billion last year because of the delayed completion of a 2016 mega deal involving ChemChina’s US$43 billion takeover of Swiss agribusiness company Syngenta. If the deal was excluded, the value would otherwise have fallen 22 per cent to $38 billion, according to the report.

The report was upbeat about FDI this year, saying that it would be driven partly by the One Belt One Road Initiative.