Chinese direct investment in US and Europe falls by 73 per cent to a six-year low as firms face tougher scrutiny

  • New investment screening rules abroad hit China’s outbound investment in 2018, with 21 Chinese acquisitions cancelled by foreign regulators
PUBLISHED : Monday, 14 January, 2019, 8:02am
UPDATED : Monday, 14 January, 2019, 10:07am

China’s direct investment into North America and Europe fell by almost three quarters in 2018 to a six-year low of US$30 billion, according to international law firm Baker McKenzie.

One of the main reasons for the huge drop was the high number of deals that were cancelled or blocked by foreign regulators amid heightened scrutiny of Chinese firms’ acquisitions.

Regulators pulled the plug on 21 Chinese takeovers last year, seven in Europe and 14 in North America, worth a combined US$5.5 billion, according to a report released by Baker McKenzie on Monday.

This led China’s outward foreign direct investment (FDI) in the two regions down sharply from US$94 billion in 2016 and US$111 billion in 2017.

The US was responsible for the lion’s share of the decline. Chinese companies invested just US$4.8 billion in the US last year, down 83 per cent from US$29 billion in 2017 and US$45.63 billion in 2016.

Unlike past major investors in the US, like Japan and South Korea, China is not a military ally of the US. Washington has therefore frequently pushed back against Chinese investments, citing national security concerns, particularly when it came to ownership of critical infrastructure, political and defence-related technologies.

Alibaba's acquisition of US payment services company MoneyGram was shot down last year over fears that information about American military personnel could be leaked to mainland China. Alibaba owns the South China Morning Post.

The amount spent by Chinese companies investing in European firms fell by 70 per cent to US$22.5 billion in 2018, from US$80 billion the previous year.

Excluding a mega deal which saw ChemChina acquire the Swiss pesticides and seeds group, Syngenta, for US$43 billion in 2017, the investment of Chinese companies in Europe still fell by 40 per cent last year, the report added.

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The EU is also in the process of establishing new investment screening rules.

“Some deals are still getting done despite new investment screening regulations, trade tensions and Chinese investment controls, but all parties in a prospective transaction need to conduct plenty of due diligence and take in-depth regulatory advice to assess if a deal is viable,” said Michael DeFranco, global head of M&A at Baker McKenzie.

With such scrutiny continuing as well as the negative impact of the trade war between the US and China, analysts believe China’s outbound FDI will continue to decline in 2019.

“The market sentiment worldwide has been gloomy since the second half of last year, while the trade war has not yet been resolved. Many Chinese companies will not rush to make any more big overseas deals in the near future amid these uncertainties,” said Gordon Tsui Luen-on, managing director of financial advisory firm Hantec Pacific.

Another factor behind the decline was the fact some Chinese companies have gone from being the biggest buyers some years ago to being the biggest sellers of assets in the US and Europe.

The Baker McKenzie report showed there was a record high of US$23 billion in divestitures by Chinese companies in North America. China’s FDI outflows from North America outweighed inflows by US$5.5 billion.

HNA Group, Anbang Insurance Group and Dalian Wanda Group have been reversing course to sell off their overseas assets. They were at the forefront of a Chinese shopping spree of high-profile assets worldwide a few years ago, which ultimately prompted a crackdown by Beijing amid concerns about their unsustainable debt levels.

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HNA, a large conglomerate based in Hainan, sold more than US$17 billion in assets last year, according to a Bloomberg tally. The main part of that was the sale of its holdings in Hilton Worldwide Holdings and its spin-offs. HNA is also seeking to sell buildings in America, London and China, as well as shares in Deutsche Bank an d its stake in an aircraft leasing business.

Anbang has hired Bank of America to advise on the sale of its US luxury hotel portfolio worth of about US$10 billion.

“There may have been an over correction in the market, perhaps caused by confusion of the trade conflict with investment policy,” said Rod Hunter, international trade partner in Baker McKenzie's Washington, DC office.

“The big legal change is the imposition of mandatory declarations for certain foreign investments – for instance, in critical technology. While this new requirement will initially create uncertainty, expedited declaration procedures will make it easier for foreign investors and US businesses to navigate with confidence over time.”