The shift of Chinese investment in the EU
Jorge Costa Oliveira
According to a recent study by researchers at Rhodium Group and MERICS, Chinese foreign investment stagnated in 2021. While global foreign direct investment (FDI) has recovered sharply, outward Chinese FDI rose by a mere 3% to 96 billion euros. Meanwhile, merger and acquisition (M&A) transactions by Chinese companies abroad fell to a 14-year low in 2021, amounting to only €20 billion, down 22% from an already weak 2020. Investment from China in Europe (the 27 EU countries and the UK) increased 33% (to €10.6bn) year-on-year, but remains low when compared to 2016-2017.
The increase was due to two factors: a EUR3.7 billion acquisition of Philips’ home appliance division by Hong Kong Hillhouse Capital and a record EUR3.3 billion in greenfield investment. However, 2021 was the second year running to record the lowest Chinese investment in Europe since 2013.
The Netherlands was the largest destination for Chinese investment in 2021, followed by Germany, France and the UK. Together, these countries received 39% of all Chinese investment in Europe.
The share of Chinese state-owned investors (SOEs) has fallen to a 20-year low in Europe, with their investment down 10% from 2020. Their share of total Chinese investment has also reached its lowest point in 20 years – a mere 12%. SOEs’ investment was focused on energy and infrastructure, particularly in southern Europe.
Consumer products and the automotive sector were the main sectors subject to Chinese investment in Europe. This was, in part, due to the aforementioned acquisition by Hong Kong Hillhouse Capital. In the automotive sector it was propelled by greenfield investments in batteries for electric vehicles (EV) made by CATL. Together, the two sectors accounted for 59% of the total value of Chinese investment. The next three largest sectors were: healthcare, pharmaceuticals and biotechnology; information and communication technologies (ICT); and energy.
The nature of Chinese investment in Europe is changing. After years being dominated by M&A, Chinese investment in Europe has become more focused on greenfield projects.
Chinese venture capital investment is pouring into European tech startups, and by 2021 it had more than doubled to a record EUR1.2 billion.
It was centered in the UK and Germany and focused on a handful of sectors, including ecommerce, fintech, gaming, AI and robotics.
Chinese investment in Europe is unlikely to increase in 2022. This is because strict controls on capital outflows, the policy of financial deleveraging and other restrictions, including those arising from the zero-Covid policy, are still in place. The war in Ukraine and expanding regimes of screening and scrutiny of Chinese investment in the EU and U.K. will not help either. However, there are still compelling reasons for Chinese companies to invest in Europe: demand for European innovation and technology (catalyzed by U.S. blacklists involving hundreds of Chinese companies and restrictions on large Chinese tech companies), the need for integration with European value chains, compliance with European regulations and avoiding regulatory hurdles, and internationalization to markets with high disposable income.
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