Chinese Investments in Europe – The End is Not Near

Chinese investment in the EU and UK has decreased steadily since its peak in 2016. To start with, the decrease was due to the Chinese authorities wanting tighter control over the money flow. They were concerned that many Chinese companies were buying speculative assets in Europe, such as football clubs, real estate and bankrupt industrial companies, sometimes using such transactions as an excuse to transfer funds out of China. Since then however, other factors have come into play. In 2020, Chinese M&A activity in the EU and the UK hit a 13-year low, down 45% from 2019 according to the Rhodium Group. In turn, Private sector investment dropped by almost 50%. One reason for this drop is undoubtedly the travel restrictions imposed by China due to the Covid-19 pandemic. The three weeks mandatory quarantine upon return to China, the unavailability of flights (currently at 2% of the 2019 level) and the very high prices of the limited flight tickets have all contributed to making travel between China and Europe less feasible, thereby reducing appetite for cross border investment. The other reason has to do with the current political climate. After more than 7 years of negotiations (in which the undersigned also participated to some degree through the EU Chamber of Commerce), China and the EU signed the China Europe Comprehensive Agreement on Investment (CAI) on 30 December 2020. The agreement still needs to be ratified by the European Parliament to be valid.

In March 2021, the EU, following the US and the UK, sanctioned certain Chinese officials for alleged human rights abuses in Xinjiang, causing the Chinese government to retaliate with its own sanctions, which, among various organisations, also targeted individual members of the European Parliament from all major political factions. The latter led the European Parliament to pass a motion on 20 May 2021 to freeze the ratification. It is now highly unlikely that the CAI will be ratified in the short term. This has created a perception in Chinese circles, both state owned and private, that the political relationship between China and the EU plus the UK is problematic, and a certain degree of confusion as to what extent the Chinese authorities would support various outbound investments into the EU and the UK. In parallel with the above, the EU took the initiative to urge member states to tighten their investment screening mechanisms vis-à-vis investors from outside the union. Investment screening regimes have been reviewed by 14 EU countries, including Germany, France and Italy, since the start of the Covid-19 pandemic. In the short term, this has caused uncertainty among potential Chinese investors as to which investments might be restricted. We believe that over time, however, transparent and consistent screening practices will reduce such uncertainties. It is worth noting in this context that China also applies an investment screening regime, which has only had a limited negative effect in relation to EU investors investing in China.

As to the extent of the application of the investment screening rules in 2020, the 20 EU member states with foreign direct investment screening tools of their own referred 265 cases to the European Commission for review. Of those, 80 per cent passed review in a short first phase, with 14 per cent going to a second phase of more substantial evaluation. In total, the EU issued an opinion on just eight transactions, with only 2 per cent of all inbound investments blocked. This goes to show that the new investment screening rules are not necessarily a big quantitative factor in terms of investment flows from China to Europe. In the meantime, the Chinese economy has continued to undergo structural changes, steadily increasing the share of GDP created by advanced technology. For example, according to official statistics from October 2021, Chinese high-tech manufacturing value added grew 14.7% year on year, while the total manufacturing value added grew 10.9% during the same period. In some sectors the growth was more pronounced. For example, the output of new energy vehicles increased 127.9% year on year. As Chinese technology companies move higher up in the value chain and increase in size and maturity, often their relative size in relation to their partners of interest in Europe also increases, gradually making acquisitions and investments in Europe more and more feasible. We also know from our conversations with many large and medium sized technology companies in China, that many of them are constantly keeping an eye on European technologies. Based on this, we believe that the Covid-19 travel restrictions described above have contributed to a certain floodgate effect, so that once the restrictions are loosened, many Chinese technology companies will take the chance to evaluate the feasibility of investing in European technology companies and acquiring the technologies that they have been observing with interest throughout the pandemic. We still believe that this wave of investment after the floodgates are opened, so to speak, will happen despite the unfavorable background landscape of very fraught political relations between China and the EU plus UK, which are unlikely to improve in the medium term.

Viktor Arak
Managing Director
Renevo Capital

(Image Source: 2000-2020 Rhodium Group, 2021-2023 Renevo Capital inhouse forecast)