Despite China’s rapid containment of Covid-19, companies headquartered in the country significantly reduced their global expansion plans in 2020. Within that 12 months, Chinese mergers and acquisitions (M&A) around the world fell by a whopping 45% (to $29bn), the smallest amount since the subprime financial crisis, according to data from international law firm Baker McKenzie (see chart below).
As far as completed Chinese acquisitions go, the only region in which 2020 figures kept pace with 2019 was Latin America, mainly due to the completion of a number of energy and utilities acquisitions in Brazil, Chile and Peru.
The aforementioned statistics are underpinned by a pre-existing trend. Global foreign direct investment (FDI) from China has slowed consistently since it hit an all-time high in 2017, as per the below chart.
The main reason for this is the rise of hawkish regulation against China (especially in the US), the growth of capital controls from Beijing over Chinese companies, and the US-China trade war. These ongoing headwinds, alongside the obvious impact of Covid-19 on the global economy, are behind this fall in Chinese FDI in 2020.
Chinese investment to Europe and the US
FDI from China to Europe hit a decade low in 2020, according to Baker McKenzie’s data.
Investment to the European continent was more fragmented than previous years, and consisted of smaller transactions spread across a larger number of geographies and industries. Nonetheless, the year saw $7.5bn in completed direct investment from Chinese companies (down from $13.3bn in 2019), with Germany, France, Poland, Sweden and the UK getting the most capital, in that order.
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Chinese investors put $2bn into Germany, in line with the performance of previous years, while investment into France mounted a comeback after falling dramatically in 2019, according to Baker McKenzie. Meanwhile, FDI into the UK was unusually low, mainly due to Brexit uncertainty in 2020, increased political tensions with China, and persistent Chinese restrictions on outbound transactions in real estate and other service sectors.
Although Covid-19 saw many European countries tighten their FDI regulations in 2020 – especially with regards to China – the recently agreed EU-China trade deals could mark a flourishing of economic ties. ‘Could’ remains the operative word.
Tougher investment screening rules and related policies have substantially increased regulatory risks and uncertainty for Chinese investors. Sylwia Lis, Baker McKenzie
“While regulatory and political headwinds for Chinese investors in the EU will persist and the Comprehensive Agreement on Investment is not an instant game changer, it does send a strong signal that Chinese investment is welcome in Europe, which is likely to positively impact investor psychology,” says Thomas Gilles, chair of Baker McKenzie’s EMEA-China Group. “That, combined with potential political encouragement by Beijing, could help revive Chinese FDI in Europe and reverse the downward trend since 2017.”
Although Chinese M&A to North America decreased in 2020, overall figures actually increased if greenfield FDI is included. Entertainment, health and biotech, and natural resources were the top target sectors for Chinese FDI into North America, while California, Ontario, Delaware, North Carolina and Massachusetts were the top states/provinces, according to Baker McKenzie.
Brighter outlook for Chinese investors
Alongside the EU-China trade deal, the most positive signal for Chinese foreign investment is the new US administration. Although Joe Biden’s government will maintain a hard stance towards China, it is likely to employ less disruptive tactics, such as trade tariffs.
Moreover, Chinese investors will have more transparency on ‘red lines’ in overseas jurisdictions as new investment screening regimes settle. “Tougher investment screening rules and related policies have substantially increased regulatory risks and uncertainty for Chinese investors, especially in data, technology, infrastructure and related areas in recent years,” says Sylwia Lis, an international trade partner in Baker McKenzie’s Washington, DC office.
Covid-19 only accelerated such regulation, she adds, saying: “Looking ahead, while foreign investment review rules and practices will undoubtedly continue to evolve, some of the uncertainty around new regulatory regimes is easing as legislation has been implemented and regimes become functional.”
There is also the fact that China’s current account surplus ballooned in 2020 as global travel halted Chinese overseas tourism spending while Chinese exports recovered before many other countries impacted by Covid. “This has put appreciating pressure on the renminbi and is creating an opportunity for China to allow more capital outflows, including outbound M&A,” says Baker Mckenzie.
That China has weathered the pandemic so well, relatively speaking, is why it overtook the US as the world’s top destination for FDI in 2020. Foreign M&A into China rebounded strongly in the second half of 2020, reaching full-year levels similar to 2019, according to Baker McKenzie.
As Beijing’s political and macroeconomic conditions seem likely to improve in 2021, FDI from China is likely to pick up. Conversely, the country may very well be heading for another record year of investment attraction.