Chinese investment slows as EU turns the screws

Beijing’s strategy of buying up crucial sectors in Europe has passed its peak as governments turn to stricter scrutiny of Chinese investments, a report said Wednesday.

Over the past year, China invested about €17.3 billion in Europe, researchers at Rhodium Group and the Mercator Institute for China Studies (Merics) calculated. That's a 40 percent drop compared with 2017, and a 50 percent fall compared to the record €37 billion in 2016.

There are two reasons for the slowdown, the researchers said. At home, the Chinese government has reined in its past investment programs; and in the West, Chinese investors are seeing new regulatory and political hurdles pop up — not least in the EU, where there is a raging debate on China’s involvement in telecoms.

“You see a progressive increase in pushback in the West. It is much more developed in the U.S., but it is strengthening in Europe,” said Agatha Kratz, associate director at Rhodium Group, a research firm specialized in China.

The EU is revamping its China strategy. EU countries this week approved a regulation on screening foreign investments that will fully apply by October 2020, and will allow national capitals to block bids in strategic sectors.

But amid a global debate about Huawei and its involvement in the next generation of internet networks, the Commission is going beyond investments. It is also reviewing procurement rules, data protection policies, security policies and competition rules to make sure Europe updates its laws against rising competition from China.

“The debate doesn’t stop with the fact that we have an investment screening in place, it is actually just starting,” said Mikko Huotari, deputy director at Merics.

The College of Commissioners meets Wednesday to prepare for an upcoming EU-China summit on April 9.

Biotech, cars come into play

Researchers calculated that Chinese investors have started targeting a wider array of sectors.

Financial services, health and biotech, consumer products and services, and the car industry saw rising investment — unlike “traditional” targets such as transport, infrastructure and real estate that accounted for the bulk of Chinese buying over the last eight years.

“It’s hard to tell whether an investment is politically motivated or economically motivated,” said Kratz, but “we see an overlap between sectors in the 'Made in China 2025' strategy, and patterns observed in Chinese investment.”

The researchers said that 82 percent of Chinese investments in 2018 could have fallen under the scope of the EU’s new investment screening mechanism, which is being implemented across the Continent.

Waking up to the threat

The sharp downfall in Chinese investment flows to Europe is mostly due to China's debt crisis, according to researchers and analysts. China, struggling with highly indebted companies and banks, last year passed a law to rein in lavish spending on M&A and started questioning the value of certain acquisitions, fearing its state-owned companies were overpaying.

But it’s also true that the EU is warier of takeovers of prized high-tech companies by Chinese state-owned enterprises and has moved to make such transactions more difficult.

On Tuesday, EU countries approved a new investment screening regulation, which will oblige member governments to collect and exchange information. This comes after a crackdown on strategic takeovers in Germany, France and Britain. All three countries have toughened their national legislation on foreign investments in the last two years.

That's led to some concrete decisions to block acquisitions. Germany last year for the first time used its investment screening law to block the takeover of high-tech company Leifeld Metal Spinning. The government also thwarted a Chinese plan to acquire part of electricity provider 50Hertz.

China and the U.S.

The U.K., Germany and France continued to attract the bulk of China’s European investments, the study showed, but the big three are less dominant. Their share declined to 45 percent in 2018 from 71 percent in 2017, while Sweden and Luxembourg made it into the top five list.

While EU countries are paying more attention to China, it's still a much smaller presence on the Continent than the U.S.

“Chinese investment have been welcomed in the first years, but viewed with very much skepticism since," said Hinrich Voss, a researcher at Leeds University who studies global foreign direct investment. "But Chinese investments are still significantly smaller than U.S. and other countries’ investments, as well as intra-European investments.”

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