As the Covid-19 pandemic hit in 2020, concerns grew that the economic slump might trigger a round of Chinese distressed asset buying worldwide. So far, these fears have proven mostly unfounded. China’s global outbound merger and acquisition (M&A) activity dropped to a 13-year low in 2020, with transactions totalling around EUR 25 billion, down 45 percent from 2019.
The same was true of Chinese foreign direct investment (FDI) in the European Union and the UK. Shrinking M&A activity meant Europe saw a 45 percent decline in completed Chinese foreign direct investment last year, down to EUR 6.5 billion from EUR 11.7 billion in 2019. This took Chinese investment in Europe to a 10-year low. Greenfield investment held up better, reaching its highest level since 2016 at nearly EUR 1.3 billion.
These are the key findings of the joint report by Rhodium Group and MERICS: “Chinese FDI in Europe: 2020 Update” by Agatha Kratz (Rhodium Group), Max J. Zenglein (MERICS), Gregor Sebastian (MERICS).
The “Big-3” – Germany, the UK and France – reclaimed their top spots, with Germany at the helm. While it remained in third place, the UK saw Chinese FDI fall 77 percent. Poland emerged as a key recipient in 2020, pulled up by one major acquisition.
Because small- and mid-size transactions dominated in 2020, Chinese investment was spread more evenly across sectors than in 2021. Infrastructure, ICT and electronics took the top three spots.
State-owned enterprises (SOEs) represented 18 percent of total Chinese FDI to Europe, increasing their share but keeping absolute investment flows stable. In contrast? Private investment plummeted 50 percent.
Despite a global turnaround in the first quarter of 2021, Chinese FDI faced greater scrutiny by EU member states: 14 member states, including Italy, France, Poland and Hungary, updated their FDI screening mechanisms last year, and member states moved to block several acquisitions by Chinese firms.
Chinese FDI activity in Europe continued to fall in the first quarter of 2021. Europe remains an attractive investment location, but persistent disruption from Covid-19, high barriers to outward capital flows in China and rising regulatory barriers to foreign investment in Europe have all contributed to low levels of Chinese investments. Deteriorating EU-China relations could create important additional headwinds for Chinese investors going forward.