The economic uncertainty initially triggered by the pandemic and now being drawn out by geopolitical tensions has subdued China’s global investment activity. Chinese foreign direct investment (FDI) remained more or less level at EUR 96 billion in 2021, while mergers and acquisitions (M&A) activity dropped to a 14-year low (EUR 25 billion). Chinese investments in Europe (the European Union (EU) and the United Kingdom (UK)), on the other hand, which had been steadily declining since 2017, bounced back in 2021, increasing by 33 per cent year-on-year, and reaching EUR 10.6 billion. Despite this recovery, Chinese FDI in Europe has dropped by 77 per cent compared to the peak in 2016 of EUR 46 billion, and remains on a downward trajectory due to increased scrutiny—including stronger investment screening in Europe as well as ongoing capital controls in China—and an economic slowdown at home.
In an environment marked by overall low investment, single large transactions strongly distort investment data, making it difficult to identify clear investment trends. In 2021, for example, the Hong Kong SAR-based private equity firm Hillhouse Capital bought Philips’ home appliances unit for EUR 3.7 billion, accounting for roughly one-third of total Chinese FDI in Europe. Such outliers heavily impact the industry and/or geographic composition of Chinese investments.
Germany, the UK and France, Europe’s “big three” economies, have consistently attracted the bulk of Chinese investments. Between 2012 and 2020, their share accounted for 57 per cent of total Chinese FDI in Europe. That share fell to an all-time low of 39 per cent in 2021 due to the Hillhouse Capital mega-deal, with the Netherlands becoming the largest single recipient of Chinese investment, accounting for 35 per cent of total Chinese FDI in Europe as a result of the acquisition. Together with the UK and Germany, 70 per cent of total Chinese investments were concentrated in these three countries in 2021.
Investments in other European countries outside of the “big three” tend to be more volatile, with single transactions increasing the relative share of the recipient country in Chinese FDI. For example, the share of Chinese investment in Eastern Europe reached an all-time high of 10 per cent in 2020, following a single large transaction in the logistics sector. In 2021, Chinese investments in Eastern Europe plummeted by 74 per cent due to the inflated base the previous year, accounting for only 4 per cent of total Chinese investments in Europe, generally reflecting the 10-year average of 5 per cent.
Chinese FDI is targeted at consumer products and the automotive industry
The Hillhouse Capital deal in 2021 pushed investments in consumer products and services (EUR 3.8 billion) to the top of the list of FDI in Europe (36 per cent of total Chinese investments in Europe). Without that acquisition, however, investment in consumer products in Europe would have been close to zero. Chinese FDI in Europe’s automotive industry (EUR 2.4 billion)—which came in second—was driven by several greenfield projects. Leading Chinese battery producers are leaving the domestic market in search of growth opportunities in Germany, France and the UK. Geely-owned carmaker Lotus, for example, is expanding its vehicle production and development facilities in the UK. Together, investments in consumer products and the automotive industry in Europe accounted for 58 per cent of total Chinese FDI in Europe in 2021.
Chinese investors also showed strong interest in Europe’s health, pharmaceutical and biotech industry, investing EUR 961 million in 2021, as well as in information and communication technology (ICT) (EUR 941 million). These two industries accounted for 9 per cent and 8 per cent of total Chinese investments in Europe, respectively. The Chinese government prioritizes these two industries, and Huawei and ByteDance are strong Chinese players in the ICT market aiming to expand globally. Major deals included Shenzhen Mindray’s acquisition of HyTest Invest, a global provider of medical devices and solutions (EUR 560 million), as well as Huawei and ByteDance’s continued investment in greenfield projects in the UK and in Ireland.
More greenfield investments fuelled by Chinese battery plants
In 2021, Chinese FDI targeted greenfield investments, reaching a record high of EUR 3.3 billion, up 51 per cent from the previous year. This uptick hinges on a handful of multi-year projects concentrated primarily in the automotive and ICT industries. Both industries accounted for 94 per cent of total investments in Europe. Nearly 70 per cent targeted the automotive industry, as Chinese battery producers, including CATL, SVOLT and AESC, expanded their presence at European production sites. Notable greenfield investments in Europe’s ICT industry were ByteDance’s in the establishment of a data centre in Ireland and Huawei’s investment in an optoelectronics research and development (R&D) centre in the UK.
Yet despite the increase in greenfield investments, China’s M&A activity continued to be the mainstay of Chinese investments, accounting for 69 per cent (EUR 7.3 billion) of total investments in Europe. Investors’ primary interest continues to be the acquisition of assets and technology. The rise in greenfield investments over the past two years is not substantial enough to indicate a structural change in Chinese investment patterns in Europe. Whether the current trend is sustainable will depend whether follow-up projects will replace the capital-intensive investments in European automotive and ICT industries.
The era of massive Chinese investments seems to be over for now
Due to the political developments in both Europe and China, Chinese FDI is likely to remain at its currently low level. This means that single transactions (or a lack thereof) will continue to strongly influence China’s overall investment patterns in Europe. Although no clear trends can be identified based on the low investment volume, Chinese FDI in Europe seems to be marked by increasing uncertainty, both domestically and in Europe.
The Chinese leadership’s focus on zero-COVID policies with strict travel restrictions severely curtails outbound investment options in the short term. Although China recently announced stimulus support for its struggling economy, it ultimately prioritizes stability, and it is therefore unlikely that a fundamental shift in capital controls will take place. China’s regulatory crackdown on consumer tech could also drive higher investments in consumer and digital tech, especially in Europe’s start-up scene.
In Europe, on the other hand, policymakers are adapting investment screening regimes and are closely scrutinizing Chinese investments. Germany, Italy and the UK have already publicly blocked Chinese investments in strategic industries in 2022. The EU is presently devising new regulations, including on procurement and foreign subsidies, which could severely impact market access of Chinese companies. Moreover, European stakeholders continue to be sanctioned by Beijing, and the Comprehensive Agreement on Investment, which could have spurred an improvement in economic ties, will unlikely be ratified any time soon.
China’s economic ties with Europe are increasingly being perceived under the guise of economic security and reduced dependencies. For now, concrete steps pale in comparison to Japan’s new security law which is gradually being implemented or the new export controls announced by the United States in October. Vigilant of one-sided dependencies, the United States’ Inflation Reduction Act—among many other objectives—effectively aims to oust Chinese companies from American battery supply chains. The increasingly difficult business environment for Chinese firms in some countries bolsters the relative attractiveness of Chinese investments in Europe. The first visits to Beijing since the outbreak of the pandemic by French president Macron and German chancellor Scholz recently–the latter with a business delegation in tow–seem to indicate that some European leaders place high emphasis on continued good economic relationships with China. Still, the stumbling blocks for Chinese investments in Europe are growing larger, not only with regard to economic security but also in terms of the increasing political differences.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).