Looking forward, 2017 is likely to be another strong year for Chinese FDI in both regions as large deals announced last year come to a close. If ChemChina’s $43 billion acquisition of Syngenta goes through as expected in the second quarter, it will almost single handedly set a new record year for Chinese investment in Europe. Other pending acquisitions include HNA’s purchase of a 25% stake in Hilton Hotels for $6.5 billion, Zhongwang’s investment in US aluminum maker Aleris for $2.3 billion, and LeEco’s acquisition of US television manufacturer Vizio for $2 billion. At his speech at this year’s World Economic Forum in Davos, President Xi Jinping projected that Chinese outbound investment will total $750 billion in the next five years. Europe and North America stand to attract a significant share of those future flows, given their strong economic fundamentals and attractive assets. Chinese companies are still underinvested globally, and their push to catch up is a secular trend backed by the government’s pursuit of a new growth model.
In the past five years, Chinese companies have ramped up investment in Europe and North America at a remarkably fast pace. Total Chinese FDI in both regions nearly doubled from $25 billion in 2011 to $41 billion in 2015. Then it doubled again in just one year, rising to $94.2 billion in 2016 and accounting for nearly half of all of China’s global outbound investment.
“Whilst Brexit clouds the outlook for 2017 in some sectors such as financial services, the fundamental drivers for Chinese FDI into the UK and Europe as a whole remain strong.” TIM GEE, M&A partner in Baker McKenzie’s London office
At the same time, political and regulatory uncertainties weigh on a bullish outlook for Chinese FDI in 2017. Although China’s temporary measures to slow capital outflows don’t appear to represent a fundamental break with its “going out” policy of encouraging Chinese companies to expand overseas, they increase uncertainty about the ability of Chinese companies to transfer funds offshore and complete transactions. China’s short-term controls could also discourage new investments in areas targeted for greater government scrutiny, including megadeals over $10 billion, financial investments, real estate and entertainment transactions, and acquisitions in sectors outside an investor’s core business. In the US, the risk appetite of Chinese buyers may also be tempered by uncertainty about President Trump’s foreign investment policy and the potential for new legislation that could expand CFIUS’s mandate beyond its narrow focus on national security. Concerns about investment-related national security risks are not confined to the US, as demonstrated by a recent German government decision to withdraw its initial approval of a now-aborted bid by a Chinese investment fund to acquire Aixtron SE, a German chip equipment manufacturer with US operations. Against this backdrop of closer scrutiny, it is clear that Chinese investors need to manage foreign investment review risks early in their transactions, even in sectors not typically associated with national security risks. In transactions involving assets in multiple jurisdictions, Chinese investors also need to develop coordinated regulatory strategies to account for increasing coordination among governments. The number of newly announced Chinese acquisitions in North America and Europe has already declined in the second half of 2016 and early 2017 and is likely to remain subdued for the first half of this year. In the long run, however, the expansion of China’s corporate footprint in North America and Europe should continue if growing concerns among government authorities, business leaders and the broader public about equal market access can be addressed through bilateral investment agreements and other policies. In the absence of reforms to increase the role of markets and level the playing field for foreign companies in China, the risk of a broader backlash against Chinese FDI in North America and Europe will continue to rise.
NEWLY ANNOUNCED CHINESE ACQUISITIONS IN NORTH AMERICA AND EUROPE
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Source: Bloomberg, Rhodium Group.
OUTLOOK FOR 2017:
Strong Fundamentals Amid Greater Uncertainty
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Appendix A: Transaction Attractiveness Indicator
Appendix B: Country Forecasts
Appendix C: Methodology
M&A Transactions (US$B)
M&A Transactions (# Of Deals)
Domestic IPOs (US$M)
“While many Chinese companies have become astute buyers in navigating regulatory procedures such as CFIUS national security reviews, it will become increasingly important for Chinese investors in the US to develop a political risk assessment and regulatory plan as part of their overall deal strategy.” SYLWIA LIS, Trade compliance partner in Baker McKenzie’s Washington DC office
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Chinese direct investment in North America and Europe more than doubled
North America took the lead as the top target market by deal value
Chinese investors target different assets in North America and Europe
Privately-owned Chinese companies drove acquisitions
Chinese investors continue to target assets in key jurisdictions in both regions
The number of canceled and withdrawn transactions rose
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