China’s European investments in downward trend, 10-year low amid coronavirus pandemic, political tensions: report

China’s European investments hit a 10-year low last year because of the pandemic and political tensions, and the trend is likely to persist in 2021, according to a report released on Wednesday.

Chinese foreign direct investment (FDI) to Britain and the 27 European Union countries declined to €6.5 billion (US$7.8 billion) from €11.7 billion (US$14.1 billion) in 2019, down by 45 per cent, according to the joint report by consultancy Rhodium Group and German think tank the Mercator Institute for China Studies.

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OECD statistics showed global FDI volumes plunged by 38 per cent in 2020, compared to the previous year – their lowest level since 2005 – against a backdrop of international disruption to cross-border mergers and acquisitions (M&As) as a result of the pandemic.

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Fears that Chinese investors might use the pandemic as an opportunity to buy distressed foreign assets hit by recession proved unfounded. China’s total global outbound investment also dropped to a 13-year low, with completed M&A transactions of just €25 billion (US$30.3 billion), down 45 per cent from 2019, the report said.

There were multiple reasons for the decline, according to the report, in addition to the uncertainty caused by Covid-19. These included persistent outbound capital controls in China, heightened regulatory scrutiny of Chinese investments in Europe, and deteriorating public sentiment towards China.

Before the pandemic, the EU had already announced a screening process for non-EU investment in critical sectors and 14 member states – including Italy, France, Poland and Hungary – updated their FDI screening mechanisms last year. Some European countries have also moved to block several acquisitions by Chinese firms.

Germany remained the top recipient of Chinese capital, with 30 per cent of the total, while Poland rose to second place with a record €815 million (US$988 million) in Chinese investment. The big loser was Britain, which saw a 77 per cent year on year plunge, although it remained at number three with 12 per cent of China’s European investments.

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China’s private sector investors were the most affected, with their share of FDI dropping by a huge 49 per cent year on year, to €5.3 billion (US$6.4 billion). Despite facing increased scrutiny, investments by state-owned enterprises maintained steady at €1.2 billion (US$1.4 billion) – an 18 per cent share, compared to 11 per cent in 2019.

According to the report, Chinese investment in Europe was more diversely distributed among different sectors in 2020, after the previous year’s focus on infrastructure, because of the smaller average size of individual outlays. However, transport, construction, infrastructure and ICT were still the top targets for Chinese buyers.

The report predicted Chinese FDI was unlikely to pick up in the coming year, despite the economic recovery. “As EU-China relations enter a new phase, the greatest risk to China’s FDI into Europe is the souring political relationship,” it said.

China and the EU reached a Comprehensive Agreement on Investment (CAI) last December, but the ratification process was frozen by the EU parliament, after tit-for-tat sanctions. Earlier this year, the EU took action against four Chinese officials and one organisation in connection with alleged human rights abuses in Xinjiang, and Beijing bit back with sweeping retaliatory bans.

China’s activities around the South China Sea and Taiwan, as well as human rights issues, could exacerbate the souring political tensions and affect economic ties, the report said. “The CAI’s adoption by 2022 is now highly unlikely. Whatever the CAI’s shortcomings, the failure to conclude it could lead to slower progress on true reciprocity and erode public tolerance towards Chinese FDI.”

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