Ms Gesche Heidorn, Ms Li Wang and Dr. Deniz Tschammler provided great support for the preparation of this chapter.
End AbstractStarting Point: Prior to the Global Financial Crisis
In the beginning of the twenty-first century, China was one of the world’s major recipients of foreign investment, while its role as an outbound investor was still insignificant. In 1999, the Chinese government issued a new going-out policy to encourage Chinese companies to invest overseas. Since the mid-2000s Chinese outbound non-financial foreign direct investment (FDI) experienced a continuous, but unremarkable increase. After the global financial crisis of 2008, however, growth rates started to accelerate notably—the global financial crisis also changed the landscape of the Chinese overseas FDI.
In the first years of the new millennium, the international merger and acquisition (M&A) market prospered, driven and accomplished by the globalization process and other cross-border activities, such as the integration of the global financial markets. Thanks to the highly liquid capital market, financial investors were able to use high leverage to reach high return. The sub-prime crisis followed by the global financial crisis was the turning point, which completely changed the market. The economy floated down and banks and the capital market were not able anymore to provide favorable financing. Both strategic and financial investors were reluctant to invest. However, on the other hand, policy restrictions of the Chinese government on cross-board capital flows had ring-fenced China’s financial system and protected it from direct disruption by the financial crisis to certain extents, although the Chinese export suffered under the global recession caused by the financial crisis. In total, China was less exposed to the global financial crisis than other economies and not directly affected by the sub-prime mortgage problem.1
As global direct investment flows dropped in the aftermath of the financial crisis, China started to play an increasing role as providers of overseas FDI.
Going Out During and After the Financial Crisis
In the years after 2008, China became more and more influential as an overseas investor. Although most transactions during the financial crisis were organized as auctions, the Chinese investors were in many cases one of the few bidders who were able to submit competitive offers. On the other hand, Chinese companies were faced with a slowing down of the domestic economy, increasing competition in the domestic market and devaluation pressure on the Chinese currency. Cross-border M&A presents a possibility to increase market share abroad, to realize further growths as well as to access brands and technology, which first and foremost strengthened the competitive ability of the Chinese investors in the Chinese domestic market. In addition, in certain industrial sectors, outbound investments of Chinese A-share listed companies were also driven by the high equity valuation in the Chinese equity capital market. Many of the Chinese financial investors, for example, private equity funds or investment funds, also used the Chinese equity capital market as an exit for their cross-border M&A transactions.
Most of the Chinese investors started as beginners in the cross-border M&A business. However, they quickly developed their skills in the field and, years later, were in many cases able to successfully compete with their international competitors in competitive auction processes. The substantial increase in the number and complexity of corporate transactions caused a shift in China’s global investment position.
Already in 2011, China had become the world’s sixth largest source of FDI2 and, in the following years, continued to manifest its position as one of the top direct investor nations globally. In 2014, China’s overseas investments rose by 14.1% to $102.9 billion, while inbound FDI only rose by 1.7%.3 China’s share as a foreign investor in Europe increased considerably from 0.3% in 1995 to 2% in 2015.4 Investments also saw a shift in sector composition, from natural resources in developing countries to technology, brands, real estates and other assets in high-income economies.5 State-owned enterprises accounted for a majority of China’s cross-border investments, with the share increasing from 62% in 2014 to 70% in 2015.6
During the global financial crisis, Chinese investments were welcome also in the US and European countries. In some cases, Chinese investors used their network and distribution channel in their Chinese home market to help their acquired foreign subsidiaries to gain more market access and market share in China, which helped the foreign subsidiaries overcome the financial crisis and the recession. The leverage on such potential synergy in China is often also the economic basis for a higher premium offered by Chinese bidders in global M&A auctions. The valuation gap between the international equity market and the Chinese equity capital markets also helped Chinese bidders to offer competitive purchase prices.
On the other hand, these new Chinese investments in the Western receiving countries were unprecedented in history and have been under close observation of the recipient countries and often associated with different concerns and worries.
For industrial countries there has been the question, ever since the beginning of the recent development of Chinese overseas FDI, whether their industry would sell out its technology to China, which builds the basis for the prosperity and wealth of society, and thereby lose its technological advantage toward China.7 Such concerns and worries have also been, to certain extent, fueled by ambitious Chinese domestic industry policies, such as the so-called Made in China 2025 initiative.
Another concern of the local press of the Western receiving countries is that the Chinese takeover of the companies would lead to loss of jobs and deterioration of employer-labor relations. Apart from distressed transactions, which are often followed by a restructuring process, such concerns and worries have rarely been confirmed in the praxis.8
Slowing Down After the OFDI Boom in 2016
In 2016, China saw its strongest annual growth of overseas FDI. According to China’s Ministry of Commerce (MOFCOM), Chinese overseas FDI surged by 44.1% to a record value of USD 170.11 billion.9 In Europe—one of the key destinations—Chinese investments increased by 77%,10 with Germany being the largest European recipient.11
In 2017, however, the value of Chinese overseas FDI fell sharply by 29.4% to USD 120.1 billion, marking the first drop after more than one decade of continuous growth.12 The first half of 2018 deepened geographic discrepancies in Chinese overseas FDI activity. While investment in Europe slowly recovered in the first six months of 2018, investment in the US experienced a continuous decline.13
As will be discussed below, the decline is both attributable to Beijing’s tightening on regulatory control over capital outflow and enhanced screening mechanisms of Western recipient countries.14 In addition, the threatening trade war between the US and China could also add further headwind for Chinese overseas FDI.
The Numbers: Development of Chinese Overseas FDI in 2017 and 2018
Europe saw a comparatively moderate drop in 2017, amounting only to 17%,15 while in the US, the volume of completed transactions declined sharply by 35%.16 In terms of new activity in the US, there was even a drop of 90% compared to the record year of 2016.17 The decline in the US was strongest in entertainment, consumer products, services and real estate as well as in hospitality.18
Already in the second half of 2017, Chinese investment momentum rebounded in Europe.19 Meanwhile, the US saw a further decline. In the first half of 2018, newly announced Chinese M&A transactions only amounted to USD 2.5 billion—the lowest level seen in a decade—compared to a value of USD 20 billion in Europe.20 Sweden was the largest European destination in 2018 (USD 3.6 billion), followed by the UK (USD 1.6 billion), Germany (USD 1.5 billion) and France ...
