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News : EU Economy Last Updated: Feb 20, 2015 - 9:34 AM

Chinese investment into Europe at record high; UK on top, Ireland hopes
By Michael Hennigan, Finfacts founder and editor
Feb 11, 2015 - 7:11 AM

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Chinese investment into Europe is at record levels and at 50% higher than the US level. With 153 separate investments worth $18bn last year, Europe has emerged as one of the top destinations for Chinese foreign investment globally. The UK is the top destination and $55bn has been invested in Europe in five years but IDA Ireland, the Irish inward investment agency, has yet to have an impact.

Baker & McKenzie, the global law firm, says that using a unique dataset of acquisitions and greenfield investments provided by research firm Rhodium Group, the new report, Reaching New Heights, paints the clearest picture yet of Chinese investment into Europe. The full report will be released in March with Chinese investment bank CICC.

The US Rhodium Group said last month that Chinese investment into the US over the past 12 months totaled $12bn, topping the $10bn mark for the second year in a row. The number of M&A transactions reached a new all-time high in 2014, as smaller sized deals and financial stakes are becoming an important driver of investment activity.

Meanwhile, The Wall Street Journal reports today that US businesses in China have voiced increased concerns over what they see as rising anti-foreign sentiment and increasingly difficult operating conditions as the economy posts slower growth.

An annual survey released on Wednesday of about 500 members of the American Chamber of Commerce in China found that most companies believe that foreign firms have been targeted in widely publicized government investigations for a range of anticompetitive practices.

Many of those companies seeing themselves as targeted said this had reduced their interest in making fresh investments in China.

"Chinese investment in Europe has become much more diverse in recent years and is now extending into all parts of Europe," said Thomas Gilles, chairman of the EMEA-China Group at Baker & McKenzie. "What we're seeing is the maturing and normalization of Chinese investment processes in line with the international economy."

In 2013 investment levels dropped as deals in energy and materials declined. However, investment bounced back to record levels in 2014. While crisis opportunities and low valuations still play a part, consistently high levels of investment in an increasing number of sectors and countries where assets no longer look cheap suggests that Chinese FDI in Europe is a structural trend, not just a cyclical phenomenon.

FDI from China into Europe barely existed until 2004 and then averaged less than $1bn annually. Then, in 2009, investment flows tripled to nearly $3bn, before tripling again in 2010 to more than $10bn. $55bn has been invested since 2009.

How the Chinese are investing in the EU

The Baker & McKenzie report says that over the last decade the majority of Chinese firms have grown their EU market presence through greenfield projects and expansions (69% of all deals). However, the bulk of investment value can be attributed to acquisitions (86% of total value), as these transactions are generally more capital-intensive than greenfield projects and expansions.

In the last three years the average value of greenfield projects has been growing. Previously consisting mostly of offices and smaller administrative operations, Chinese firms have begun to invest in greenfield projects with significant capital expenditure, including R&D centers in Scandinavia, food processing facilities in France, real estate developments in Britain, and machinery production in Germany. Firms have also ramped up spending on the expansion of existing facilities in Europe including chemical plants, warehouses, and other transportation infrastructure.

The composition of M&A activity has also changed substantially since 2011. One important trend is the growing importance of small and medium-sized M&A deals, often undertaken by financial investors. While megadeals above $1bn still dominate total inbound Chinese investment, small deals (below $100m) and middle-market transactions (between $100m and $1bn) have grown particularly strongly since 2011. More importantly, they are less prone to annual fluctuations than large-scale transactions and provide another confirmation of the structural expansion of China’s private sector in Europe.

Thomas Gilles said: "The rise of private equity funds and other financial investors in the Chinese outward investment space is driving a change in investment strategy from full to part ownership, as well as the realization that minority stakes can often help to preserve and create value for less experienced Chinese investors."

Countries of choice: investing for the long term

Since the turn of the century the four countries which have attracted the most Chinese investment are the United Kingdom ($16bn), Germany ($8.4bn), France ($8bn) and Portugal ($6.7bn) followed by Italy ($5.6bn), The Netherlands ($4bn), Hungary ($2.6bn), Sweden ($2bn), Spain ($1.5bn) and Belgium ($1.2bn).

While 70% of the investment over the last decade has gone to those economies which emerged relatively unscathed from the crisis, the last three years have also seen significant Chinese interest in the privatization of state-related industries such as utilities or logistics in countries including Portugal, Italy and Spain.

"Chinese investors are clearly taking opportunities when they arise in markets going through difficult times but they also see great benefit in investing in more stable countries, where there are strong existing economic ties to China through trade and tourism", said Danian Zhang, chief representative of Baker & McKenzie's Shanghai office. "They are making a long-term bet on the European economy."

Ireland not among top 67 destinations for Chinese outbound FDI in 2014

Sector spread evolving and maturing

Chinese investments in the EU are spread across a wide range of sectors. For the entire period of 2000-2014, the top recipients of Chinese capital were energy ($17bn), automotive ($7.7bn), agriculture ($6.9bn), real estate ($6.4bn), industrial equipment ($5.3bn), and information and communications technology ($3.5 bn).

Toby Clark, head of Investment Banking at CICC Europe, explains, "The mix of industries Chinese investors are interested in has shifted rapidly, reflecting the changing position of Chinese firms in global value chains and the evolution of China’s policy framework for outbound FDI."

Prior to 2011, EU market entry was primarily motivated by trade facilitation considerations and the desire to access technology in sectors such as automotive and industrial equipment. In 2011-2012, the drive to technology and other competitiveness-enhancing assets increased, but energy and materials became the major drivers of investment activity as state-owned firms were seizing opportunities to buy into European mining firms, energy assets and utilities. In 2011 and 2012, Chinese firms spent a combined $11bn on fossil fuel, renewable energy, and utility assets in Europe.

Te report says that this changed radically in 2013 and 2014 as Chinese investment in energy assets collapsed to $5bn for both years combined as the appetite of state-owned firms for foreign energy assets declined and sweeping changes to the resource-intensive growth model, and renewable energy projects became less attractive due to cuts in feed-in tariffs in many European economies.

On the upside, commercial real estate has made up for some of the declining energy investment. From virtually zero before 2013, Chinese investment in European commercial real estate surged to $2.8bn in 2013 and $3bn in 2014, not including future development costs. A downturn in the Chinese domestic market in 2013 and 2014, and the boom in the overseas Chinese population during the same period – tourists, student, and emigrants - were the major drivers for outbound real estate FDI.  Policy liberalization for outward investment by institutional investors such as sovereign wealth funds and insurance companies also contributed to greater real estate investment.

Other industries that have exhibited above-trend growth in 2014 compared to previous years are finance and business services, agriculture and food, and transportation and infrastructure. Finance and business services in the EU received over $2bn investment, mostly in the last two years, driven by financial liberalization in China and new business opportunities related to the internationalization of the Chinese currency, the renminbi (RMB).

"Though starting from a small base number, investments in food more than quintupled in the last three years, with several large acquisitions motivated by the desire to acquire know-how, technology, and brands to feed the fast growing food market in China. Investments in transportation and infrastructure also reached more than $2.4bn through the end of 2014. The uptick in commercial airline and port services investments was fueled by increasing Chinese tourism, trade, and business activities in Europe," the report says.

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