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Chinese M&A investment in Europe, US hits 5-year low on slow economy, trade

The pullback of Chinese companies from M&A in Europe and the U.S. has continued over the first half of 2019, with investment volumes dropping to their lowest levels since 2014, according to recent research.

In 2018, Chinese foreign direct investment, or FDI, in the EU and the U.S. was already at a five-year low as strict capital controls and domestic deleveraging put a brake on Chinese companies expanding abroad.

While the key driver for the decline is the domestic economic situation, China's trade dispute with the U.S. and increased regulatory scrutiny in Europe have also contributed to the negative trend, analysts say.

The EU's new framework for the screening of foreign direct investments, which came into effect April 10, has been widely seen as a move to protect European companies, particularly from Chinese investors. But despite the tighter rules, Europe still gets considerably more Chinese investment than the U.S., whose relationship with China has rapidly deteriorated since the trade tensions began in 2018.

Both regions are seeing downward trends, but China invested 3x more in European companies than in those in the U.S. over the first half of 2019, according to a report by independent research firm Rhodium Group and law firm Baker McKenzie. Overall Chinese FDI in the period stood at $9 billion in Europe, compared to $3.3 billion in the U.S.

"Europe's higher level of investment reflects an asset base that is a better match for Chinese outbound policy, as well as lower political and regulatory scrutiny," the researchers said.

Germany drives slump

But still, Europe has seen a strong decline, especially in M&A deals. At $2.39 billion, the amount of Chinese M&A investments in Europe in the first six months of 2019 was 84% lower than a year ago and a far cry from the peak of $72.89 billion recorded in the first half of 2016, the German arm of auditing firm Ernst & Young said in a new report Aug. 12.

The value of deals hit the lowest level seen since at least 2013, according to Ernst & Young Germany. At 81, the number of M&A deals and stake buys done by Chinese investors in Europe has also dropped to its lowest level since the first half of 2014, when it stood at 72.

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Germany itself took the biggest hit among European countries with the number of deals dropping to 11, the lowest first-half level recorded since 2013 and down 56% from a year ago.

At just $505 million, the Sino-German transaction value in the first six months of 2019 was a fraction of the year-ago level of $10.10 billion and the peak volume of $10.45 billion in the first half of 2016, according to Ernst & Young's report.

Despite the declines, Germany still ranked second as a destination for Chinese investments in Europe, in terms of valuation and number of deals. The largest number of Chinese deals were closed in the U.K. — 17 in the first half of 2019, compared to 21 a year earlier.

Global withdrawal

Although most notable in Europe and North America, driven mainly by a withdrawal from deals in the U.S., Chinese FDI has been on the decline across the globe, Rhodium and Baker McKenzie said in a July 11 report.

"Chinese companies invested just $12.3 billion in the advanced economies of Europe and North America in the first half of 2019, down 18% on the same period last year and the lowest activity level since 2014," the researchers said.

On a global level, China's outbound investments have notably decreased with the volume of newly announced M&A deals slumping 60% to only $20 billion in the first half of 2019, Rhodium and Baker McKenzie found.

Continued domestic policy and economic problems, as well as foreign regulatory and geopolitical pressures, have kept more Chinese investors at home, the firms said. Outbound investments of state-owned enterprises nearly dried up over the first half with 94% of activity recorded in Europe and North America coming from privately held Chinese companies.

Transaction values have also shrunk, with the average deal size standing at $29 million in 2018 and $35 million so far in 2019 — about a third of the average deal ticket of $90 million booked in 2015, Rhodium and Baker McKenzie said.

Gloomy H2 prospects

The outlook for the second half of 2019 remains gloomy given China's continued struggle to boost economic growth and ongoing foreign policy issues, most notably the trade dispute with the U.S., according to analysts.

Market worries about global trade have eased somewhat after the U.S. government said Aug. 13 that it will delay the launch of new import tariffs on China until December. But this is unlikely to lead to a notable growth in Chinese M&A investments in Europe and the U.S. by year-end.

Given the current deal pipeline, no major turnaround is expected in Chinese FDI in Europe and North America in the second half of the year, Rhodium and Baker McKenzie said. As of June 2019, there were just $4.6 billion of pending M&A transactions in North America and $2 billion in Europe.

The Chinese economy is not recovering despite the stimulus package introduced by the government in 2018, Commerzbank's emerging markets research team said in an Aug. 13 note. A further significant increase in the stimulus is not expected in the second half, and the economy is unlikely to see a substantial pickup by the end of the year, the analysts said.