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EU investment screening reforms create further barriers? Recent trends on Chinese FDI in EU

In the past few months, foreign direct investment (FDI) has returned to the forefront of discussions among European policymakers and business circles. The COVID-19 outbreak and its negative impact on the economy have intensified concerns related to potential takeovers of vulnerable European companies in key sectors. See some examples below.

The volatility and undervaluation of European state markets lead to the risk of loss of critical assets and technologies. Currently European countries like Spain, Germany and Italy are considering changing their FDI screening regimes or have already done so.

At the European Union (EU) level, on the 25th March the European Commission published an updated guidance on the screening of FDI.

The new guidance is the EU’s support to the use and adoption of Member States’ screening mechanisms. It provides clarity on foreign direct investment screening before the new EU FDI Regulation enters into application, as well as extra restrictions to capital movement from third countries. No new rules are added, but the guidance enables full use of existing ones.

Given the potential impact that these policies will have on European companies – both in their EU and China operations – it is key for them to have a clear understanding of both the current landscape in terms of Chinese FDI in Europe and the recent measures taken at the EU level. The impact of the increased scrutiny on FDI in the past year already shows in the most recent figures:

This graph shows the percentage of Chinese FDI in the EU-28 by country group 2010-2019. We can see that the percentage of investment in France, Germany and UK has been declining for 3 years and Northern Europe took the lead in 2019.

Q1 2020 was one of the lowest quarter of the past 5 years for Chinese FDI transaction trends in Europe. Besides the announced FDI screening methods, other reasons also limited the development of Chinese investment in Europe. Especially after the COVID-19 outbreak, many firms have been more critical on accepting Chinese investment.

This table shows the biggest transactions happening between China and EU in 2019. Greenfield investment takes only 1/10 among these largest transactions. Most investments happened to existing organizations through mergers and acquisitions (M&A). Although M&A takes the largest part of the Chinese FDI in Europe, the announced outbound M&A in 2019 are still at a 10-year low.

It is likely that alternative channels beyond equity investment will be scrutinized even more closely in the future. For Chinese companies wanting to invest in Europe, or European companies wanting to attract overseas investments, addressing the issue in a timely and effective manner will help avoid knee jerk reactions from the national security community and other domestic interest groups.  Working together with a local agency with high-level government connections in both China and the EU can make sure the door stays open for collaborations.

The transition phase of FDI Screening Regulation will enter into force in 11th Oct 2020. How will the trends develop later this year? Will the policy influence your financing process? For a detailed breakdown of the new EU FDI Regulation and the recently published guidance, or for more information about our services facilitating FDI in the EU, please do not hesitate to contact us at: shanghai@dr2consultants.eu