Monday 16 July 2018 12:33 pm | Updated: Friday 24 May 2019 7:50 pm

China shifts investment focus from North America to Europe

China is shifting its investment focus away from North America and onto Europe, as trade policies and political change force a shift in East-West relations.

In the first six months of 2018, foreign direct investment (FDI) from China into Europe reached $22bn ($16.63bn), compared with just $2.5bn in North America.

In the first six months of 2017, Chinese FDI in North America was valued at $24bn. However, since then a series of regulatory changes in China and an escalating trade war with the U.S. has led to a 92 per cent fall in investment within the space of 12 months.

By contrast, European inflows from China are on the rise, with Sweden, the UK, Germany and France proving to be the most popular locations for Chinese money in 2018 thus far. Approximately $3.6bn was invested by Chinese companies in Sweden during the first six months of this year, while $1.6bn was invested in the UK, $1.5bn in Germany and $1.3bn in France.

The figures were released by global law firm Baker McKenzie and highlight the economic impact of recent policy divergence.

"The scale and speed of the diverging trends revealed by these figures is remarkable," said Thomas Gilles, chair of Baker McKenzie's EMEA-China Group. "At the same time, no-one should be surprised by the direction of travel – China is actively courting the EU with offers of reciprocal market access in an attempt to show foreign investment is not a one-way street, while trade relations with the US continue firmly on a downward path."

This geographic shift has coincided with a change in Chinese investment allocations. The real estate and hospitality sectors no longer hold the top spot in Chinese FDI, while “real economy” sectors such as automotive, health and biotech, and consumer products and services are growing in popularity.

“China plays a vital role in driving the global economy and its clear outbound investment is continuing at a more measured and sustainable pace, even if the geographic mix is changing," said Danian Zhang, chief representative of Baker McKenzie's Shanghai office. "What is important for Chinese investors is that the deals that do progress involve real economy sectors with sound business planning and objectives, that can be operated in a safe business and regulatory environment. It is normal that there is a mix of buying and selling activities for outbound investment projects as corporate health after all requires acquiring as well as disposing of assets."

As well as reducing investments into North America, Chinese companies have also been divesting their existing assets at an “unprecedented pace”, with Baker McKenzie suggesting that several prominent investors have been “forced to sell holdings as part of a financial clean-up and tightening campaign back home in China”.

There were a total of $9.6bn of completed divestitures in North America by Chinese firms in the first half of 2018, with another $4bn pending. Almost $1bn of European assets were sold in 1H 2018, with another $3bn pending.

According to Baker McKenzie, there is currently more than $20bn in pending M&A transactions in Europe, with just $2.5bn pending in North America, suggesting that these investment trends are set to continue for the rest of the year.