Chinese companies' cash heading for Europe, North America drops to five-year low as capital controls, scrutiny abroad puts the brakes on investment

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Chinese companies invested just US$12.3 billion in the advanced economies of Europe and North America in the first half of the year, the lowest amount since 2014 and almost a fifth less than last year, according to the law firm Baker McKenzie.

The decline has been almost entirely attributed to state-owned firms turning their backs on both regions, a research report the firm released on Thursday found. Private companies accounted for 94 per cent of the total spent in the first six months.

China’s overseas spending, once rampant, has been curbed drastically by the introduction of strict capital controls intended to stop money leaving the country.

At the same time Chinese companies have faced increasingly tough scrutiny abroad, particularly under US President Donald Trump’s administration, with many major deals being rejected on national security grounds.

North America did see an overall increase of 19 per cent in Chinese investment, but it was largely because it followed 2018’s exceptionally low base. Moreover, the increase was entirely in the US, as investment in Canada remained flat.

By the end of June, there had been US$3.3 billion in foreign direct investment (FDI) transactions made by Chinese firms in North America and US$9 billion in Europe, the report showed.

It was a far cry from the same period in 2017, when Chinese investment peaked in Europe at US$53.9 billion, and the second half of 2016 when US$28.4 billion poured into North America.

Activity quickly levelled off in both regions after two mega deals kicked off the year. They were the Chinese sportswear maker Anta’s US$5.2 billion acquisition of Finnish sports brand Amer, and the textile giant Shandong Ruyi’s purchase of Invista’s apparel and advanced textiles business for an estimated US$1.6 billion, according to the report.

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Both Anta and Ruyi are privately owned companies headquartered in China.

“As capital controls remain firmly in place at home amid macroeconomic pressures and political and regulatory scrutiny abroad at elevated levels,” the report found, North America and Europe are not the only regions seeing declines in Chinese investment.

China’s global outbound investment continued to fall in the first half of the year, with newly announced merger and acquisition transactions down 60 per cent to US$20 billion, it said.

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Direct investment by state-owned companies in the EU and North America has dropped significantly. In Europe, such investment contributed to just 6 per cent of the total, having accounting for more than half of all Chinese investment in the previous five years. In North America, the share of state-owned investment has dropped to 8 per cent in the first six months, the report said.

The plunge in FDI backed by state firms reflected Beijing’s tight grip on foreign spending to safeguard the country’s foreign exchange reserves ” a safebox that is key to China’s confidence in its trade war with the US, said Iris Pang, an economist at ING Bank NV in Hong Kong.

“Probably the state companies received window guidance that asked them to slow down the cross-border investment projects, because the FX reserve level has always been considered as a confidence barometer,” she said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

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