EU-China FDI Monitor

Transcription

1 EU-China FDI Monitor 3Q4Q 214 Update: Public Version This report was produced for the European Commission under the China Observatory project. See final page for full disclaimer. 1 East 4 th Street, Suite 361, New York, NY 116 Tel: Fax: Web: Address: 5 Columbus Circle, New York, NY 119 Tel: Fax: Web: 1

2 Foreign Investment in China: Global Trends Foreign Direct Investment Flows in China, Monthly FDI flows in USD million*, percent year-on-year growth 35, MOFCOM, Utilized FDI (Left Axis) SAFE, Inward FDI Balance in BOP (Left Axis) 3, Utilized FDI % YoY Growth, 3mma (Right Axis) BOP FDI % YoY Growth, 3mma (Right Axis) 25, 2, 15, 1, 5, Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 6% 5% 4% 3% 2% 1% % -1% -2% -3% -4% After a weak first six months, official Chinese data show a recovery of inward FDI flows in the second half of 214. Data on utilized FDI provided by the Ministry of Commerce (MOFCOM) shows China attracting $12 billion in 214, a slight increase compared to the previous year (+2%), following two years of negative growth. Data compiled by the State Administration of Foreign Exchange (SAFE) for Balance of Payments (BOP) statistics (which differs from MOFCOM statistics in several ways, most importantly in the accounting of reinvested earnings and other intra-company flows) show a similar downward slope in H1 and recovery in H2. Source: Ministry of Commerce (MOFCOM), State Administration of Foreign Exchange (SAFE). *Monthly BOP figures are derived from quarterly figures. FDI growth was slow last year but China remains an essential place for foreign firms. The negative sentiment that triggered large-scale outflows of capital from China in H2 has not yet significantly affected long-term real economy investment. Despite official ambition to see outward FDI exceed inward FDI, and state media and government think tanks joining that chorus, we have not yet reached that tipping point. Inward FDI continued to outpace OFDI flows by any available measure. MOFCOM data shows $12 billion of utilized inward FDI and $116 billion of outward FDI for 214. The preliminary BOP data show an even greater FDI surplus once reinvested earnings and other FDI-related capital inflows are properly accounted for ($199 billion, the second highest surplus on record). Three consecutive years of flat inward FDI flows seem to have tempted Chinese leaders to argue that FDI stagnation is a new reality that comes with China s transition to middle-income status. It is important for China s economic partners to point out that it is not necessarily middle-income status that leads to FDI stagnation, but the outdated policy approach of restricting foreign investment in many sectors. Openness and high levels of foreign investment are vital components of successful advanced economies and thus China cannot lean back and be satisfied with a decade of zero FDI growth. Instead, it needs to actively support foreign inflows through a more open policy framework and other measures to level the playing field. 2

3 EU Investment into China: Transactions Data EU M&A Transactions in China, Quarterly number of transactions, investment value in USD million Q1 Investment in M&A Deals (Right Axis) Number of M&A Deals (Left Axis) 211 Q2 211 Q3 211 Q4 212 Q1 Source: Rhodium Group EU-China FDI Monitor. 212 Q2 212 Q3 212 Q4 213 Q1 213 Q2 213 Q3 213 Q4 214 Q1 214 Q2 214 Q3 214 Q4 1,6 1,4 1,2 1, Starting with the next Flash Report, this section will comprehensively review trends in European FDI transactions into China including industry and geographic trends. Due to the transitional stage of the database, this issue will be limited to a brief review of M&A patterns and their policy relevance. Aggregate value of completed acquisitions by European firms in China dropped sharply from an average of $3 billion per year in to less than $1 billion in 211 and 212. Stable levels of global M&A into China in that period suggests that this downturn was mostly a result of conservative capital spending and low risk appetite of European multinationals as a result of the crisis. In 213 and 214, European M&A spending in China has bounced up again, albeit it hasn t reached pre-crisis levels yet. 3

4 EU Investment into China: Transactions Data EU M&A Transactions in China by Industry, Quarterly investment value in USD million 1,6 1,4 1,2 1, Energy 213 Q1 213 Q2 Source: Rhodium Group EU-China FDI Monitor. Consumer Products 213 Q3 213 Q4 Industrial Machinery & Equipment Financial Services 214 Q1 214 Q2 Agriculture and Food 214 Q3 214 Q4 Health and Biotech Materials The industry composition of M&A transactions confirms that European firms are mostly trying to get access to sectors with high growth potential under China s new growth model: Consumerrelated assets (L Oreal stake in Magic Holdings); healthcare and biotech (Bayer s acquisition of Dihon Pharmaceuticals) and other advanced service operations (Skyscanner s takeover of Youbibi). Notably, we also recorded the first major financial services transaction since more than four years, a 5% stake in Tianping Auto Insurance by French insurer AXA ($63mn) in Q These patterns confirm the appetite of European firms for modern services assets, reinforcing the need for EU leaders to improve market access and level the playing field for foreign firms particularly in those areas. 4

5 Chinese Outward Investment: Global Trends Chinese Outbound FDI Flows, Monthly OFDI flows in USD million*, percent year-on-year growth 18, 16, 14, 12, 1, MOFCOM, Non-financial OFDI (Left Axis) SAFE, Outward FDI Balance in BOP (Left Axis) Non-financial OFDI % YoY Growth, 3 mma (Right Axis) BOP OFDI % YoY Growth, 3 mma (Right Axis) 2% 15% 1% Official data on outbound FDI by Chinese firms show the similar recovery seen in inward flows in the second half of 214. Both MOFCOM and SAFE BOP data show weakness in the first months of the year and a strong recovery in the second half. 8, 6, 4, 2, Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 5% % -5% MOFCOM s full-year 214 OFDI figure totals $116 billion, up 1% from the previous year and the largest in history. Full-year figures from SAFE are not available yet, but will likely be lower than MOFCOM s as they factor in reverse flows back into China through subsidiaries. Source: Ministry of Commerce (MOFCOM), State Administration of Foreign Exchange (SAFE). *Monthly BOP figures are derived from quarterly figures. While these numbers paint a very optimistic picture, there are several reasons to be skeptical about their reliability. For one, it now seems to be the official party line to praise OFDI growth as a positive contributor to the global economy, and the full-year number came out at almost exactly the growth rate predicted by MOFCOM at the beginning of the year (1%). The positive OFDI data is in conflict with other measures such as global M&A activity by Chinese firms. In contrast to the 1% growth of OFDI, Chinese global M&A activity dropped 13% year-on-year (largely due to a decline in energy and materials investments). While there are some commercial factors to explain this discrepancy, it is likely that some of the OFDI outflows recorded in official data have not actually ended up in FDI projects. This is particularly plausible in light of China recording the largest capital outflows in history in 1H 214, suggesting that investors were seeking ways to bring money out of the country and switch from RMB to assets denominated in USD and other currencies. One of those ways may have been FDI, particularly in light of recent policy changes that simplified such transactions. 5

6 Chinese Investment in the EU: Transactions Data Chinese FDI Transactions in the EU-28 by Entry Mode, Quarterly number of transactions, investment value in USD million Investment in M&A Deals (Right Axis) Investment in Greenfield Projects (Right Axis) Number of Greenfield Projects (Left Axis) Number of M&A Deals (Left Axis) 213 Q1 213 Q2 213 Q3 213 Q4 214 Q1 214 Q2 214 Q3 214 Q4 Source: Rhodium Group EU-China FDI Monitor. 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, While China s global OFDI was dragged down by a slump in natural resources M&A, Chinese FDI deals in Europe saw strong growth in 214 after a temporary drop in 213. Our database counts 154 transactions in the EU-28 economies with a combined value of $18 billion, a new annual record. In Q4 alone, firms completed transactions worth $7.4 billion (close to last year s total annual value). Greenfield investments remained stable while M&A activity jumped, fueled by large investments from private equity firms and other financial investors. 6

7 Chinese Investment in the EU: Transactions Data Chinese FDI Transactions in the EU-28 by Industry, Quarterly investment value in USD million 8, 7, 6, 5, 4, 3, 2, 1, Transport Source: Rhodium Group EU-China FDI Monitor. Finance and Business 213 Q1 213 Q2 213 Q3 213 Q4 214 Q1 214 Q2 214 Q3 214 Q4 ICT Machinery Health Real Estate Energy Auto Ag and The industry composition of Chinese inward FDI to Europe shows some significant changes in the second half of 214, with important policy implications. Real estate continued to be one of the primary targets in 214 ($2.8 billion), but no major deals were completed in the second half of the year. Energy, on the other hand, surged again in H2 after a period of very little deal flow, but mostly due to a large utility deal (CDP Reti), bringing full-year investment to $3.5 billion. The other large driver of activity in 2H was investments in agriculture and food industries. Previously targeting French vineyards and other small-sized assets, Chinese investors completed deals worth $4 billion in 2H in food distribution/trading (Nidera) and consumer-related assets (Pizza Express). This push goes together with a broader increase of global investments in agriculture and food. Although investments thus far have mostly targeted supply chain and consumer-related assets rather than farm land, it is worth monitoring by policymakers. This trend has sparked public and legislative backlashes in other regions (for example, new legislation to include food in national security screenings in the US following the Smithfield acquisition). A second important trend relevant for policymakers is growing investment in financial services and insurance. Chinese investments increased from virtually zero to $1.5 billion in 214, mostly attributable to Fosun s acquisition of three Portuguese insurance companies. More deals are on the horizon, such as the announced takeover of Delta Lloyd s Belgian banking operations by Anbang. This new trend may require regulators to consider whether they pose potential risks, particularly deals by private equity firms like Fosun that are aimed at accessing capital to fuel investment activities back home and globally. More importantly, for leaders and BIT negotiators, this opens up a new window of opportunity to make the case for a level playing field, as financial services is arguably one of the most heavily restricted sectors for foreign investors in China. 7

8 Chinese Investment in the EU: Transactions Data Chinese FDI Transactions in the EU-28 by Country Group, Quarterly investment value in USD million 8, 7, 6, 5, France U.K. Portugal Netherlands 4, 3, 2, Spain Italy 1, 213 Q1 213 Q2 213 Q3 213 Q4 214 Q1 214 Q2 214 Q3 214 Q4 Germany Source: Rhodium Group EU-China FDI Monitor. With regard to the distribution of Chinese investment in Europe, the United Kingdom and Germany remain the most important regular recipients of Chinese investment. While there were no megadeals, those two economies have attracted a constant inflow of Chinese capital in the past three years. France and Spain are also regular recipients, but at a lower frequency. Outlier countries that are not regular major recipients, but have attracted big deals in 214 include Portugal (Caixa Geral de Depositos insurance assets), the Netherlands (Nidera), and Italy (CDP Reti). 8

9 Chinese Investment in the EU: Transactions Data Chinese FDI Transactions in the EU-28 by Type of Investor, 214 Q3-Q4 Each bubble represents one transaction; size of bubbles represents total value State-owned Firms This chart depicts the landscape of Chinese investors in Europe in Q3 and Q4, along two dimensions: ownership and type of investment. It exemplifies two important trends in 214. Financial Investment = $1 Private Firms Source: Rhodium Group EU-China FDI Monitor. State-owned firms refer to firms that are at least 2% owned by the government, sovereign entities, and central SOE's; Private firms refer to firms with less than 2% ownership by the government, sovereign entities, and central SOE's. Strategic investments refer to those made for the purpose of long-term business development and integration; financial investments refer to those made primarily for financial returns. The four quadrants are categorical and the position of the bubbles is arbitrary. For a detailed explanation of sources and methodology, see methodology paper. Strategic Investment First, while private firms have gained weight in Chinese outbound FDI and now account for the majority of EU transactions, state-owned firms (such as COFCO or State Grid) remain an important part of the OFDI story. This highlights the need to remain focused on related policy areas such as SOE reform or competitive neutrality/state aid. Second, financial investors are emerging as important new players in China s outbound FDI, including both private firms (Fosun, Hony Capital) and state entities (China Investment Corporation). This shows that the government is increasingly willing to allow firms with large pools of money to join the ranks of outward investors, which reinforces a bullish outlook for China s global outbound FDI. 9

10 Disclaimer This material was produced by Rhodium Group LLC for the European Commission under the China Observatory project (215/S ). The information and views set out in this note are those of the author and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of the data included in this study. Neither the Commission nor any person acting on the Commission s behalf may be held responsible for the use which may be made of the information contained therein. Rhodium Group is a specialized research firm that analyzes disruptive global trends. Our publications are intended to provide clients with general background research on important global developments and a framework for making informed decisions. Our research is based on current public information that we consider reliable, but we do not represent it as accurate or complete. 215 Rhodium Group LLC, 5 Columbus Circle, New York, NY 119. All rights reserved. 1