Since the beginning of the 21st century, China has embraced a set of initiatives and policies – promoted by the government – to encourage its companies to invest abroad. Called the “go global” policy, it was the beginning of China paving the way to upgrade its economic system. The main goal was to gain access to new technologies that could stimulate innovation at home to become more competitive abroad.
Looking at China 20 years later, it can be said that the “go global” push worked. Before most people realized the extent of what was happening, China had become a leading actor in some of the most crucial and innovative sectors, such as the production of green technology and electric vehicles. These two sectors are already crucial and will become even more crucial in the coming future.
Europe has played a prominent role in the economic rise of Beijing, being one of the primary destinations of Chinese foreign direct investment. Specific factors drove Beijing’s choice to invest in Europe, such as the deindustrialization trend embraced by the continent in the current century and, particularly, the opportunity to acquire and learn from European world-famous brands and technologies. Starting from 2000, Chinese FDI in Europe has experienced astonishing growth, reaching its peak in 2016 with 37.3 billion euros invested in that year alone.
Since 2016, however, Chinese FDI in Europe undertook a declining trend that is still ongoing. According to the recent report by Rhodium Group and MERICS, in 2022, Chinese FDI in Europe reached a new decade low of 7.9 billion euros, confirming the negative trend of the previous years. This means that the level of Chinese FDI in Europe today is 83 percent below its 2016 peak.
The Great Retreat
What we are witnessing in Europe reflects a broader trend affecting both China and the world. The COVID-19 pandemic and escalating geopolitical tensions – first of all, the war in Ukraine – have dramatically contributed to reducing the flow of global cross-border investment. According to China’s official statistics, during the last year, total non-financial outbound investment declined by 23 percent; in 2022, it dropped to the lowest value since 2014, registering a total of 111 billion euros. This same pattern was followed by China’s total outbound mergers and acquisitions (M&A) activity, which has also drastically diminished.
This trend is also motivated by the growing spread of anxiety about the political implications of a too-deep economic integration with China. The European Union, accordingly with the United States, has recently switched to a much more cautious approach concerning Beijing. Since 2019, the EU has labeled China as a systemic rival, with the consequence of imposing stricter investment screening rules for Chinese companies investing in European countries.
According to the Rhodium Group and MERICS report mentioned above, at least 10 of 16 investment transactions pursued in 2022 by Chinese entities in the technology and infrastructure sectors have been stopped, mainly due to objections raised by authorities in the United Kingdom, Germany, Italy, and Denmark. In specific strategic sectors, such as semiconductors, Chinese investments are being considered a threat to security. As a consequence, stricter controls aim at reducing the flow of sensitive technological know-how to Beijing. Increased European scrutiny of deals is coherent with a broader trend gaining momentum among countries on the western front. For instance, the Committee on Foreign Investment in the United States, the body in charge of screening transactions by non-U.S. companies, has recently become more severe with Chinese acquisition proposals concerning U.S. technology assets.
Along with the changing attitude toward China, there have also been crucial factors related to China’s domestic environment. Under Xi Jinping’s leadership, since 2016, China has gradually re-introduced stricter control on outbound capital flows. This was done to limit capital and currency outflows, forcing domestic households and businesses to reinvest their money in the domestic economy rather than in foreign enterprises. At the same time, the zero COVID policy embraced by China for almost three years, from early 2020 to late 2022, also contributed to a reduction in outbound FDI, by hindering cross-border travel and thus deal-making activities.
Moreover, intense competition for global assets in a booming M&A context likely disadvantaged Chinese buyers due to their limited international experience and emerging regulatory concerns.
Less Is More?
Nonetheless, the decline isn’t the only relevant aspect of Chinese FDI in Europe. There has also been a profound shift in the nature and target of the investments that are being made. After years of rapid growth, the levels of Beijing’s greenfield investments in Europe have overtaken M&A transactions for the first time in 20 years, reaching 4.5 billion euros (57 percent of the total). There is a two-sided force behind this significant change: On one side, it was pushed by a substantial expansion of greenfield investment. On the other side, Europe experienced a radical decline in Chinese M&A activity: in 2016 such deals amounted to 45.9 billion, while in 2022 their value dropped to just 7.9 billion.
The shift toward greenfield investment was driven mainly by a few large-scale projects, concentrated in the automotive sector. Chinese battery giants – including CATL, Envision AESC, and SVOLT – invested in building battery plants in Germany, Hungary, the U.K., and France, according to the report.
China’s leadership in the green economy energy sector has developed rapidly over recent years. For instance, with regard to EVs, Beijing is a top producer. In 2022, 6.7 million units or 64 percent of global new energy vehicle production occurred in China, which also accounted for 59 percent of the 10.52 million global NEV sales. Nonetheless, the greatest part of the sales happened within China: in fact, the Chinese internal market still accounts for around two-thirds of EV sales. Here comes the crucial role of Europe: It is the second biggest market for electric cars, and it is increasingly committing to the green transition and decarbonizing road transportation.
Europe’s appetite for EV batteries is huge, but the same cannot be said for its production capability of this crucial input. Even as Europe offers good charging infrastructure and generous government subsidies to purchase, it lacks major battery firms able to meet the market demand.
In the last decade, Beijing has put a lot of effort into upgrading its position in the global value chain and reshaping its image to the world, from the factory of the world for cheap and simple products to a modern and technologically advanced actor, selling high value-added products. Affirming its role as a global leader in the green energy sector and in the production of EVs is part of the re-branding strategy of Beijing.
Consistent with this purpose, Europe represents the perfect channel to internationalize Chinese high-skill production in the green energy sector. It is a great market with fruitful long-term prospects and, up until now, a much more open market to Chinese investments compared to the United States. The 2022 U.S. Inflation Reduction Act (IRA) links EV tax credits to batteries free from components produced by entities of concern, such as China. This has drastically curtailed Chinese EV companies’ investments in the United States.
Given all these conditions, we should not be surprised to see further Chinese investments in the European green sector. Nonetheless, the geopolitical context makes it unpredictable whether Europe, as a response to security concerns, will improve even stricter screening of Chinese companies’ investments.