Jan Holthuis
Partner | Lawyer
Send me an e-mail
+86 (0)21 61730388
Chinese Outbound Direct Investment (“ODI”) has experienced a steady growth year after year, with a massive peak in 2016. However, in 2017 there was a big turnaround. Chinese ODI in non-financial sectors decreased by 33.7% compared with the previous year, from USD 181.2 billion to USD 120.1 billion.
Click here for a graph on Chinese ODI in non-financial sectors (2006-2017).
Figures gathered on Chinese ODI in 2018 suggest that there will be another serious decline this year (estimated about 20-25% as compared to the previous year). This is for a large part due to the trade war between China and the USA, but investments in European countries have also decreased. There are 3 main reasons for this decline:
1. Chinese regulations
Since November 2016 the Chinese government has been increasing its scrutiny of outbound investment which finally led to implementation by the National Development and Reform Commission (“NDRC”) of the regulatory pathway for ODI transaction approval on August 18, 2017. It is called the The Opinions on Further Guiding and Regulating Outbound Investment. The pathway classifies outbound investment into three groups: encouraged, restricted and prohibited transactions. This system finds its inspiration in the Negative List for foreign direct investment.
The increased control on ODI in China has the aim to curb unwanted or illogical investments overseas, but it of course also has influence on regular outbound investment.
2. Capital availability
Partially due to the large capital outflow of the years 2014-2016, Chinese liquidity is not as stable as it used to be. Even though financial reserves are going up since 2016 it has not yet reached the levels of a few years ago. Meaning Chinese parties simply have less assets to invest any project, both in China and abroad.
3. Overseas regulatory changes
One of the consequences of the regulations mentioned above was that, in 2017, Chinese ODI consisted of a larger part of investments by state-owned enterprises (“SOEs”) as the scrutiny from the Chinese government was mostly focused on capital outflow in the private sector. This large share of investment by SOEs is boosted by some very large transactions, such as the acquisition of Syngenta by ChemChina and by the implementation of the Belt and Road Initiative (“BRI”). Most investments which can be grouped under the BRI-umbrella are SOE funded investments. These and other developments have caused countries like the USA, France, Germany, The Netherlands and Italy to reevaluate their FDI screening systems in the last 12 to 18 months. The increased scrutiny on FDI (from China) in these and other (mostly developed) economies are mainly focused on high-tech sectors with the aim to protect national security.
The European Union even set out a bloc wide strategy to insure that FDI does not jeopardize national security or public order in its Member States. On September 13, 2018 the European Commission published a plan that consists of 3 parts:
These developments are not solely meant for the screening of FDI from China of course, but since special attention is paid to investment from SOEs in sectors like technology or infrastructure, it is sure to have some effect on Chinese investment in the EU.
Finally, it is expected that none of the three developments described above will be turned around soon. Therefore, it is reasonable to assume that Chinese ODI will not see a significant increase in the near future. However, it is not all bad news, as both the national and international legislation and screening is meant to guarantee an increase in quality of Chinese investment, rather than an increase in quantity.
Do you want to receive news and updates directly in your mailbox? Subscribe to our newsletter. Or follow us on LinkedIn or on WeChat.