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Business trends

Chinese dealmakers pivot to Europe amid US scrutiny

Buyouts in America tumbled 66% while European investment jumped 82%

Chinese automaker Zhejiang Geely Holding Group aims to tap Daimler's advanced battery technology through its purchase of nearly a 10% stake in the German automaker. (Photo by Wataru Kodaka)

HONG KONG -- Chinese corporations looking for acquisitions have turned their attention to Europe as greater government restrictions in the U.S. close the door to deals there.

Last year, Chinese investment in U.S. companies fell to $3 billion, 65.8% lower than in 2017 and down 95% from a peak in 2016. M&A activity in Europe shot up 81.7% to $60.4 billion, according to data compiled by Mergermarket.

Overall, outbound investments by Chinese enterprises dropped 45.1% to $108.2 billion from 2017. Energy, mining and utilities, as well as the technology and consumer sectors, attracted the most investment.

Analysts believe that Chinese investors are shifting their money to safer locations, as they anticipate a drawn-out trade war between China and the U.S.

"While in the past [Chinese investors] would go to the U.S. for technology, now they are identifying opportunities in Japan and Korea for technology in the semiconductor and electronics industry, and Europe for industrial and robotics technology," said Jane Jiang, a Shanghai-based partner at law firm Allen & Overy.

While China-affiliated companies had been active acquirers of American technology businesses for years, the administration of U.S. President Donald Trump has taken a more hostile stance toward the practice. It has imposed tighter rules and blocked several high-profile deals on national security grounds.

In November, the U.S. government enforced a tougher law on foreign investment in 27 sensitive sectors, including telecommunications, semiconductors and aircraft manufacturing. Many of these industries are included in Beijing's "Made in China 2025" initiative, a national strategy to boost advanced manufacturing and reduce dependence on imported technologies.

But even before that, a number of Chinese takeovers in these key industries fell through. Early last year, Xcerra, a U.S. semiconductor company, called off its sale to a Chinese investment company backed by state-owned Sino IC Capital, saying that regulatory approval was "highly unlikely." In March, the Trump administration rejected Singapore-based chipmaker Broadcom's takeover of Qualcomm on worries the deal would erode America's lead in mobile technology and give China the upper hand.

Meanwhile, Chinese investment in Europe surged last year as Beijing's relations with Washington soured.

Portugal has surpassed Hong Kong as the top target of Chinese acquisitions, with deals there totaling $27.4 billion in 2017, according to Mergermarket. The amount was boosted by a $10.8 billion offer by state-owned Three Gorges for a controlling stake in Portuguese energy unit EDP-Energias de Portugal. But the deal's closure has dragged into 2019 because of regulatory hurdles, the power company's chief executive told Reuters in December.

Finland, the U.K. and the Netherlands were among the top five overseas destinations for Chinese investment in 2018, the data shows.

Chinese companies have bet on industrial and consumer names in Europe, with information and communications technology companies gaining traction, according to a report by Paris-based investment bank Natixis.

But state leaders in Europe are growing concerned by the influx of Chinese money, especially when it involves key industrial technologies.

In August, the German government vetoed the takeover of Leifeld Metal Spinning by Chinese nuclear equipment maker Yantai Taihai Group on national security grounds. Leifeld produces high-specification metals for nuclear and other applications. But Berlin gave the green light to Chinese automaker Geely's purchase of a stake in Daimler after a lengthy examination.

Still, European policy makers remain wary of local companies' increased Chinese exposure. In November, the European Union agreed on rules for establishing a system that would standardize national screenings of foreign investments across the bloc, especially ones from China.

Despite the greater scrutiny, Europe remains an attractive place for Chinese companies to invest amid a slowing domestic economy and rising financing costs elsewhere.

"The EU has now stood out with the lowest cost for finance compared with the U.S. and emerging markets," the Natixis report said.

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