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A China Business Law Journal survey of law firms around the world shows a protracted US-China trade war and a bevy of international and domestic political developments have dealt a blow to Chinese outbound investment. Mithun Varkey reports

Chinese business have become more selective and cautious about their investment in light of increasing economic and geopolitical risks around the world, which have led to a decline in outbound deal-making.

Chinese outbound investments fell 10% (US$143 billion) in 2018, according to data from China’s Ministry of Commerce, while an Ernst & Young report from August this year noted that overall outbound investment in the first half of 2019, at US$54 billion, was down 8% year-on-year.

“Outbound Chinese investment has been slowing considerably this year,” says Ulrike Glueck, managing partner of CMS Law in Shanghai. “So far, we have not experienced much impact form the trade war on our business. However, this is probably due to the reason that lawyers’ work is always at the end of the business pipeline, and existing projects are not impacted.

“However, due to the trade war and other reasons, globally, GDP growth is shrinking and some countries are already moving towards a recession. Thus, I expect 2020 to become a more difficult year,” says Glueck.

Rising protectionism

While there is a consensus about a slowdown in China-related work across regions, Europe seems to have seen the most impact. The effect of the trade war has been compounded by a surge in protectionism and increased scrutiny of inbound deals in Europe.

“The trade war has added additional uncertainties for Chinese investors … it began at a time where European [including German] legislators tightened their thresholds for approving foreign investment, in particular with regard to high-tech industries,” says Mark-Alexander Huth, a partner at German law firm Schulz Noack Bärwinkel (SNB).

Outbound“To make things worse,” he adds, “the Chinese foreign exchange regime added further difficulties to Chinese outbound investments with regard to their financing. This all seems to have had a negative impact on the motivation of Chinese investors, and resulted in an immediate slowdown of German-Chinese M&A transactions this year.”

This view is echoed by Zhu Yifan, a senior associate at Germany-based law firm Noerr. “We have recently seen a slowdown of outbound Chinese investment,” says Zhu. “One of the reasons is that Chinese investors are getting more strategy-oriented and thinking more cautiously and rationally about their outbound strategies; another reason is that the [central] government is carefully adjusting its management of cross-border capital flows to respond to changing economic conditions.

“However, it also plays an important role that the German government is looking more cautiously on foreign direct investment [FDI] and has tightened the applicable regulations this year again,” he says.

“The rules governing Chinese M&A in the EU are changing,” notes Zhang Shaohui, a partner and head of the Europe-China desk at Dentons Luxembourg, adding that “legal risks and challenges for Chinese investment in the EU have increased significantly and are threatening the security of those investments”.

“In Europe, due to the rapid growth of Chinese investments, especially because of the particular focus on strategic sectors, the role of state-owned enterprises [SOEs], and the uneven playing field for foreign investors in China … Chinese investment is seen as a challenge,” says Zhang. “In certain circumstances, it is even viewed as a potential threat to the EU. Consequently, the EU has now decided to increase its scrutiny of FDI from third countries, including China, by establishing a screening framework at an EU level.”

Huth says another factor that is affecting Chinese investment is historically low interest rates in Europe, which has increased the prices of strategic assets.

Quick on the feet

Hermes Pazzaglini, a Shanghai-based partner of Italian law firm NCTM, while admitting to the trade war’s significant impact on their Chinese business, is more optimistic. He believes that “the [central] government will restructure the PRC economy to find alternative markets within or outside China”.

“We are also confident that the current trade war with the US can become an opportunity to develop the Belt and Road Initiative and strengthen relations with the EU,” he says.

Ashurst’s Germany-based partner, Matthias von Oppen, is another lawyer who believes that Chinese investments “will continue to play an important role in the future because the number of investment transactions remains relatively large”.

“The slower growth of the Chinese economy may further drive the need to find new growth opportunities through acquisitions or joint ventures overseas,” says von Oppen. “Although there is capital control, strategic outbound investments are supported by the [central] government. China’s enterprise outbound investment regulations, which took effect in March 2018, can simplify and formalize administrative procedures for FDI.

“As the ‘Industry 4.0’ and ‘Made in China 2025’ initiatives show, German industry is particularly attractive for China.”

SNB’s Huth also expects the buzz around Industry 4.0 and artificial intelligence (AI) to be drivers for China-EU deals.

Jaap Jan Trommel, managing partner of Dutch law firm NautaDutilh, says, “Chinese investors are inclined to evolve from massively large-scale deals to quality-oriented growth in the coming years.

“We are aware that China has been one of the world’s largest outbound investors and we do not think that Chinese investors will stop with their overseas expansion,” says Trommel. “Now is likely to be the phase that Chinese investors and the government reassess their strategies and policies of the outbound investment.”

He says there is Chinese interest in sectors that The Netherlands is famous for, such as agriculture and food, energy and natural resources, healthcare, technology, media and telecommunications, and transport and logistics.

Antonio Sánchez Cerbán, a partner at the Beijing office of Spanish law firm Uria Menendez, says, “Energy, particularly renewable energy, is the sector attracting the most interest from Chinese companies in Spain, Portugal and Latin America this year.

“Agribusiness and infrastructure are the other two sectors where we have detected a heightened appetite in Chinese investors,” he says.

Given the Chinese focus on the technology sector, Israel is a market of great interest for Chinese businesses, and is seen as an alternative source for cutting-edge technologies. Israeli firms continue to see enquiries from Chinese companies keen on entering the country’s vibrant technology sector.

“We’re seeing increased Chinese interest in the Israeli tech sector as tensions rise between China and the US,” says Eli Barasch, a partner at Israeli law firm Gross Kleinhendler Hodak Halevy Greenberg Shenhav & Co. (GKH).

He says that even though Israel doesn’t have a comprehensive foreign investment regulatory scheme like the US, EU and Canada, Chinese investments into the country are increasingly at the risk of restrictions under pressure from the US administration.

“However, Chinese investors face uncertainty due to reports that Israel will soon adopt a foreign investment regulatory regime that could restrict Chinese investment in Israel,” says Barasch. “Reports indicate that the Trump administration is pressuring Israel to adopt a foreign investment regulatory regime, which would apply to all foreign investment but is clearly aimed at China.

“China has come to see Israel as an alternative source for cutting-edge technologies, and the US sees that too, and reports indicate that it is using its influence over the Israeli government to push Israel to restrict Chinese investment and technology transfer.”

Simon Weintraub, a partner at Israeli law firm Yigal Arnon & Co., says there has been a definite decline in Chinese outbound investment into Israel in 2019 because of capital control restrictions in China, and, “because of the trade war with the US, as most Israeli companies, especially in the technology space, have deep connections to the US markets as well as a US investor base.

“We are still receiving some requests for investments into Israeli companies,” says Weintraub. “Many have come from Chinese corporates, many of which have funds located offshore. We are also being approached regarding potential business collaborations/JV arrangements with Israeli companies.”

OutboundHe says most of the interest is coming in sectors such as medical technology, agriculture technology and automotive technology.

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