China is firmly established under the hood of Europe

China markedly reduced foreign direct investment in 2022. Not by choice: Foreign regulators have become much tougher when it comes to attempts by Chinese companies to acquire assets abroad. First of all, infrastructure and high-tech. But it seems that China has managed to find something very useful in this. Companies in the country, according to the report on China’s foreign direct investment from Rhodium Group and Merics, decided to prepare themselves an ideal springboard for the subsequent conquest of the electric car market in Europe – the second largest in the world after China itself.

The Chinese economy is going through difficult times. On the one hand, it is under pressure from the consequences of the COVID-19 pandemic with its endless lockdowns in 2022, and on the other hand, the deterioration of relations with Western countries. Considering all this, the drop in the volume of direct foreign investments of China at the end of the year by 23% at once is not at all surprising, it is noted in a joint report analytical companies Rhodium Group and Merics.

Investments by Chinese companies abroad fell to €111 billion, the worst figure since 2014. Approximately the same sharp decline in Chinese investment in Europe – by 22%, to € 7.9 billion, which was the minimum over the past decade.

However, as the authors of the report note, the point is not so much that China has nothing to spend, it has simply become much more selective. Yes, and European regulators are very cautious.

European authorities, fearing that Chinese investment poses a threat to national security, have become much tougher in responding to Chinese attempts to acquire any of the European assets in the technology sector. So, according to Rhodium and Merics, at least 10 out of 16 investment deals between Chinese and European companies were not completed in 2022 due to objections from the EU and UK authorities.

This resulted in two trends at once. Firstly, the volume of M&A transactions in Europe involving Chinese companies fell to a minimum since 2011 – to €3.4 billion. Secondly, for the first time in 20 years, this type of Chinese investment in Europe has given way to investments in new production projects.

And now the most important thing: if in 2013 the lion’s share of Chinese investment in Europe was in infrastructure projects, real estate and resource extraction, then in 2022 China invested mainly in battery factories for electric vehicles.

The automotive sector accounted for 53% of total investment, an unprecedented concentration of investment in one sector since 2013. And investments in the supply chains of the electric vehicle market have grown about 40 times compared to 2016, from $605 million to more than $24 billion.

At the same time, China invested most actively in 2022 in countries that are the largest automotive markets in Europe: the UK, Germany, France and Italy.

“China’s interest in Europe, the world’s second largest market for electric vehicles after China … is not surprising,” the authors of the report note. “There is a relatively good infrastructure for charging (electric vehicles.— “b”) and generous public procurement subsidies approved under the broader Green Measures Program to reduce carbon emissions from road transport.” That’s just the European authorities sought to do everything so that the promising market for electric vehicles is not captured by Chinese manufacturers and suppliers.

Kirill Sarkhanyants