China's outbound investment tanked in the first five months of 2020 due to the COVID-19 pandemic and an across-the-board regulatory shift in most developed markets, according to findings in a recent report by Baker McKenzie and research firm Rhodium Group.

Between January and May, outbound investments from China dropped both in deal count and in value, the report found. Compared with the same period in 2019, new outbound deals announced by Chinese companies were down 88% in total value, at $6.4 billion. Until the end of May, Chinese investors announced an average of 30 outbound deals each month so far this year, just one-third of the average 90 deals every month during 2016-18, the period when China's overseas investment peaked.

Chinese investments into Europe suffered the biggest fall with only $1.4 billion worth of deals announced in the first five months of this year, down a sharp 93% from $19.5 billion last year. Deals into North America were down to $700 million from $6 billion. Chinese outbound investment into the rest of Asia totaled $4.3 billion, a 65% drop from last year.

"In comparison to the boom years, China's outbound investors are simply not in the same position to ramp up overseas buying at the moment," said Frankfurt partner Thomas Gilles, who chairs the firm's Europe, Middle East and Africa-China group.

Gilles said Chinese companies with global ambitions now face a very different environment, largely because of recent changes in foreign investment regimes in several industrial countries.

The Committee on Foreign Investment in the United States, or CFIUS, continues to lead the charge in scrutinizing Chinese investment. A recent example of CFIUS's broad reach under expanded jurisdiction granted by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) came last month when the committee ordered California-based Ekso Bionics Inc., a robotics medical devices manufacturer, to unwind a joint venture in China. The deal, which occurred outside of the U.S., did not have an impact on Ekso's U.S.-based assets.

Paul Marquardt, a Washington, D.C., partner with Cleary Gottlieb Steen & Hamilton, wrote on the firm's international trade and sanctions watch blog that given the existing military application of Ekso's technology, a CFIUS ban would not have been surprising had the deal been a Chinese acquisition of Ekso. "But … the transaction appears to have been far from that and its review potentially signals a significant expansion of CFIUS's asserted jurisdiction," he wrote.

And COVID-19 has not slowed the committee down. "The pandemic may prompt CFIUS to examine health care sector transactions more closely than before," said Rod Hunter, a Washington, D.C., partner at Baker McKenzie and a former CFIUS official.

More are following in CFIUS's footsteps. The pandemic has prompted governments in Europe and elsewhere to tighten foreign investment regulations in an effort to protect strategic industries such as health care from being bought out by foreign interests. In March, Australia announced temporary measures to require all foreign transactions into the country to be subject to government review. France and Spain both lowered thresholds for transactions to be screened, according to the Baker McKenzie report, while others, including the U.K., Sweden, New Zealand and Poland, are currently planning foreign investment review legislation.

As Chinese outbound deals plunged, inbound foreign investment into China came into focus. In the first five months of 2020, newly announced foreign M&As into China totaled $9 billion, surpassing Chinese outbound M&A activity in both deal count and value for the first time in a decade, according to the report.

The report identified technology and financial services as the areas where Chinese assets are attracting foreign interests. German carmaker Volkswagen, for example, recently announced two billion-dollar investments: It spent $1.1 billion to take over control of a joint venture with China's Anhui Jianghuai Automotive Group and is buying a 26% stake in Chinese battery maker Guoxuan High-Tech for $1.2 billion.

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