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New era of Chinese FDI in Germany: Potential tightening of investment screening
Research & Advisory / 6 July, 2020
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Master of Finance Class of 2016
Kuang is currently working as Assistant Manager in Deal Advisory M&A at KPMG AG, focusing on cross-border M&A transactions between China and Germany. Before joining KPMG, he studied the Master of Finance at Frankfurt School with a focus on corporate finance.

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Chinese foreign direct investment (FDI) in Germany faces stiff headwinds

Chinese investors seeking to invest in Germany are facing several major challenges. These include the negative economic impact on their own business, as well as the travel restrictions enacted due to the Covid-19 outbreak. In addition, concern among German authorities that foreign investors may try to take advantage of a temporary weakness in German companies is increasing, especially those regarded as “hidden champions”—small or medium-sized firms which possess core or dual-use technologies or enjoy dominating market positions. Furthermore, the Foreign Exchange Control in China creates great amount of uncertainty, presenting a significant disadvantage to mainland Chinese investors trying to compete against other bidders for German assets, especially in insolvency proceedings. Consequently, the volume of Chinese FDI in Germany has declined by more than 30% in 2019 YoY. This is likely to continue and may even accelerate this year.

European Union (EU) level of investment screening

On 25th March 2020, the European Commission issued guidelines to ensure a strong EU-wide approach to foreign investment screening in a step towards protecting security and economic sovereignty. Germany needs to reevaluate its existing protocols for reviewing foreign investments accordingly. Consider, for instance, a German acquisition target which has locations in other EU member states. In such a scenario, Chinese investors will be required to obtain approvals from the European commission for the envisaged acquisition.

Upcoming changes in German regulation for reviewing foreign direct investment

Due to the new guidelines, the German Federal Minister for Economic Affairs Peter Altmaier presented a draft bill which aligns the German investment screening process with EU Regulation 2019/452. The bill contains the following stipulations:

  1. Extended application area: Besides security interests of the Federal Republic of Germany, possible threats to public policy or security of another member state of the EU or in relation to projects or programs of union interest within the meaning of Art. 8 of Regulation (EU) 2019/452 will be relevant for the decision whether an invest might be prohibited;
  2. Expanded criteria for prohibition: An anticipated threat to public order or security is sufficient to restrict or prohibit an intended investment;
  3. Invalidity of all transactions by default: All legal transactions subject to reporting requirements shall be null and void until the review process is completed;
  4. New Point of contact: Establishment of a contact point in the Federal Ministry for Economic Affairs and Energy (BMWi).

Challenges always come with chances — New opportunities

Since the time I wrote my master thesis during my Master of Finance of studies about cross-border transactions between China and Germany at Frankfurt School, I have been a careful observer and facilitator Chinese FDI in Germany. Despite the notable obstacles, the inclination of Chinese investors to seek direct investment in Germany persists, as the need for advanced know-how, access to European customers and controlled oligopolistic markets still play a vital role in their overseas expansion strategies. In addition, collaborations between the two countries will only continue to strengthen, as China remains one of Germany’s largest export markets. Current difficulties have forced both economies to devise creative solutions and seek out new opportunities, such as saving insolvent companies, promoting R&D collaborations with German companies and institutions as well as jointly establish sales and production in China. The Covid-19 outbreak has served to highlight just how effective they are in fighting global problems. With more Chinese investors conducting overseas acquisitions out of genuine interest and rational strategic considerations, German entities will seek to add greater value by partnering with Chinese enterprises.

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