The mystery of the vanishing Chinese investor


Lucy Fitzgeorge-Parker
Published on:

Why aren’t firms putting their money where Xi Jinping’s mouth is?


For those eagerly anticipating a flood of Chinese investment into emerging Europe, the last few months have brought good news and bad. 

First the good news. Last year, China became the biggest foreign investor in the region for the first time. According to law firm CMS, Chinese firms announced €7.7 billion of acquisitions in central and eastern Europe over the 12-month period. 

Now the less good news. CEFC China Energy’s purchase of a stake in Russian state oil firm Rosneft accounted for more than 97% of that total. In other words, apart from one big ticket deal, a region covering central Europe, eastern Europe, the Balkans and Turkey attracted just €200 million of M&A flows from China. 

Given the hype around Chinese acquisitions in CEE for the best part of a decade, particularly since the launch of the Belt and Road Initiative (BRI), this number is astonishingly low. So what explains the failure of Chinese firms to put their money where their president’s mouth is?

Bankers report that Chinese bidders regularly turn up in M&A processes across the region. Why then do they rarely stay the course?


An obvious explanation – and the one most commonly proffered by sell-side advisers – is the difficulty of marrying Chinese business practices with western-style M&A. Frustrated bankers and lawyers describe lengthy waits for Chinese bidders to navigate bureaucracy back home and frequent communication breakdowns. 

“I was in one situation where we’d do an investor call, we’d hear nothing for four weeks and then they’d come back with a piece of paper that we couldn’t read,” says one CEE banker. 

Advisers say this makes it all but impossible for Chinese firms to participate successfully in auctions. “These are efficient processes where the seller doesn’t have the patience to wait for a revised bid,” says one. “Having Chinese investors involved can add an interesting dynamic, but there’s little expectation that they will go through and finalize the deal.” 

Chinese companies seem to be more comfortable with bilateral processes where they can negotiate at their own pace, but even then, there is no guarantee that things will go smoothly. 

“Even a one-on-one deal takes time due to the complicated approvals process in China,” says a CEE lawyer. “Firms not only have to get regulatory approval to invest abroad, they then have to get a separate permit to transfer funds out of the country to pay for an asset.”

Those with assets to sell in emerging Europe have also learned the hard way that Chinese firms are less reliable than their western counterparts when it comes to completing deals.  

The Chinese are very focused on trying to do investments that fit with BRI, but often they are financially unsustainable or there are political issues 
 - CEE lawyer

The recent CEFC debacle, which saw the firm withdraw from a planned acquisition of a 40% stake in Czech financial group J&T and freeze progress on the Rosneft deal after the arrest of its chairman, Ye Jianming, was the latest in a series of disappointments for CEE sellers. 

CEFC had emerged as the poster child for Chinese M&A in emerging Europe, following a $1.5 billion spending spree in the Czech Republic as well as asset purchases in Romania and Georgia. 

Advisers say the firm’s travails will contribute to uneasiness in CEE around Chinese buyers. 

“I think it will make people wary – although to be honest many were already very sceptical about dealing with China,” says one.

This cynicism extends to investment related to the BRI – and not without reason. Lavish promises of engagement by Chinese policymakers at CEE-focused forums such as the ‘16+1’ have yet to move the needle in terms of east-west deal flow. 

“The Chinese are very focused on trying to do investments that fit with BRI, but often they are financially unsustainable or there are political issues,” says a CEE lawyer. 

Fundamentally, says one western banker, the problem is that there is little strategic rationale for Chinese firms to make acquisitions in emerging Europe. 

Most of China’s outbound investment has been about securing the supply of essential commodities or acquiring sophisticated technology, neither of which are particularly plentiful in the developing markets of central and southeastern Europe. 

“In terms of scale etc, it’s very difficult to imagine there’s something in the region that would be sufficiently attractive or unique to appeal to China,” says the banker. 

Bright spots

Amid the general gloom, however, there are a few bright spots. Bankers point to CEE Equity Partners, a private equity firm set up by the Export-Import Bank of China in partnership with various regional institutional investors, including Hungary’s Eximbank. 

Over the last four years the Warsaw-based firm has invested around $1 billion in a range of assets including a Polish wind farm, a Czech solar plant and a Hungarian telco. Further acquisitions are expected after the closure of a second funding round. 

Advisers say the structure provides a good model for Chinese engagement in CEE. 

“All the team are local or western investment bankers who know how to do deals,” says an M&A specialist in central Europe. “The Chinese tell them what sectors they want, but then they have a free hand.”

A second CEE-focused private equity-style fund, set up by ICBC in late 2016, is also said to be looking at investments in Poland and elsewhere, although no acquisitions have been made as yet. 

Moreover, while suitable investment opportunities may remain elusive, advisers report sustained interest from Chinese firms in emerging Europe. And on the other side, CEE locals show no signs of giving up hope that the promised wave of cash from China will eventually materialize. 

“We are travelling regularly to Beijing and sending ideas to our Chinese partners,” says a central European banker. “We welcome Chinese investment in the region.”