1. Chinese foreign direct investment (FDI) in the European Union (EU) continued to decline in 2019. Chinese FDI transactions in the EU-28 dropped by 33 percent last year, from EUR 18 billion in 2018 to EUR 12 billion in 2019, bringing the total back to 2013 levels. The decline is in line with the downward trajectory of China’s global outbound investment since 2016.
2. The geographic and sectoral distribution of Chinese investment in the EU shifted last year. Consumer products and services were the main target for Chinese investors in 2019, overtaking automotive and concentrating 40 percent of investment volume. For the first time since 2010, Northern Europe was the top recipient of Chinese capital, overtaking the “Big 3” (UK, Germany and France).
3. The share of state-owned investors plummeted. The proportion of inbound investment coming from China’s state-owned enterprise (SOEs) tanked further to a mere 11 percent of aggregate investment (the lowest level since 2000). Continued administrative controls and financial constraints in China and a changing regulatory environment in Europe contributed the drop.
4. As acquisitions and other equity investment have become more difficult, Chinese firms are pursuing alternative ways to interact with European entities.  Chinese companies have stepped up research and development (R&D) collaborations with EU companies, universities and governments, among other channels.
5. Though most of these partnerships are benign and desirable from a European perspective, some raise important concerns. R&D collaborations are a natural outcome of China´s maturing economy, and the Covid-19 outbreak shows just how crucial they are for fighting global problems. Yet problematic cases exist, including ones that facilitate the transfer of critical and dual-use technologies to China´s military-industrial complex or contribute to the state’s ability to exert mass control over its population.
6. Europe needs to do a better job at identifying problematic tie-ups in order to preserve fruitful openness in science and research collaboration. As with investment screening, EU leaders need to find solutions that address a narrow set of concerns while preserving Europe’s economic openness. If policymakers are concerned about critical and sensitive technology transfers to China, or European firms directly or indirectly contributing to human right abuses, then their scrutiny needs to expand beyond equity investment to cover these partnerships. Furthermore, inaction will invite pushback from key allies and OECD partners, risking costly and unnecessary decoupling. To match changing realities, information-sharing mechanisms, export controls and other monitoring tools all need adaptation. Researchers, whether at companies or universities or individuals, must invest in understanding China’s firms and policies better, to identify and mitigate against risks.

China’s outbound investment trajectory has changed profoundly in the past five years. Outbound investment peaked in 2016, after a decade of double-digit growth, and has been on a downward trajectory ever since. Outflows dropped precipitously in 2017 and 2018 after Beijing imposed administrative restrictions to curb “irrational” capital outflows. In 2019, China’s global outbound FDI (OFDI) dropped back to 2014 levels (Figure 1). The substantial drop does not mean that Chinese companies have lost their appetite for the global economy. Instead, it mostly reflects changes in several domestic variables that have made it more difficult for firms to raise funding and get approval for overseas investment.