Chinese Premier Li Keqiang (L) looks at President of the European Commission Jean-Claude Juncker during a joint press conference at the Great Hall of the People in Beijing on July 16, 2018. Wang Zhao | AFP | Getty Images

China is investing nine times more into Europe than it is into North America as policies force divergence, a report released this week reveals. Chinese outbound foreign direct investment (FDI) has dramatically swung toward Europe in the first half of 2018 and its FDI into North America has dropped by a whopping 92 percent in the last year, from $24 billion to $2 billion, according to multinational law firm Baker Mackenzie. In the first six months of the year, newly-announced Chinese mergers and acquisitions (M&A) into Europe were $20 billion compared to $2.5 billion in North America, while completed Chinese investments in Europe exceeded those in North America six-fold, at $12 billion compared to $2 billion. Policy in both China and the U.S. is pushing this shift, as lawmakers act to protect their industries or prevent capital outflow. Amid increasing capital outflows in 2016, China tightened regulations over outward investments, cracking down on outbound FDI in the second half of that year. Chinese firms have been divesting from North America at a rapid rate amid this tightening campaign, with $9.6 billion of completed divestitures in the first half of 2018 and another $5 billion pending, the report said. Europe also saw Chinese divestment, with some $1 billion of assets sold in that time frame and another $7 billion pending.

Meanwhile, U.S. regulators are beefing up national security investment screenings and developing a framework for stricter scrutiny of outbound technology transfer developed at home. In a high-profile case, the Donald Trump administration placed a ban on Chinese telecoms manufacturer ZTE, enacted in response to the company violating sanctions on Iran and North Korea. But the White House lifted the ban three months later after ZTE nearly shut down, despite opposition from Congress, which has overwhelmingly deemed U.S. tech sales to the firm a national security threat.

Trade war taking a toll

"Policy is weighing on deal making," said Rod Hunter, international trade partner in Baker McKenzie's Washington, DC office. "For all the noise about CFIUS the past two years, we have recently seen more predictable reviews, and upcoming CFIUS legislation should not represent a major departure for Chinese buyers.” CFIUS refers to the Committee on Foreign Investment in the United States, an inter-agency panel of the U.S. government tasked with reviewing the national security implications of foreign investments. Still, he said, “It is no surprise that escalating Sino-U.S. trade disputes are impacting Chinese investments in the United States." Beijing and Washington are locked in a full-blown trade war, with each country currently holding tariffs over $34 billion worth of each other’s goods, and President Trump most recently threatening a new round of tariffs on $200 billion of Chinese products. Trump cites America’s widening trade deficit with the People’s Republic as a key trigger for the conflict, while investors lament what they call China’s unfair trading practices, which include forced technology transfers, disproportionately limited market access and preferential state subsidies.

Beijing wooing Europe

Meanwhile — and in response to Trump’s escalating trade war with the world, which has seen him impose sweeping tariffs on all foreign steel and aluminum exports without exception for close trading partners Mexico, Canada and the European Union — China and Europe have grown closer.