Venture Capital/Analysis/

China’s new Europe strategy: Smaller tech and VC investments

While general investment slowed, interest in tech remains. The metaverse and fintech are among key interest areas.

By Steph Bailey

Closed lock
Member
Credit: Adobe Stock

Tech and startups are at the forefront of a new, more subtle Chinese investment strategy in Europe — and areas like fintech and the metaverse are particularly in the spotlight.  

Overall Chinese investment in the region has fallen dramatically from the mid-2010s heyday when Chinese companies were buying up stakes in big-ticket businesses like PSA Peugeot Citroën, the Port of Piraeus and Pizza Express — due, at least in part, to policy changes both in China and Europe. 

However, “there are certain areas where Chinese investments are still flowing,” says Francesca Ghiretti, an analyst covering EU-China relations at the Mercator Institute for China Studies. “China keeps having a very targeted interest in certain sectors and certain enterprises. It no longer invests wherever.”

Focus on tech 

Because of the development strategies of the Communist Party of China, investment has shifted from infrastructure to future-oriented sectors, namely tech. Europe, which overtook China in creating billion-dollar startups last year, is an attractive destination for sectors such as biotech, cleantech, deeptech and fintech. 

“On the China side, the key drivers are the move towards technology self-sufficiency,” says Mark Hedley, China-Britain Business Council (CBBC)’s London regional director and tech sector lead. But “it’s not going to get there overnight”, he adds, so China needs to continue to develop that capacity through outbound M&A and investment. 

“Companies like Alipay and Tencent and so on acquire businesses where they complement the strategic ambitions of those companies,” says Hedley. “We’ve seen some investments into blockchain startups in the UK where there’s Chinese companies looking to introduce new technologies to their ecosystem.”

A desire for knowledge might be matched with a desire for soft power, adds analyst Spiros Margaris: “With China’s investments, you always have to wonder, is it just an investment or is it a little bit of soft control?”

Hitting the brakes

The year 2016, when Chinese state-owned shipping company COSCO bought the Port of Piraeus in Greece, was the high point for Chinese investment with €44.2bn flowing into the region overall. Then came a dramatic fall.

The reasons for the slowdown are manyfold but include the Chinese government’s crackdown on foreign spending to drive up domestic investments as per its 2025 Made in China policy, an initiative that strives to position the country as a global tech powerhouse. 

 

“Up until five, six years ago, the Chinese government very much encouraged outward investments, it was really a formally declared objective of macroeconomic policy making,” says Robert Basedow, assistant professor for international political economy at the London School of Economics. “In recent years, the Chinese leadership has become a bit more critical of this.”  

Shift of destination — and origin

On the European side, Chinese investment has been slowed by a wave of screening mechanisms that have been introduced by some of the biggest economies in Europe to check foreign direct investment (FDI) coming from China against national security risks.

German industrial robot startup Kuka, for example, was a top target for China. But the thought of Chinese ownership caused political angst and the takeover collapsed.  

Basedow adds that the EU is also preparing an investment screening mechanism to identify foreign subsidies, where the Chinese state pays Chinese firms to buy shares or equity in European businesses. 

 

One of the ways around this has been to increase the number of Chinese investments being made in Europe through venture capital. While Chinese investments into the EU used to be driven by state-owned enterprises investing more broadly, focused venture capital investing in smaller enterprises and startups is on the up.

“The greatest growth has definitely been in venture capital,” says Giretti.

Fight for fintech, venture into the metaverse 

Fintech remained a top area of interest for Chinese investors, mostly corporate VCs and crypto funds, in 2021, having previously funded top players like Klarna and N26. 

According to GP Bullhound, tech conglomerate Tencent remained the most active Chinese investor into Europe at the end of 2021 — with five out of six deals going into European fintechs, such as France’s Lydia and Germany’s Billie. 

 

The People’s Bank of China recently released a Fintech Development Plan for 2022-2025, which aims to develop China’s fintech sector further.  

“The Chinese are extremely advanced in the fintech space, fintech apps and super apps are much more advanced than what we have,” says Spiros. “But it’s also a different environment. It’s a different audience.”

GP Bullhound also found Chinese investors started showing a preference for metaverse assets at the end of 2021.

“You’ve got the whole metaverse concept which is being developed in parallel in the west, led by the big tech firms, but also in China, probably going in quite different directions,” says Hedley. “But the big gaming companies like Tencent, the big multimedia technology companies, come to the UK because it has the world’s best in terms of gaming talent.” 

The green/grey area 

Another way around investment screening is to ditch M&A and shoot for greenfield FDI, building research and development centres and partnering with universities. 

“There’s also those businesses that have grown more through greenfield investment and investing in manufacturing or investing in R&D capabilities,” says Hedley. “Companies like Huawei have a number of R&D centres in the UK.”

While greenfield investment into new R&D facilities can be tracked, universities have academic freedom and might not disclose investments.

“This is sort of a grey area because it also occupies agreements between academic institutions,” says Ghiretti.  

Targeting smaller countries 

As well as a shift towards investing in tech, Ghiretti says Chinese investors have changed the countries they have been targeting. 

Consistently the UK, Germany and France have been occupying some of the main top positions,” she says. “But the Benelux has been emerging quite strongly, mostly the Netherlands, but also Belgium and also countries like Sweden and Finland.”

The reason? Well, Ghiretti says one reason is linked to China increasingly investing in smaller companies to try and stay “below the threshold of attention” of most European countries’ screening processes.

Trouble ahead? 

As China remains a relatively small investment player to say the big bucks of the EU or the US, and fintech and metaverse investments could garner more scrutiny. 

One curveball is China’s friendship with Russia — which has been dragged into the headlines since Russia’s invasion of Ukraine — could be the latest geopolitical catalyst for a dip in Chinese money flowing in.

“There will probably be a negative brand associated with China by having close association to Russia,” analyst Spiros Margaris tells Sifted. “Even a neutral stand might have a negative association.”

Steph Bailey is a writer at Sifted. She tweets from @steph_hbailey

Join the conversation

avatar
  Subscribe  
Notify of