July 7, 2017
The impact of the 2016 UK referendum has reverberated well beyond Europe as a political and economic shock of substantial proportions. There has been great debate about the implications on the UK’s relationship with China and the potential impact on Chinese inbound investments in particular.
Before analysing the likely impact, one must take a step back. Both countries have enjoyed a longstanding trade relationship, dating back to the 17th Century when England was on the cusp of becoming the most powerful country on the planet.
Although the relationship has not always been a fruitful one – the Opium Wars spring to mind – recent years have seen resurgence in diplomatic relations, culminating in President Xi Jinping’s State visit to London, in what then Prime Minister David Cameron stated marked the “golden era” in ties between the two countries.
This period is also marked by China’s love for all things British. Both Harrow and Dulwich College have school campuses in Beijing and Chinese investors now own some of the UK’s most notable brands, including House of Fraser, Pizza Express and Sunseeker yachts to name but a few.
Historically, the UK has tended towards a rather open and less protectionist stance in relation to inbound investment which has been generally consistent with its view towards Chinese investors. This is pronounced compared to the view of continental cousins, who have often cited the UK as being weak for allowing Chinese companies openly into their domestic market, particularly in areas deemed sensitive to national security.
The recent Chinese investment in Hinkley Point C enabled Chinese state-owned company China General Nuclear Power Group (CGN) to be placed seemingly at the heart of plans to develop Britain’s new generation of nuclear plants. Furthermore, the Chinese telecommunications company Huawei has been allowed to provide equipment and services, placing it at the centre of Britain’s communications network, despite being banned from bidding for government contracts in both the United States and Australia.
These factors help explain why Chinese FDI has consistently poured into the UK since 2000, with the total figure amounting to US$16 billion between 2000-2014, nearly double that in Germany (US$8.4 billion) and France (US$8 billion), the next largest EU destinations.
With the Chinese love for British brands and services, the UK’s perceived superiority in the areas of finance, real estate and higher education, alongside other attractions including the English language and a seemingly favourable economic and fiscal environment, there is a strong case to be made that Chinese investment into the UK is unlikely to abate despite the uncertainty associated with Brexit. What’s more, recent figures released from Grant Thornton show that Chinese holdings in the UK have seen revenues soar in the past two years, with many Chinese-owned companies in Britain today enjoying triple-digit growth.
Many Chinese investors themselves see Brexit as a “first world problem”, with the pros of investing in the UK, for example in the UK property market, seen as a safe bet compared to the over-priced and over-supplied housing markets in China, amplified by the fear of RMB devaluation. Chinese investors arguably need to find a safe haven to balance their assets, regardless of Brexit. Many Chinese investors in fact could look to benefit from uncertainties associated in British real estate, which could see a fall in prices and value opportunities.
Others see great potential for further bilateral areas for cooperation, whether in the fields of infrastructure, finance, or services, with many also highlighting the possibility for signing a China-UK trade agreement once the UK has left the EU.
Nonetheless, there is still great reason for caution and perhaps we are seeing signs of a hiatus while negotiation talks around Brexit remain unresolved. Many Chinese investors and media have openly expressed great uncertainty associated with the upcoming Brexit negotiations. While Chinese investment into property real estate deals seems to be continuing strongly, on the corporate side there appears to have already been a pause in Chinese investment into the UK since last year’s referendum.
The EU remains China’s largest trading partner, with total bilateral trade topping €515 billion in 2016. China is consequently more likely to prioritise a new trade agreement with the EU, before it does so with the UK. Furthermore, with the UK on the cusp of exiting the world’s largest economic bloc, Chinese investors may begin looking elsewhere in a continent where its appetite for investment has soared in recent years. 2016 saw more than €35 billion of Chinese investments into the EU, increasing by more than 77% compared with 2015.
With over a third of this Chinese investment into the EU in areas related to advanced manufacturing, it is no surprise that China has a particular admiration for German companies. This coincides with China’s aims to boost its own industrial and manufacturing capabilities, encapsulated in the national industrial policy of ‘China Manufacturing 2025’. A prominent (and rather controversial) example of a recent strategic Chinese acquisition in Germany was Chinese home appliances maker Midea’s purchase of German robotics maker Kuka. With trading relations between both Germany and China increasing by an average of 14.2% annually, and with more Chinese acquisitions in Germany in 2015 (36) higher than in any country in the EU – the UK had 34 – who is to say further investments won’t continue to grow at an even faster rate with the UK outlook seemingly clouded with some uncertainty.
And what of London’s place as a major RMB hub for international currency transactions? With many worried about passporting arrangements following Brexit, which could limit financial services firms’ ability to market products across the bloc, there is great concern about Britain’s continued role in helping internationalise the use of the RMB. The UK is now second only to Hong Kong as an RMB economy by weight for customer-initiated transactions, with the next most significant European economy requiring a four-fold increase in activity just to match where the UK is now. The Chinese have seen London until this point as a global financial centre. Uncertainties could begin to play out, particularly if many of the banks and other financial services’ firms begin to relocate their headquarters elsewhere within Europe.
Of course, other internal political factors could play out on both sides to have a bearing on Chinese FDI. Capital control restrictions in China may continue to bite and thus impact Chinese investment anywhere, regardless of Brexit. In the UK, Prime Minister Theresa May delayed approval for Hinkley Point C, having had concerns about Chinese involvement in such a sensitive project. There are no guarantees that Chinese investment and further involvement with other nuclear projects, including Bradwell and Sizewell, will be passed under the weakened May administration. May’s former joint chief of staff, Nick Timothy, had already expressed security concerns associated with Chinese investment in an article for ConservativeHome in 2015.
Despite compelling reasons for both sides of the argument, there is undeniably a strong feeling of uncertainty and slower investment amongst Chinese investors in our client base and beyond when concerning the UK. However, the compelling desire of the Chinese to invest in all things British should not be underestimated, and we should still expect a steady rate of Chinese investment in the short to medium term even while the Brexit negotiations play out. After all, the uncertainty surrounding Brexit, the election and volatility in sterling did not stop the Chinese owner of Volvo Cars – Geely – last month from taking a controlling stake in the British sports car maker Lotus, or China’s sovereign wealth fund just last week striking a £10 billion-plus deal to buy Logicor, the London-based European warehouse group, from Blackstone. Who is to say this also won’t stop other Chinese investors in the coming weeks and months as the Brexit negotiations begin to play out?