After the vote for Brexit: Chinese investment in the UK, Part 2

It’s been very hot and very busy since I landed in Shanghai. The trip – from August 11 to August 20 – is aimed at doing some research for DIE WELT, as well as catching up with contacts that I haven’t to spoken since my last business trip to China in April. In the months that followed, I was occupied with covering the run-up to June 23rd, the day of the British EU-referendum. Hence I did not have time to travel to China.

Here in Shanghai, the vote for Brexit seems to be less of a concern than it is in London, where, close to two months after the referendum, it’s still the dominant topic for dinner conversations, work meetings and small talk on the elevator. Nevertheless, the vote for Brexit does have some significance for the Chinese. For years, the UK has been the top-receiver of Chinese FDI into Europe, a trend that was helped by the country’s openness to foreign investors, the perceived ease of doing business as well as the fact that the UK was a member of EU and thus functioned as a gateway into Europe.

I therefore asked my contacts in Shanghai: Will this change, now that the country wants to leave the EU? Will the country be less attractive for Chinese investors? And does the fact that Prime Minister Theresa May has put the long-awaited Hinkley Point project on hold (the nuclear reactor that was to be built with French and Chinese capital in Somerset) make any difference at all? The decision by Mrs. May – mainly driven by security- and cost concerns – bears a certain irony, given that it became publicly known only hours after EDF, the main financier for the project, finally decided to go ahead with it. Beijing reacted angrily towards the delay. As the Chinese ambassador to the UK, Liu Xiaoming stated in a commentary piece for the FT, Hinkley Point is a “test of mutual trust between UK and China”.

Since then, Prime Minister May has written to President Xi Jinping, assuring the Chinese government of the British intent to continue having strong and fruitful relations between London and Beijing. During her travels to Hangzhou (where the Chinese will host this year’s G20 summit in early September), May will, according to British media, raise the issue again and hopefully find a face-saving solution for both governments.

Interestingly enough, most of my interview partners here in Shanghai do not really share the concern that increased tension between Beijing and London could affect the attractiveness of the UK for Chinese investors. Quite the opposite: A manager from Fosun, the largest privately held Chinese conglomerate, argued on Monday that now, thanks to the depreciation of the pound sterling, the UK could become even more attractive for Chinese investors.

“We love crises“, he said, “they provide us with buying opportunities that did not exist before.“ Glancing over Pudong’s glitzy skyline from Fosun`s headquarter on the Bund, he stated that private conglomerates such as Fosun do not invest because of political guidelines from Beijing but for economic reasons. “The outcome of the British referendum did not change any of this“, he said.

Similar views were shared when I visited Ctrip, the Chinese travel company. Headquartered in Sky Soho Shanghai, a futuristic office complex designed by star architect Zaha Hadid, the company has grown quite substantially over the years, thanks to the ever growing Chinese demand for domestic and international travel. Not only Chinese tourists will flock to the UK, thanks to the lower value of the pound, one of the leading managers at Ctrip said. “I think the relationship between the UK and China will get tighter post-Brexit“, she commented. Even if the Hinkley Point deal was cancelled and the Chinese government reacted furiously, private investors would still buy UK firms, UK property and pour money into other UK assets, she thinks.

As I found out during a panel debate at the European Chamber of Commerce on Tuesday, this has actually happened before. “Remember the deep freeze between Beijing and London when Prime Minister Cameron received the Dalai Lama“, a former British diplomat told me. “Private investment into the UK reached new highs during that time.“

Thus, he argued, even if Hinkley Point was scrapped, this should not lead to a major decrease in Chinese investment into the UK. That’s an interesting assessment, given that the Chinese government influences state-owned enterprises – of which China has many – and thus shapes their foreign investments. The same is true for state-backed venture funds. One would assume that investors influenced by the Chinese government would be less likely to continue investing in the UK after such a high-profile fall-out between London and Beijing.

But, as I was told, this is not true for private investors and their vehicles. “Many Chinese look for brands and products that they can introduce to their Chinese customers“, the former diplomat said, citing examples such as Weetabix, the British cereal firm that was sold to Chinese bidders. “For these transactions, it does not matter whether the relations between governments flourish.“

Still, the type of Chinese investments in the UK might change over time. As a lawyer of Pinsent Masons, the British law firm, pointed out to me on Wednesday, the motivation of Chinese investors abroad could change. “So what is there for Chinese investors to buy, in the UK?“ he, a German that has lived in China for years and years, asked. “There is not too much technology remaining. Chinese investors will put their money elsewhere“, he stated.

A slight hint towards Germany, where Midea, a Chinese appliance maker from Foshan, hast just bought the robotics firm Kuka? Where the automation firm Broetje this week got new, Chinese owners? According to the lawyer, Chinese firms will increasingly shift their European investments towards the acquisition of technology, away from real estate and consumer brands.

It remains to be seen whether British infrastructure will still attract Chinese investment, after a potential cancellation of the Hinkley Point project. “It all depends on the diplomatic skills and the priorities of Prime Minister May“, the co-president of Ctrip said on Monday.

Other large scale projects such as HS2, the planned high-speed rail linking London and the North, face an uncertain future after the vote for Brexit, as the government will have to come up with financing for many more projects, once the UK has left the EU. And, will there be similar security concerns about Chinese investments into rail as there are with nuclear energy?

For other, non-Chinese investors, the current change in sentiment against Chinese involvement in crucial infrastructure projects in the UK might provide a lucky coincidence. As I was told, the Canadian Pension Plan Investment Board (CPPIB) is very interested in buying National Grid, the UK grid operator.

Given that Prime Minister May thinks differently about Chinese capital than her predecessor, the Chinese might not be successful in bidding for this (were they interested). That is especially true after the move by Australian regulators to block the sale of a controlling stake in Australia’s state grid to Chinese buyers. Now, it could be somebody else’s turn.

Advertisements

British universities after Brexit

It’s her favourite topic: Europe. Helen Drake is a professor for French and European Studies at Loughborough University. For years, she has researched European politics, European integration and European history. This, the Brit fears, could become much more difficult, should the UK go ahead with its plan to exit the European Union. “European studies will lose a lot of their attraction”, the professor said when I interviewed her earlier this week. “My students are already less interested in Europe than in other topics.”

She believes that this is down to the ambivalence that has characterised the relationship between the UK and the EU for decades. For her, the vote for Brexit could also have personal consequences – Drake holds a chair for European Integration that is financed by the European Commission. “I have no idea whether I will be able to keep it beyond the initial funding period”, she stated.

These days, academic staff and students think along similar lines. They all worry about the future of the British university system, should the UK leave the EU, as requested by its people. Students and staff with European passports are equally worried. They fear that the cost of studying in the UK will go up and that European funding will no longer be available to British researchers.

Up until now, the vote for Brexit hasn’t had too many practical implications, neither for Europeans nor for Brits (except the pound/stock market crash). “There is no immediate change to the UK’s participation in the Erasmus+ programme following the EU referendum result”, the website of the British Erasmus office states. “All participants and beneficiaries should continue with their Erasmus+ funded activities and preparation for the published application deadlines in 2016 and 2017.” Every year, there are tens of thousands Europeans that come to the UK with the help of this program.

Many now fear that this could change within a couple of years. “It is understandable that there are fears among the 125.000 EU-students and the 43.000 staff from EU-countries”, Julia Goodfellow, the president of Universities UK, the association of British universities, commented recently.

It all depends on the negotiations between Brussels and London, once Article 50 is officially triggered. In the run up to this, the universities are only one of many parties that lobby the government. “The universities have to work hard to influence the government in order for them to keep the status quo”, said Charlie Beckett, one of my former professors at the London School of Economics and Political Science (LSE). For him, it is very difficult to forecast the impacts of a British divorce from the EU, at least at this point in time. “It does not change the fundamentals but many of the details”, he said.

One core area of concern is the freedom of movement. This could hit the universities hard: Europeans make up five percent of the student body, among the University staff, it’s 15 percent. “The end of the European freedom of movement could lead to many European students no longer coming here”, explained Julie Smith, a lecturer at the University of Cambridge and a Member of the House of Lords.

This is also what Ulrike Franke believes, a PhD student at the University of Oxford. “Not only with regard to the legal status, but also with regard to tuition fees, there is a lot of uncertainty”, the 28-year old German said when I phoned her. So far, Europeans pay the same amount of fee as British students, up to 9000 pounds per year. It is quite possible that they would have to come up with substantially more than that, should the UK treat them like overseas students.

With fees of around 35.000 pounds per year, a degree in the UK would become much more expensive. “In this case, many Europeans will consider going to the US instead”, Franke stated, “the UK would lose the cost competitiveness that has drawn a lot of Europeans here.” Two weeks after the historic vote for Brexit, she is still desperate. “I am heartbroken”, she said.

After the British exit from the EU, life for scientists and researchers could also become harder. “Because about the uncertainty around tuition costs, future job opportunities and the legal status, many professors and students will give it a second thought”, said Marc Szepan, another PhD candidate in Oxford.

Deans have started thinking about how to compensate for the loss of European funding after Brexit. Given that the UK is running a substantial budget deficit, they don’t assume that the government will be able to foot the bill. “The government simply cannot afford this”, Julie Smith from the University of Cambridge believes.

According to data from Universities UK, British universities received 836 million pounds during the 2014/2015 academic year, a similar amount came from the central government in Westminster and the NHS. Thus, the public sector would have to double its spending once the UK turns its back on the EU. The majority of income though, around 33.2 billion pounds, is provided by tuition fees.

Already now, a short time since the referendum on June 23rd, British scientists are receiving unofficial warnings to not apply for European funding after 2018. “Even if we were theoretically still eligible for European funding, we should not underestimate the subjectivity factor”, Helen Drake said. By that, she means that even in case the UK continued to qualify for European grants and funding, researchers or students might not be selected, because of anti-British feelings. So far, more than 60 percent of the research partners of British Universities come from other EU-countries, Universities UK has found out.

Interestingly enough, some German scientists are more optimistic than that. Theoretically, it could be the case that the UK is cut off from European projects such as Horizon 2020 (budget: 80 billion Euro), should it press on with its exit from the EU. However, “I don’t believe the EU will really do this”, said Markus Rudolf, dean of the German business school WHU. “It would reduce its own attractiveness if British universities were no longer part of the European network.” Contrary to this, LSE-professor Beckett believes that British universities will increasingly have to search for funding outside of the EU. “We are already seeing that funding agreements are being postponed or even cancelled”, he said.

Britain’s move to exit the EU will not only impact European students in the UK. “Also for British students, this will be dramatic”, said Ulrike Franke, the German PhD student in Oxford. “Even before the referendum, they spent less time abroad compared to other EU nationals.” Helen Drake has made similar observations. “The number of British pupils and students learning a foreign language has gone down continuously”, the professor stated. “This trend will be amplified in this current climate of euro-scepticism.”