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.

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