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.

Sino-British relations: Does Brexit signal a rapid end to the “golden era”?

It must have been a shock. Just hours after the board of the French energy company EDF decided to go ahead with the plan to build a new nuclear reactor in Hinkley Point in Somerset, after a months-long impasse, Britain’s new prime minister Theresa May let it be known that she wanted to reconsider the whole project. The French shook their head in disbelief. After all the back and forth, after all the wrangling, multiple delays and the resignation of a board member? May’s announcement was an unpleasant surprise, to say the least.

Admittedly, there are huge doubts about the economics of the project. The nuclear plant will cost around 18 billion pounds to construct and could, according to new forecasts, gobble up another 19 billion pounds during the length of its lifetime. The so called “strike price” on which the previous government and the energy company agreed is still around twice as much as today’s price of a kilowatt hour of energy. Thanks to the global stock market turmoil earlier this year, EDF is worth much less than it was before, adding further to the doubts that have engulfed the project since its early days.

Still, from a French perspective, Hinkley Point C seems worth taking some risk. The reasoning behind this is clear. France prides itself to be a world leader in nuclear energy. Unluckily, in Europe, this energy source has lost a lot of its allure in the wake of Fukushima. Consequently, the majority of new nuclear plants that are being planned or constructed happens to be located outside of Europe. China is, with a huge margin, the country that is and will be building the largest amount of nuclear power plants on earth, for the foreseeable future.

And that’s where it gets interesting. In order for France to retain its status as a leading nuclear power, it needs to demonstrate that it can successfully develop and build new nuclear plants, ideally in Europe, its home market. China, on the other side, has started to compete aggressively for business outside of Asia and is trying to sell its Hualong One reactor – it is, according to Chinese officials “their own” design – to governments in Latin America, in Africa and the UK. Therefore, the predominantly state-owned French energy company has decided to go ahead with Hinkley Point C, even if the numbers don`t stack up.

Ironically, EDF still needs Chinese capital in order to lift the financial burden that comes along with building the new reactor. About a third of the investment comes from a Chinese consortium, among them CGN, China General Nuclear Power Group. For the Chinese side, the project functions as a bridgehead into the UK. Already in 2014 did the Chinese and the British government sign a Memorandum of Understanding according to which the Chinese would be given the right to design, build and operate a reactor on British soil. To start, a so called test-reactor was to be build in Bradwell in Essex. This agreement fit quite nicely into the Chinese strategy to export its Hualong One technology to foreign countries. That it was the UK, once the most powerful nation on earth, that accepted this, must have appeared as an extremely lucky pull.

But then came the vote for Brexit and with it, the new Prime Minister. Contrary to her predecessor, Theresa May does not have the reputation of being too China-friendly. She is said to have been sceptical about the advances that David Cameron and his Chancellor George Osborne have made to the Chinese, an abrupt U-turn after Cameron’s meeting with the Dalai Lama that led to a sudden shock-freeze of Sino-British relationships.

Only last October did President Xi Jinping travel to the UK, ending a ten-year period during which the Chinese President did not visit the country. He was given everything the UK had to offer: A stay at Buckingham Palace, a ride in the Royal Carriage, a beer with “Dave” in a local pub. Add to that trade deals worth nearly 40 billion pounds and you had both a happy PM and a happy Mr. Xi (whose country was courted by its former oppressor – the Chinese view on the UK – with the world to watch).

Not only the French, but also the Chinese have recently shaken their head in disbelief. For them, a lot is at stake. Will their Hualong One export-strategy fail, now that the UK is no longer that interested in the deal? It seems that Beijing thinks exactly that. Both the Chinese media as well as the Chinese ambassador to the UK, Liu Xiaoming, have criticised May’s decision heavily. Ambassador Liu even went as far as to indirectly threaten the UK: “Right now, the China-UK relationship is at a crucial historical juncture . . . I hope the UK will keep its door open to China,” Mr Liu wrote in the Financial Times.

This happens at a time when the UK has lost some of its attraction for Chinese investors already. Once outside the EU, the country will no longer function as a gateway into the EU. Still, because of its openness, the weakened Pound Sterling and the relative ease of doing business, investors will retain some interest in the UK. Given that there will likely be less investment from Continental Europe, once the UK has left the EU, the country needs these Chinese investors more than ever. But – what an irony – the new government does the opposite: It works very hard on harming its reputation as an open, China-friendly country in the center of Europe. Very bad timing, I guess.

I am of course aware that some people think that Hinkley Point is just one example out of many where China poors money into the UK. Yes, overall, there is still a case for Chinese investments in the UK, after all, assets are now dirt-cheap, compared to the price levels they were at before the 23rd of June. But, don’t forget: Chinese overseas investments are heavily influenced by the central government and by priorities that have been formulated by Beijing. State investments and private investments are often intertwined. Should the British government go ahead and scrap the project – for budgeting reasons, for security reasons – this will consequently have a lasting, negative impact on the relationship between China and the UK.

That’s not to say that the British concerns should be overlooked. Both costs as well as national security are valid arguments when assessing the feasibility of an endeavour such as Hinkley Point C. Tragically, it’s not as if these issues weren’t obvious before. Already two, three years ago, it was clear that Hinkley Point would be expensive, maybe too expensive.

It was also clear that you would have concerns about national security if you handed control over nuclear power plants to companies from an autocratic country such as China – even if those Chinese nuclear companies were controlled by the same regulators as their British counterparts. The plan to have the Chinese design, build and operate a nuclear plant in Britain did raise a lot of eyebrows at the time, in Germany, but also in other countries. I remember having had strong debates with some of my German readers at the time who thought this was really, really dangerous.

But on the British side, optimism prevailed. Only once you digged a bit deeper, you realised why this was the case: The government desperately needs new power plants. It is already behind schedule in replacing the old fleet and cannot find Western firms except EDF to commit to expensive and large-scale projects anymore. Thus, although there might have been security concerns before, Prime Minister Cameron decided to go for the Franco-Chinese solution, making sure to lobby for additional Chinese investment for big infrastructure projects such as HS2. Theresa May, at that time Home Secretary, did reportedly raise her concerns but did not manage to gain much traction.

Unfortunately, Cameron’s strategy no longer looks as good as it did some years ago. Now, after its U-turn with the Dalai Lama-crisis, the UK risks a second U-turn, away from China. Both issues, the desperate need for new power stations as well as the hot-cold-hot-cold-attitude to China stem from the same problem: The lack of long-term, strategic thinking in this country. That makes the UK government look a bit foolish, in comparison to other European countries, but especially in comparison with countries like China that – thanks to their autocratic, undemocratic form of government – plan in decades, not in months.

The fact that CGN is now under investigation in the US for alleged espionage complicates matters even further. With security becoming an ever bigger issue, will Prime Minister May dare to rebuke the Chinese, risking the relationship that was deemed to be so important by her predecessor? I guess I won’t be the only one watching this space.