China’s investment in the UK, the subject of a recent Sunday Times investigation is uniquely both a hot potato and a large rounding error.
First published in May 2021.
China’s investment in the UK, the subject of a recent Sunday Times investigation is uniquely both a hot potato and a large rounding error. This curious juxtaposition has arisen because of the special position that China occupies nowadays at the intersect between economic and national security. China has always recognised this space and for the first time, its new 14th Five Year Plan has a chapter on this very topic. The UK is by contrast a late-comer, having fantasised to its cost about a so-called Golden Era in relations with China as recently as 5 years ago. Chinese’s foreign direct investment (FDI) in the UK, as elsewhere, will for the foreseeable future be held up to much greater scrutiny, and not before time.
For the sake of perspective, we should remember that Chinese companies have invested a lot in the UK, which has long been China’s favoured FDI destination in Europe. Yet the outstanding value of the stock of such FDI may amount to little more than 3-6 per cent of the total, cited as about £1.6 trillion in a recent House of Commons report. Relatively limited as it is, we should not dismiss it as being insignificant either to China or to the UK.
China’s FDI and construction projects, valued at over $2 trillion since 2005, are spread fairly evenly around the world’s major regions. The US has been the single biggest recipient nation, Europe the single biggest region, and the UK the biggest within Europe. China has to invest abroad because it runs balance of payments surpluses (goods and services), the counterpart of which includes this type of capital outflow. Its FDI, though, fulfils different functions.
Most Belt and Road investment, in Pakistan or Iran, for example, comprises debt financing for projects, and is now broadening to health- and digital-related goods and services. In developed economies such as the UK, while Chinese firms do some greenfield investment, they tend seek to acquire assets, know-how, technology, brands and market presence by equity or merger and acquisition. They invest in the UK for commercial reasons, of course, but also for other purposes. With state enterprises, these purposes are clear.
When private firms are involved, remember that in China ‘private’ does not always mean what we typically understand. In Xi Jinping’s China, proximity to and involvement with the party is always a matter of degree. You only have to see how Jack Ma and his Alibaba group have been treated this year. Since the abrupt pulling of the Ant IPO, Ma’s only public appearance has been a video appearance, probably orchestrated, from a rural location talking about local issues, and the government seems to be putting other big firms like Tencent in the cross-hairs too.
David Cameron & Xi Jinping. | Flickr/Number 10
Chinese firms are expected to be useful to the party’s grandiose national goals such as those articulated in the 14th five year plan in technology and innovation, and in other areas such as China Standards 2035, in which it seeks to establish its own global standards, say for internet protocols, data privacy, and a myriad of new fields hatched by advanced technologies. Firms in the UK, say, are expected to showcase their activities as leaders in their field to other nations who might then look favourably on Chinese FDI, especially in strategic sectors. They also serve in a way as ambassadors for Chinese national interests and values in which sponsorship, donations and recruitment can help to stifle opposition to China or propagate its narratives.
UK governments have to look at Chinese FDI in the country in a different light, giving its blessing to deals which are mutually beneficial, but drawing the line where access to sensitive data, technology or other assets would compromise both the nation’s economic and national security. So far, there is no evidence that Chinese FDI in the UK has achieved anything close to the transformational role played by Japanese and German FDI in boosting output, employment and productivity in the car industry, or of other foreign firms in, say the technology, pharmaceuticals and biomedicine sectors.
No one’s feathers should be ruffled by China’s buying into London’s black cabs, Hamleys, Pizza Express, Heathrow, Clarks shoes, or other products and sectors, including manufacturing and transportation, that meet appropriate criteria. Yet, contemporary politics demand now that we run the rule over any potential acquisition of companies or research partnerships with entities involved in any part of the semiconductor and integrated circuit supply chain, AI, quantum computing, bio-medicine and the kind of tech-start-up firms which flourish around our universities, science parks and along the M4 corridor.
The National Security and Investment Bill, when enacted, will expand the government’s powers to block FDI in 17 sensitive sectors, largely in technology, and allow it to review deals up to 5 years post completion. The original row over Huawei’s technology has moved on apace and is now set in a trenchant geopolitical context in which China’s human rights abuses, repression, and values and its activities to validate the ‘East is rising, West is declining’ slogan are centre-stage. FDI has to sit comfortably in that space between economic and national security.
▫ George Magnus, Economist, Author and Commentator. Associate at the China Centre, Oxford University, and adviser to some asset management companies. Former Chief Economist at UBS. Global macro, China, demography.
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[This piece was originally published in George Magnus’ blog and re-published in PMP Magazine on 14 May 2021, with the author’s consent. | The author writes in a personal capacity.]
(Cover: Flickr/Number 10. - David Cameron and President Xi visit a local pub, The Plough at Cadsden during his visit to Chequers. | 22 Ocober 2015. / Licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.)