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Ekaterina Arapova

PhD in Economics, Head of Department of Assessment and Coordination of International and Duel Master's Degree Programs, MGIMO-University, MFA of Russia

On September 15, 2016, the news broke that the UK government had approved the Hinkley Point nuclear power station construction project that is being financed, among others, by a Chinese state corporation. In July, the decision on the matter was delayed due to security reasons and the need for a more detailed assessment of possible consequences that the increased investments of Chinese companies into the UK economy’s strategic sectors could have. The UK authorities introduced protective measures aimed at retaining control over foreign investments into strategic infrastructure projects, including nuclear energy.

On September 15, 2016, the news broke that the UK government had approved the Hinkley Point nuclear power station construction project that is being financed, among others, by a Chinese state corporation. In July, the decision on the matter was delayed due to security reasons and the need for a more detailed assessment of possible consequences that the increased investments of Chinese companies into the UK economy’s strategic sectors could have. The UK authorities introduced protective measures aimed at retaining control over foreign investments into strategic infrastructure projects, including nuclear energy.

The Hinkley Point story signals that, on the one hand, the British government cannot afford to alienate strategic partners from among non-European states. On the other hand, the new government will conduct a policy of a more active and zealous protection of its national security interests, using the independence gained after withdrawing from the European Union.

Brexit could lead to a radical change in the balance of power on the United Kingdom’s domestic market and in the geographic and sectoral structure of trade and investment flows. Relevant changes could also affect China, one of the most dynamic investors in the UK economy.

China’s Expansionist Investment Policy

China is still the world’s third-largest investor behind the United States and Japan. In 2015, the overall amount of China’s foreign direct investments (FDI) was $128 billion, an increase of 3.6 % compared to 2014 [1]. German experts believe that by 2020, this indicator may almost double and reach nearly $250 billion.

In 2015, most Chinese FDI was concentrated in the services industry, retail, transportation and the financial sector, while investments in manufacturing dropped significantly. In 2015, the share of the service industry grew to 55 %, with the share of manufacturing dropping to 33 %. Chinese companies were particularly active in investing in sectors linked to infrastructure development [2].

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Chinese investments into other partner countries in Asia also demonstrate a relatively fast growth rate. Thus, in 2015, the amount of FDI into other Asian developing states grew by nearly 1.8 times [2], primarily due to expanding investments within the large-scale Silk Road Economic Belt and 21st Century Maritime Silk Road projects. At the same time, Beijing actively diversifies the geography of its investments and enhances its commercial and investment presence on foreign markets, including European ones.

In recent years, China has been one of the largest investors in the economies of developed European states, including mega-deals in mergers and acquisitions. For instance, in late 2015, the state-owned China National Chemical Corporation (ChemChina) acquired Italy’s Pirelli (PECI.MI) for €9 billion [3]. In August 2016, the company’s purchase of Switzerland’s Syngenta for $43 billion was approved.

Chinese companies are making major inroads in alternative energy, investing in and buying, for instance, an offshore wind farm business owned by large European energy companies and located mostly in the United Kingdom. In particular, it involves the purchase by the state-owned State Development and Investment Corporation of the Spanish energy company Repsol’s offshore business in May 2016, as well as China Three Gorges Corporation purchasing a 30 per cent stake in the Moray Firth offshore project from Portugal’s EDP Renovaveis, etc.

In recent years, China has been one of the largest investors in the economies of developed European states, including mega-deals in mergers and acquisitions.

It should be noted that China’s foreign investment policy has recently began to demonstrate signs of significant change.

First, investments are being rapidly reoriented from the real sector to the service industry and participation in large infrastructure projects.

Second, China is expanding investments into relatively more hi-tech projects, including alternative energy, biotechnologies, etc. The number of acquisitions of hi-tech companies and manufacturing companies is also on the rise; China’s authorities view them as the fastest and most efficient way of gaining access to cutting-edge technologies.

Third, state corporations account for the largest share in the overall amount of China’s FDI (about 70 [per cent as of 2015). In 2000–2015, FDI demonstrated an overall rising trend.

Fourth, Chinese corporations transition from being minority stakeholders looking for profit to acquiring foreign companies, to increasing their share in various projects, to participating in decision-making and in using infrastructure facilities to meet their own strategic priorities. The latest trend could be a cause for concern in the recipient countries due to the possible loss of control over strategic infrastructure facilities, as well as emerging threats to national security.

Chinese Expansion in the UK

In 2000–2015, the United Kingdom ranked first among EU countries in the terms of accumulated Chinese FDI: €15.164 billion compared to Italy’s €11.186 billion, France’s €9.485 billion and Germany’s €7.905 billion. According to data provided by Baker & McKenzie international law firm, Chinese investments totalled $3.3 billion in 2015.

Prior to 2012, China mostly invested in banking, solar power, the automotive industry and communications. Over the last few years, however, China has started to invest in more hi-tech manufacturing companies and infrastructure, while finance and the real sector are being pushed back. What is more, Chinese companies are transitioning from the acquisition of minority stakes in various companies to a more active merger and acquisition policy. Despite China’s relevant transactions in the United Kingdom being smaller in monetary terms, their number is growing rapidly (see Fig. 1). The money is mostly invested in real estate, mining, oil and gas, construction, transportation, retail and financing (see Fig. 2).

Figure 1. Mergers and Acquisitions of China Companies in the UK market (in Monetary and Quantitative Terms)

Source: Giles Ch., Plimmer G. Chinese Investment – Is It Good for Britain? // Financial Times, 18.10.2015

Figure 2. Mergers and Acquisitions of China Companies in the UK (by Economic Sector)

 

Source: Giles Ch., Plimmer G. Chinese Investment – Is It Good for Britain? // Financial Times, 18.10.2015

Investments into large infrastructure facilities in the United Kingdom remain a strategic priority for Chinese companies. In 2012, China Investment Corporation acquired an 8.68 per cent stake in Thames Water Utilities Ltd. and a 10 per cent stake in Heathrow Airport Holdings. A year before that, China’s Cheung Kong Infrastructure Holdings acquired the Northumbrian Water utilities company. By investing more money into large infrastructure facilities, Chinese companies intend to use them as a springboard to expand their presence in Europe. Thus, Beijing Construction Engineering Group invested in the Airport City Manchester project. Chinese Construction Company plans to become a parity investor (50–50) in the construction projects of UK construction company Carillion, while China Railway Group is preparing an offer to invest in the High Speed 2 project.

Chinese corporations transition from being minority stakeholders looking for profit to acquiring foreign companies, to increasing their share in various projects, to participating in decision-making and in using infrastructure facilities to meet their own strategic priorities.

Chinese state corporations are rapidly increasing investments into strategically important projects and facilities. They are also increasing their influence through the acquisition of British hi-tech companies. This is a cause for concern for the new British government, which fears that its control over large infrastructure facilities and manufacturing will eventually weaken. The government is also concerned about Chinese companies buying up the United Kingdom’s residential and commercial real estate. Thus, in January–February 2016, Chinese companies and private individuals purchased £560 million in real estate, which is equal to 40 per cent of all the total amount of real estate purchased in the United Kingdom in 2015.

The United Kingdom is not the only country that has grown wary of the expansionist investment policies of Chinese state corporations. The Australian authorities have also expressed concerns about China’s growing influence and the increased control it gains over large strategic infrastructure projects by participating in investments. Peter Jennings, the new Executive Director of the Australian Strategic Policy Institute and also the Chair of the External Expert Panel advising the Government, spoke about the need to be more vigilant and careful in regard to Chinese investments into strategically important infrastructure projects in Australia. He urged to consider not only the short-term economic expediency of attracting foreign investments, but also possible long-term consequences such investments may have for national security.

At a Crossroads: Looking for the Golden Mean

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Pavel Kanevsky:
After Brexit: An Uncertain New Reality

Researchers from the London School of Economics estimate that Brexit will lead to a 22 per cent fall in FDI, which will in turn entail a 3.4 per cent decline in the population’s real income. At the same time, losses from decreased foreign trade may be as low as 2.6 %, even according to the most pessimistic scenario. Brexit will primarily affect the automotive industry and the financial services sector.

Obviously, after Brexit – and after losing a significant number of investments from European institutions – the United Kingdom will strive to attract investment partners from third countries. Chinese companies will be the first in line, as they have a relative excess of investment resources. China–UK investment operation will also be promoted by the Chinese leadership, which has set a course for more active investments abroad.

The prospects of the United Kingdom’s investment cooperation with Europe and with third countries, including China, hinge, firstly, on which Brexit scenario will be implemented and, secondly, on the new government’s foreign policies. Thus far, both remain unclear.

Although investment flows are largely affected by Brexit, the uncertainty regarding the United Kingdom’s foreign policies and the government’s attempts to retain control over foreign investments into strategic projects and facilities will hardly affect the plans of Chinese investors to pump money into UK economy.

China–UK investment operation will also be promoted by the Chinese leadership, which has set a course for more active investments abroad.

The UK market will continue to gain popularity in the coming years, both as an investment option and as a springboard for expanding China’s trade and its commercial presence in Europe. Nevertheless, Chinese state corporations will continue to pursue their interests and strive for increased investments into infrastructure.

The United Kingdom’s policy towards Chinese investors will, in turn, be shaped by two opposing trends.

The first trend is a sharp increase in the significance of Chinese capital for the United Kingdom’s economic development. This will happen primarily through the loss of a large part of the financing that used to come from European institutions. What is more, greater competition for Chinese capital between the United Kingdom, Germany, France and Italy could prompt the British government to make it easier for foreign capital to flow into the British economy, and that would include Chinese FDI.

The second trend is the greater zeal with which the UK authorities are guarding their security interests and strategically important sectors from foreign capital after Brexit and after regaining the possibility to conduct an independent foreign economic policy. This would primarily affect attracting FDI into large infrastructure projects (the construction of transportation and energy facilities), as well as the conditions for foreign investors acquiring real estate in Great Britain. This could lead to a more complicated procedure for approving transactions and lengthier decision-making times; in some cases, legal restrictions could be introduced, and the conditions for foreign capital participating in strategically important projects and in purchasing real estate could be tightened as well.

The United Kingdom will balance between the desire to increase the influx of FDI and the willingness to protect its national security interests.

British experts and MPs have repeatedly raised the issue of introducing restrictions on the access foreign investors to real estate in the United Kingdom. It is clear that, should these initiatives be implemented, the first blow will be dealt to Chinese investors.

Consequently, we can expect certain changes in the medium-term sectoral structure of Chinese FDI into the United Kingdom: investments in communications, the financial services industry, retail and hi-tech manufacturing could grow, and investments in transportation, energy and real estate could decline.

Thus, the United Kingdom will balance between the desire to increase the influx of FDI (given an obvious drop in investments from Europe) and the willingness to protect its national security interests. The United Kingdom’s policy toward Chinese investments will depend on which of these desires desire tips the scales, and the degree to which the UK authorities will be able to preserve partnerships with Europe and attract investments from other large global investment centres.

1. World Investment Report 2016, p. 6.

2. Ibid, pp. 44–45.

3. Ibid, p. 49.


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