Will Brexit cool Chinese investment in the UK?

Chinese investment

Will Brexit cool Chinese investment in the UK?

29/01/19

Ed Ratcliffe, Head of Asia House Advisory

Ed Ratcliffe, Head of Asia House Advisory, assesses Brexit’s impact on Chinese investment.

At the time of writing, it remains unclear whether the United Kingdom will leave the European Union with no deal, a Norwegian deal, a Canadian deal, another deal, or whether it will even leave at all. Given this uncertainty, there are understandable concerns about the impact Brexit will have on invest­ment into the UK, including invest­ment from China. The UK remains one of the largest recipients of Chi­nese investment globally, and the largest in Europe.

However, the story so far con­cerning Chinese investment may provide some encouragement. The spectre of Brexit does not seem to have spooked Chinese investors. Chinese investment into the UK more than doubled to over $20 bil­lion from 2016 to 2017, and business interest and real estate investment enquiries have continued to rise through 2018.

The investment of personal for­tunes into UK residential real estate has made headlines, but there have been plenty of significant invest­ments into global giants such as Barclays and BP and more domes­tic-­oriented businesses such as Piz­za Express and House of Fraser. Unlike the investments of foreign manufacturers in the United King­dom such as Nissan or Airbus that rely on “just­-in-­time” frictionless trade, the rationale behind many of the Chinese investments in the UK appears not to have been directly related to EU membership.

Outside of the worst­-case disaster scenarios, the attractiveness of Lon­don-­listed equities for Chinese investors may not change drastical­ly. In fact, the sliding sterling has resulted in some stocks rising, and while some London­-listed compa­nies will be impacted by restricted access to the EU Single Market, many of the FTSE100 companies draw their income from diverse international sources.

The reputation of the London Stock Exchange as being well­-regu­lated, especially for protecting minority investors, is indicative of the broader suitability of the UK as an investment destination — rule of law, pools of professional expertise and an educated population more broadly, and overall ease of doing business. Chinese investors have capitalised on this with continued investment in R&D and other pro­curement from the UK.

In any case, the City of London will be seeking to maintain its posi­tion as the pre­eminent interna­tional financial centre — a prospect that may be unshaken, if not actual­ly supported, by some Brexit sce­narios.

However, it is evident that unless the UK can guarantee frictionless trade with the EU, investment opportunities in businesses that rely on “just­-in-­time” supply chains or unfettered Single Market access will be less attractive. However, the UK’s relationship with the EU itself may not be the most important var­iable. Other factors — the conse­quences of Brexit for the economy, consumer confidence and foreign policy — could have a greater impact on the opportunities for Chinese investment and UK-­China economic relations more generally.

The success and attractiveness of domestic-­oriented investments, as well as the prospects for emergent Chinese consumer brands such as Xiaomi (emergent in the UK, at least), will rely on the health of the UK economy and UK consumer spending power, which are not guaranteed in the more negative Brexit scenarios.

While a “Hard Brexit” would be disruptive, it may open a window of opportunity for foreign investors. If the UK economy takes a hit, a combination of lowered asset prices and a weak currency could be inter­esting for Chinese inves­tors with a longer­-term view.

Conversely, a deal that gives businesses certainty and opportunity could see Brexit’s potential negative impacts curbed, and investors who were holding off due to uncertainty may have the confidence to move forward.

There are wider forces at work, too, which could impact on Chinese investment to the UK post­-Brexit. As Britain goes it alone, it may find itself choosing, or being pressured, into much closer trade relations with the United States. Given the current US­-China trade tensions, it is possible that Washington may seek to extend its own China con­tainment policy through the UK’s trade policy. In this scenario, things may become very difficult indeed.

Another challenge that risks being overlooked is that coming from China itself, as companies are incentivised and encouraged to keep their cash at home. If this situ­ation is exacerbated or Chinese companies are encouraged to engage more heavily in Belt and Road Initiative projects, the UK will need to find other ways to increase its attractiveness.

Whatever the shape of Brexit, it is highly unlikely that UK companies will abandon their positive senti­ment toward China. The UK gov­ernment will likely follow suit. However, although the UK should retain its traditional suitability for foreign investment, the health of the UK domestic economy could be the main variable based on the sto­ry of Chinese investors in the UK so far.

This article was originally published in China Daily as ‘Who’ll bet on Brexit battered Britain’ on 21 January 2019.