Business Leader looks at the role Chinese investors are playing in stimulating the UK economy and how Brexit is influencing their involvement?
The ever-evolving story of Brexit has gripped the nation for more than three years, with every facet of business and wider-society feeling the impact of the vote to leave the European Union.
The major nations around the world have been interested onlookers, with some looking at the advantages a weaker Pound presents. But, what does the world’s largest economy think of the debate, debacle and, ultimately, the decision? BLM investigates.
What do the statistics show?
A total of 67 investments into 57 UK companies have included involvement from a Chinese fund since 2011.
However, since 2017, the number of annual investments into UK companies that included a Chinese fund has dropped slightly from 19 to 16 in 2018 and just 12 in 2019 so far. Q3 2019 has seen the most investments of any quarter, with Chinese investors participating in seven equity deals.
Henry Whorwood, Head of Research & Consultancy at Beauhurst, comments: “The third quarter results are reassuring, and indicate that the yearly drop is unlikely to be because of political uncertainty. This fluctuation could simply be down to natural fluctuations in deal flow, or due to Chinese investors increasingly using different vehicles to invest abroad. This likely change in investor habits will have followed the high-profile scrutiny over Huawei’s attempted deal with US telecoms provider, AT&T. Instead, Chinese investors may be making investments as individuals or through Special Purpose Vehicles, through which deals are less visible.”
It appears that overall Chinese investment in the UK is only going to rise though. According to FDI Markets, London is the leading European destination for Chinese Foreign Direct Investment (FDI) into the UK and Europe. In fact, it is the second largest recipient globally behind only Hong Kong. Chinese contributions account for over 10% of total FDI into London.
Latest statistics compiled by law firm, Baker McKenzie and research company, The Rhodium Group, confirm that, last year, the UK overtook the US as the largest recipient of Chinese outbound foreign investment. According to this joint report, Chinese outbound FDI in the UK stood at £3.83bn, followed by £3.73bn in the US and £3.14bn in Sweden.
What is driving Chinese interest in British companies?
To the Chinese, ‘Brand Britain’ has always represented quality, heritage and uniqueness, and still does. According to research recently released by Barclays Corporate Banking, Chinese consumers are still nearly 40% more likely to buy a product if the packaging features a Union Jack on it.
As well as being an important trading partner for China, the UK is also considered to be China’s friendly ally in the West. The UK was the first to join the Asian Infrastructure Investment Bank, and after Chinese President Xi Jinping’s 2015 visit to the UK, the counties entered a new golden era of political relations. This has led to many current investors from a Chinese perspective viewing the UK as a country that is open to doing business.
However, other global issues have impacted on the UK-China relationship. Wendy Wu, Director of China Outbound Desk at the TMF Group comments: “At a time when the UK’s traditional ally, the US, is at odds with China over a growing range of issues, Chinese investment into the UK is flourishing. We saw in 2017, intensified scrutiny on overseas deals, as the government sought to curb the unbridled outflow of capital and a build-up in corporate debt. Consequently, there was a steep 29% drop in overseas investment. However, from 2018 we noticed rising outward investment, thanks to clarity on the government’s strategic investment priorities, after new rules governing outbound investment which took effect in March 2018.
“This development has impacted the increasing investment into the UK. China Daily reported in August that Chinese businesses invested more money into the UK between January and August 2019, than they did in all of 2018.
“To date, the UK has yielded robust returns for Chinese investors. The 30 fastest-growing Chinese companies with investments in the UK employ more than 3,500 people and enjoy a combined turnover of more than £43bn. According to the Tou Ying investment tracker, compiled by Grant Thornton and the China Daily, these 30 companies saw 66% average revenue growth in 2018. In my observation, for many Chinese businesses, Brexit is not deterring investment. Chinese investors realise that Brexit is both a challenge and an opportunity.”
Jinzhao Li is the Managing Director of Cambridge China Centre and the co-curator of the annual Cambridge China Forum comments: “While 2018 began with a large drop of activity, the second half of the year recovered to the previous year’s levels – and 2019 has seen continued growth to record investment levels.
“More long-term reasons for the increase in Chinese investment include London’s position as a world finance centre, access to world-leading experts, favourable conditions for establishing a presence in Europe, strong IP protections and the consistent record of innovation in the UK.”
And the Chinese government has been open in its support of Chinese investors and entrepreneurs looking to expand into the UK.
What sectors have received the highest levels of investment?
It is the Chinese focus on the tech sector that is the primary interest for investors – many of whom view Brexit as an opportunity, rather than a hindrance.
Russ Shaw, Founder of Tech London Advocates & Global Tech Advocates, comments: “China has been a global leader in technology for some time, but now its innovation is going global. As with many prominent tech hubs, inward investments will stimulate growth to an extent, but the next stage is about connecting with other hubs around the world.
“According to FDI Markets, financial services, creative industries, business services and tech are the largest sectors of investment – together accounting for two-thirds (66%) of FDI projects from China. However, China’s investment in its technology businesses and rapid growth of its start-up ecosystem means that we foresee particular interest in the UK tech sector moving forward.”
Ting Zhang is founder and CEO of Crayfish.io, a full-service platform offering expertise, connections and capital, enabling businesses to achieve better engagement with China. In August, Crayfish.io launched the first ever funded initiative in the UK to help tech start-ups and small businesses get ‘China-ready’.
She comments: “Chinese investors are still hugely interested in investing in innovative British tech companies and, in this respect, Brexit has done little to dent Brand Britain’s reputation. UK assets are still considered to be high value. However, as Chinese investors tend to invest in the UK first before moving deeper into Europe, many of them are holding off for now until they see what’s going to happen with Brexit.”
According to a Tech Nation report, for the first seven months of 2019, foreign investment into the UK tech sector was £5.5bn, more than the whole of 2018.
However, it isn’t just tech that has received interest from Chinese investment. Wu explains: “We believe thanks to investment in long-term projects, there will be a sustainable investment flow from China to the UK. As Chinese companies further establish themselves in key UK industries, we believe there will be expansion into broader sectors of the UK economy.
“Consumer products, financial services, high-end manufacturing, healthcare, tourism and education, are well-known in the UK. It matches perfectly with China’s demand to upgrade consumption and development thanks to rising living standards in China.”
Will interest in British companies increase?
Despite the looming spectre of Brexit, Britain appears to remain an attractive investment opportunity, largely due to its thriving tech sector. Therefore, Chinese companies and others from around the world are still looking to invest in the UK and take advantage of the innovation, talent and resources available.
Shaw comments: “In the UK we have the creativity, the talent, the innovation – with China offering the capital, ambition and understanding of scale – that could lead to collaboration in a number of areas to mutually beneficial ends.”
Zhang continues: “From a Chinese perspective, Brexit has done little to damage ‘Brand Britain’ in Chinese eyes. Quite the opposite in fact. In China, ‘Made in the UK’ means three things: quality, heritage and innovation. And China remains as keen as ever to do business with the UK as a stand-alone unit from the rest of Europe, making this market a fantastic business opportunity for any UK business.”
It is this mix of accessibility, talent, innovation and openness to China – as well as the view that Brexit can provide opportunities – that has led to Britain and China forging a new expanding relationship that looks set to keep evolving in the years to come.