PATRICIA DE MELO MOREIRA/AFP /AFP via Getty Images
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Sebastian Shehadi

Political Editor, Investment Monitor

Putting the block on Chinese takeaways

Chinese investment offers a potential lifeline to Western governments facing prolonged recession, but worries about security pose a threat to these projects, as Sebastian Shehadi discovers.

Chinese foreign investment is under more scrutiny than ever before due to Covid-19, but very few transactions have been made in recent months.

The coronavirus pandemic has accelerated several years of growing deglobalisation, especially within the world of foreign investment. This has meant many governments taking greater efforts to block foreign businesses from acquiring companies linked to ‘national security’, especially in sectors outside the obvious: defence, energy and communications.

The trend is truly global. Since lockdown began, governments in Australia, Canada, the EU, France, Germany, India, Italy, Japan, Poland, Spain, the UK and the US have all stepped up their foreign investment screening mechanisms. In this regard, Covid-19 has aligned EU nations even more.

The rhetoric and legislation is, in all but name, underlined by fear of Chinese investment, much of which comes from state-owned companies, says Baker & McKenzie partner Samantha Mobley.

“Countries have realised that they need more local supply chains for essential supplies and want to protect from foreign control those critical assets that are required in order to fight the pandemic,” she adds.

Tech protection

At the forefront of policymakers’ minds is the safeguarding of vaccine research companies or producers and suppliers of ventilators, PPE and testing kits. However, the tech sector is also getting an increasing level of protection. For example, in June, the UK unexpectedly announced that it would increase foreign investment screening over artificial intelligence, cryptography and advanced materials.

On this, UK business secretary Alok Sharma publicly stated: “These amended powers will display a significant signal to those seeking to take advantage of those struggling as a result of the pandemic that the UK government is prepared to act where necessary to protect our national security.”

Only two months earlier the UK government blocked a Chinese government-controlled venture fund from buying British graphics chipmaker Imagination.

All quiet

Crisis breeds opportunity. In the wake of the sub-prime and eurozone crash, Chinese companies went on a spending spree, snapping up foreign companies and assets in financial distress.

However, history has not repeated itself during the Covid-19 outbreak, thus far. Despite a handful of high-profile and controversial investments since lockdown, such as China acquiring a stake in Norwegian Air, there has been no significant uptick in Chinese investment into Europe, the US or the rest of the world, according to research provider Rhodium Group.

In fact, outflows from China during this period have hit a ten-year low, while investment into China has remained strong.

“So if anything the world is doubling down on China, rather than China doubling down on the world,” says associate director at Rhodium Group Agatha Kratz. “Domestic conditions in China have changed so drastically since 2008.”

Indeed, recent years have seen China introduce much tighter capital controls, meaning much less flexibility for Chinese investors, while OECD countries have increased their scrutiny over investment from China, adds Kratz. Moreover, Chinese companies are now more occupied with crisis survival than they are foreign expansion.

Red scare?

In the response to the alleged threat posed by Chinese foreign investment, some argue that the West is showing a bloated prejudice, or even worse, making China a scapegoat for protectionism.

Perhaps unsurprisingly, this point of view is popular in China. The country’s ambassador to the UK accused Boris Johnson’s government of a ‘witch hunt’ in early January, following a policy announcement limiting national business with Huawei.

“There has been quite a lot of emotive language used around Chinese investment, and in some cases, an assumption that because an investor is Chinese there must be a malicious or political purpose to the investment,” says Mobley at Baker & McKenzie.

Rhodium Group has been looking at Chinese outward investment over the past 20 years, and finds that, despite there being much discussion about China’s political projects, it is mostly driven by commerce.

Nonetheless, there are still some issues with Chinese investments, according to Kratz.

“Some investors are linked to the Chinese army, or to human rights and environmental abuses,” she says. “Also, in strategic sectors, it is intrinsically problematic to welcome foreign investors from a non-democratic origin.”

Huawei worries

Indeed, some exceptional cases of Chinese investment do seem to require scrutiny, such as the Hinkley Point nuclear reactor deal in the UK with the state-owned China General Nuclear Power Group, and Huawei’s 5G infrastructure projects in the country.

“The major concern over both of these high-profile deals was not necessarily the fact that Chinese firms were involved, but rather that both have direct links to the government,” wrote Dr Sultan Salem and Andrew Auberteen in a research paper from the University of Birmingham.

Although Huawei maintains that all its shares are owned by employees of the corporation, various Chinese ‘intelligence laws’ mean that the company could be powerless to reject demands from its government to install backdoors in its technology used in the UK network, according to Salem and Auberteen.

“There have been multiple previous cases of Chinese espionage using technology networks, including in the UK, where a group known as APT10 targeted intellectual property and sensitive commercial data on behalf of the Chinese Government,” they stated.

On the flipside, Huawei contributed almost £1.7bn to the UK economy in 2018, large chunks of which went to research and development, added Salem.

In this vein, some commentators fear that increased foreign investment screening will deter much-needed money coming into the UK during this time of economic hardship. China is a large source of capital into the UK, investing £29bn into the country between 2005 and 2018 – with much of that coming in during the past eight years – according to the Office of National Statistics.

Kratz, however, is optimistic, saying that the broad environment for inward investment remains extremely open across Europe.

“Strengthening one’s screening regime, if done well, won’t change that,” she says. “The biggest deterrent is the politicisation of inward investment where public opinion grows more critical of Chinese investment.”

It remains to be seen whether the anticipated wave of Chinese bargain hunting will trigger a backlash. In the meantime, governments will continue to tread the thin line between ‘open to foreign business’ and national security.