What's Next for Chinese Companies After Brexit?
Gold, silver, bronze or brass? As Chinese businessmen look at investing in the UK at the end of 2016, I don’t think they really care so much about what descriptor governments choose to put on the bilateral relationship.
What they really care about--and this was really reinforced during the China-Britain Business Council Board’s annual week of meetings with Chinese government officials and businessmen--was are there still attractive investment opportunities in the UK, and is my business able to make these investments.
The accessibility point is always a factor, but during 2016 it has become even more critical with actual push back on proposed Chinese investments in countries from Australia to Germany, and in light of the statements made during the election campaign in the US of their intended policy direction.
The reality is that Chinese businessmen feel that there are fewer major economies where their investment is welcome. With the review of Chinese investment in the Hinckley Point nuclear power plant, there was a sense that the UK might be headed down a similar path and certainly, despite the decision, it has raised the uncertainty levels.
As the months pass though, more Chinese private business leaders are coming back to the point of view that they had at the start of 2016 that the UK is a distinctively interesting and attractive market in which to invest. Most of the factors that made this true a year ago still hold today. Very few Chinese investors into the UK were doing so because of the quality of access to EU markets. Rather they were looking for:
- Technology, brand, IP and expertise that they could leverage in their Chinese business. From automotive and industrial to media to FMCG and luxury goods, this has been and continues to be the case. That the full range of investment opportunities to invest in everything from start-ups spinning out of universities through to acquiring mature profitable businesses is an important plus.
- UK businesses that could be invested in and grown in the UK and eventually internationally, maybe China, maybe elsewhere, but the initial focus is on the UK. Again, the range is wide with many property and infrastructure projects, medical devices, many service businesses - retail, sports, media and restaurants.
- A location to establish their international headquarters for all businesses outside China. London is really competing with Hong Kong for this role. Hong Kong having the advantage of adjacency, London (as multinationals have known for years) the advantage of time zone, depth of available internationally experienced talent and connectivity.
Broader factors supporting investment in the UK include the perception that UK talent, from top management to researchers to factory workers, are very comfortable with, even positive about, working for foreign owners. Indeed, a growing number of Chinese investments in the UK are acquisitions from another foreign owner.
Potential investors that deals continue to move forward, highlighted by the announcements during Ma Kai’s visit to the UK this week. If Chinese executives are sending their children to study abroad, then there is a good chance they will be coming to the UK. The ability to combine professional and personal in a single international destination is an important UK advantage.
And then probably the largest plus for the end of 2016 versus the beginning is that in RMB terms, acquisitions in the UK are 15-20% cheaper as a result of the depreciation of the pound and the “uncertainty discount” now put on the value of UK assets. The opportunity to get a bargain didn’t just lead to a surge of Chinese shoppers in London’s luxury brand stores in the second half of the year but also to many more Chinese investors looking into UK assets in electric vehicles, material sciences, FMCG, and even food processing.
There are concerns, of course:
Will they be able to bring executives in to work in their UK business?
There appear to be plans to impose a salary or compensation criteria in determining whether or not to issue work visas to non-UK nationals when their employer (UK or foreign) wishes to transfer them to work in their UK operations. This I am sure is a good criteria in the vast majority of cases. However, if the company in question is a Chinese state-owned enterprise, the compensation level of the Chairman himself would probably fall below the criteria.
If the Chairman earns less than USD100,000 annually, it’s a safe bet that executives a couple of levels down the hierarchy will earn less than that. Hopefully this income criteria is an input only, not a “must exceed” hurdle, otherwise the UK might find its intention to attract more Chinese banks to expand their operations in the City of London is significantly set back.
Will their children still be able to attend university or high school in the UK?
The UK is the second most popular destination for Chinese students after the US. The new British Prime Minister, Teresa May, has been dubbed “student killer” on parts of social media in China based on expectations that she will make it much harder for students to come and study in the UK.
It was already incredibly tough for Chinese students to get a work visa after finishing their studies. Most students accepted that as part of the package and planned to seek out what they see as the more attractive job opportunities in China anyway. The UK should not kid itself that it is seen to have a wealth of job and career opportunities that Chinese students find more attractive than their options in China.
One reason I still counsel Chinese students to go ahead and apply to UK universities is the very pragmatic one of university finances. Many, many UK universities have borrowed heavily in recent years to build fine new infrastructure. The cash flow to pay off this debt comes from the fees that foreign students pay. Universities have expanded and even launched specific courses, such as masters of finance, targeted primarily at international students. Without these international student fees, universities could quickly become insolvent, requiring a government bailout. Given the overstretched nature of UK government finances, this is not a desired outcome.
Will I look foolish in the future if I buy now?
Will the pound depreciate further? Could UK-China relations shift in a way that makes it very hard for me to operate my UK assets? All low probability, and perhaps unanswerable questions, but they are present as “back of mind” issues.
But net net, if things continue on their current course, I expect that Chinese investment in the UK will rise further in the coming years, that investment will be spread across a very broad range of sectors, but that it will all become much lower profile, “business as usual” activity, business person to business person, and less about any specific metal being used to describe state of the overall relationship.
Read more of my views on China business over on my blog, Gordon's View, and please follow me on Twitter @gordonorr.