Chinese, HK investment in UK compensates for sharp fall in FDI

Mark O'Neill September 02, 2019 08:00

Heavy investment by mainland Chinese and Hong Kong companies into the United Kingdom has helped to compensate for a sharp fall by the rest of the world. They are buying because of a sharp fall in the British pound, confidence in the long-term strength of the British economy and a desire to park money away from China.

According to the UK Department for International Trade, the number of foreign direct investment (FDI) projects into the UK dropped to 1,782 in the fiscal year that ended on March 31, the lowest level in six years. It was the second consecutive annual fall since March 2017.

The fall in foreign investment had a knock-on effect on employment, with a 29 percent decrease in jobs created in the year that ended in March, compared with the previous year. In financial services and automotives, the number of jobs created fell by about a third. In advanced engineering, environment and infrastructure investment, job creation shrank by about 40 percent.

By contrast, mainland Chinese firms have spent 6.75 billion pounds (US$8.28 billion) on 15 major acquisitions in the UK this year, more than the 6 billion pounds in 23 deals in 2018.

Mainland acquisitions this year include the sale of money transfer company WorldFirst to Alibaba for 520 million pounds and the purchase of Loch Lomond Distillery to Zhang Lei’s Hillhouse Capital for 400 million pounds, while Fosun International, which owns Wolves Football Club, is injecting 450 million pounds into holiday operator Thomas Cook, which has a history of 179 years, in exchange for 75 percent of the equity in its travel business and up to 25 percent of its airline.

Hong Kong investors are also snapping up UK assets. In August, Victor Li Tzar-kuo of CK Asset Holdings (01113.HK) announced spending of 4.6 billion pounds to buy Greene King, Britain’s biggest listed pubs and brewery group. George Colin Magnus, chairman-designate of CK Bidco, the vehicle that has agreed to acquire Greene King, said it fitted a “strategy [of looking] for businesses with stable and resilient characteristics and strong cash flow generating capabilities”.

In June 2018, Li paid 1 billion pounds to buy 5 Broadgate, a three-year-old building close to Liverpool Street railway station in London with a total gross floor area of 1.2 million square feet.

Several factors account for this enthusiasm by Hong Kong and Chinese buyers. One is the fall in the pound's value, which has dropped 15 percent against the euro since the Brexit referendum in 2016. This has made UK assets substantially cheaper for those buying in other currencies.

The second is that Hong Kong and Chinese firms are bullish on the UK economy in the long term. Both HK and Chinese executives are familiar with the UK; many studied and worked there. They see Brexit as slowing but not derailing the economy and believe that the UK will remain a magnet for global capital and talent. It is English-speaking, has a strong rule of law and well-established rules of business.

Beijing has targeted the UK as a strategic economic partner. The UK is China’s second-largest trading partner in the European Union and China’s second-biggest investment destination and source of capital inside the EU, according to the Ministry of Commerce in Beijing. In the first quarter of 2019, London accounted for 44.46 percent of total global renminbi transactions. The average daily trading volume of the Chinese currency in London was more than 78 billion pounds, up 30 percent from a year ago.

Beijing is building a new embassy in the former Royal Mint overlooking the Thames in London. Property analysts estimate that China paid at 750 million pounds for the property.

With Brexit fast approaching, on Oct. 31, the British government is aggressively courting China as an important source of inbound investment. In late August, International Trade Minister Graham Stuart led a 200-strong business delegation for a 10-day visit to Beijing and Chongqing. In June, the two countries held the 10th China-UK Economic and Financial Dialogue in London. They launched the London-Shanghai Stock Connect, which allows listed companies to sell their shares in Shanghai for the first time.

The third factor is that the UK offers a safe haven to hold assets, out of the reach of Chinese political risk and tax authorities. Mainland firms have always sought such havens. After nearly three months of protests in Hong Kong with no compromise in sight, local firms are also looking to diversify risk and park their assets offshore. The outlook for the city is increasingly uncertain. And Hong Kong conglomerates no longer enjoy the privileged status they once did in China.

Retaining China as a favored business partner will be a hard challenge for new Prime Minister Boris Johnson. His friend, President Donald Trump, is demanding that he exclude Huawei from Britain’s proposed 5G network, but Beijing has made this a test of his faith in China. After Brexit, Johnson wants to rapidly secure trade agreements with both Beijing and Washington; but they may be mutually exclusive.

In any event, he can count on a continued flow of Hong Kong and Chinese capital to offset the economic shock of Brexit.

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RT/CG

Mark O'Neill

A Hong Kong-based writer, teacher and speaker.