UK to tighten foreign investment reviews


The British government is pressing ahead with plans to tighten screening of foreign investments by China and other countries amid concerns that such flows could compromise national security.

In the election manifesto they published in May the Conservatives pledged that prime minister Theresa May would ensure foreign ownership of companies controlling “important infrastructure” would not undermine British security.

A weakened Tory party has abandoned a string of other promises after losing seats in a disastrous election performance on June 8, effectively ripping up the manifesto.

But the plan for a tighter takeover regime is one manifesto idea that will still be taken forward, government aides have confirmed.

It reflects a faultline within the party about how to deal with Beijing. When David Cameron was prime minister, the UK actively courted Chinese investment — even rolling out the Queen to host President Xi Jinping in 2015 — to invest in new infrastructure.

Chinese companies have bought up a slew of property assets in recent years — including the £1.1bn “Cheesegrater” skyscraper — while investing in nuclear power, National Grid’s gas distribution arm, Wentworth golf club and Global Switch a data centre.


But that so-called “golden era”, led by former chancellor George Osborne, has receded since Theresa May became premier.

Nick Timothy, her former co-chief of staff, previously said it was “baffling” that the British government had been welcoming to Chinese state-owned companies in sensitive sectors.

Mr Timothy, who was thought to be behind Mrs May’s decision to re-examine the Chinese investment in EDF’s Hinkley Point nuclear power station last summer — only to go ahead after all — lost his job after the election.

Yet Mrs May’s administration is still pressing ahead with its plans to tighten the foreign takeover regime, in parallel to similar efforts across Europe.

A week ago, the German government expanded its powers to block the takeover of German companies amid growing concerns in Berlin at the scale of Chinese investment in the country’s high-tech sector.

In February, Germany, France and Italy presented the European Commission, the EU’s executive arm, with a common position on screening investments from abroad, a first step towards an EU-wide mechanism similar to Washington’s powerful Council of Foreign Investment in the US, or Cfius.


The British government has yet to set out exactly how its new system will operate. Its manifesto pointed towards a limited, sector-by-sector approach.

“We have already strengthened ministerial scrutiny and control in respect of civil nuclear power and will take a similarly robust approach across a limited range of other sectors, such as telecoms, defence and energy,” it stated.

Several former Tory ministers have backed a new report by the Henry Jackson Society, a think-tank, calling for the creation of a body along the lines of Cfius.

“Right now the problem is we don’t have a review process that sits down and sensibly goes through the security implications [of foreign deals] or at least in a way that is well resourced,” said John Hemmings, author of the report.

UK mergers and acquisitions are currently vetted by the Competition and Markets Authority, which is mainly focused on competition and not on security.

One conclusion of the think-tank report is that “a formal investment screening regime is both necessary and desirable to protect the UK’s economic interests and its national security”.

Sir Malcolm Rifkind, a former Tory foreign secretary, said the call for a new body to review future Chinese investments against national security criteria was “long overdue”. He said Chinese investment was broadly welcomed, but added: “Some of it has implications for our long-term security”.

Likewise, Sir Hugo Swire, a former Foreign Office minister, said, a new “investment review body” was needed because of the “strategic intent of some foreign state-owned enterprises with less-than-benign intentions”.

The Henry Jackson Society was in January reported to have been paid a monthly retainer by the Japanese embassy in London to wage a “secret PR war” against China.

But it said in a statement that the report on critical infrastructure “was produced completely independently . . . It was neither commissioned nor funded by any foreign or foreign-linked entity”.

Britain is one of the most open of the advanced western economies to foreign investment in sensitive sectors such as telecoms and civil nuclear power.

In 2013, British Telecom hired China’s telecoms group Huawei to beef up its internet infrastructure, setting up a Huawei-funded and run centre to vet the company’s equipment for malicious code and other security breaches

The Chinese investment in the Hinkley Point C nuclear reactor project has also been controversial as the consortium to build the plant includes two Chinese nuclear power companies. The report noted that China exerted massive pressure on the UK over the fate of the deal, which “stands as evidence that . . . China is quite willing to pressure states into accepting Chinese investment when it wishes”, it said.

Since 2005 China has invested $44bn into the UK, of which $11.15bn was invested just last year.

Many Chinese investors — even private companies — have ambiguous links to the Chinese state and even the military.

The report drew attention to the purchase of 49 per cent of Global Switch, a cloud data centre provider, last December, by a Chinese consortium. One of its members was a subsidiary of AVIC, a large Chinese military aerospace group. Following the deal, Australia’s government filed to terminate its contract with Global Switch, citing the change in ownership.

Chinese analysts argue that measures like Cfius are a way of using security as a pretext to impose protectionist barriers.

Ding Zhijie, professor at the University of International Business and Economics in Beijing, said: “Back when developed countries dominated international trade they greatly promoted free trade and free capital flow and claimed this would bring benefits to both sides. Now, other countries have grown and increased their overseas investment, and these same countries use ‘national security threat’ as an excuse to set up obstacles against incoming investment.”

Britain’s business department (BEIS) confirmed that new plans were being drawn up: “Government is actively engaging with businesses and stakeholders to develop proposals that improve and update our merger and takeover rules,” it said.

“It is important that we protect national security, while remaining an open and liberal international trading partner and a global champion of free trade and investment.”


link: https://www.ft.com/content/9cb95e84-6bc2-11e7-b9c7-15af748b60d0