When British writer L.P. Hartley noted in The Go-Between that the past was a foreign country and that things were done differently there, he did so against the decidedly English backdrop of Brandham Hall. One would doubt that China, or any investments into and out of it, were foremost in his mind.
Yet as we near the end of an extraordinary 2020, it is worth remembering that it was only five years ago that former UK chancellor George Osborne proclaimed a "golden decade" for business relations between the UK and China. Given how things have progressed in the intervening years, we might be forgiven for noting how foreign and how strange that proclamation now looks.
The tumultuous relationship between China and the UK in recent years is well documented. 2020, in particular, has had its share of headlines. The ongoing debate over Huawei, almost a microcosm of the wider geopolitical issues affecting Sino-British-American ties, reached a crescendo in August when the House of Commons Defence Committee determined that Huawei's presence in the UK's 5G networks posed a "significant security risk".
With any luck, we might look back at 2020 in another five years and marvel at how foreign it all was and how differently things were done then."
Soon thereafter, the UK government announced further details of a National and Security Investment Bill, the purpose of which was to strengthen existing powers to scrutinise and intervene in business transactions "to protect national security" while, at the same time, maintaining the UK's reputation as an open economy. All of this, of course, has been exacerbated by the impact of covid-19, particularly on the capital controls and liquidity pressure affecting Chinese firms and, in turn, outbound M&A activity.
It is therefore with some justification that the Chinese Foreign Ministry recently queried the point of investing in the British market. However, even as doomsayers and naysayers clamour to declare the end of the romance between China and the UK, there is evidence of inbound and outbound deal opportunities.
While inbound M&A and foreign direct investment volumes have fallen from the heady days of 2017, Chinese investment in the UK remains strong. Commentators note that Chinese investors still found the appetite to contribute an estimated $8.3bn into the UK between January and August 2019, compared to $6.1bn for the whole of 2018.
Bluster notwithstanding, trade between the two countries also reached record highs in 2019. According to the Office for National Statistics, China was the UK's sixth largest export market at £30.7bn, while, in the other direction, China was the UK's fourth largest source of imports at £49bn.
It is also clear that, for dealmakers at least, each of China and the UK remains an attractive destination for investment. For Chinese investment into the UK, much of that attractiveness has to do with, ironically, Brexit and its effect on the depreciating pound sterling.
Even with the political and economic uncertainty surrounding the UK's withdrawal from the European Union, it appears there are opportunities for investment if one wields the Chinese yuan and its comparatively stronger buying power. For UK investment into China, one of the immediate impacts of Brexit has been to drive capital previously destined for Europe into Asia, with China being a beneficiary. Indeed, data show that global foreign direct investment in China rose in October for the seventh straight month, rising 18 per cent year on year to RMB 81.9bn.
Despite the global pandemic, the political changes in the US and the looming spectre of Brexit becoming reality at the end of the year, there are still reasons for dealmakers to be optimistic about cross-border M&A between China and the UK. In the last decade, the Chinese have invested billions into the United Kingdom, including into household names like Thomas Cook, Greene King, Hinkley Point, Jaguar Land Rover, Heathrow, National Grid, and Thames Water.
However, it was only in March this year that Jingye Group, a leading Chinese steelmaker, acquired British Steel, saving more than 3,000 jobs in the process.
Similarly, it was only in June this year that China Pacific Insurance completed what was London's second largest stock listing of the year, issuing $1.8bn in global depositary receipts under the London-Shanghai Stock Connect programme, which allows companies listed in one country to access the equity capital markets in the other. In the other direction, UK businesses have made several strategic forays into China this year, particularly in the luxury retail and education sectors.
While there is no doubt that foreign direct investment has slowed, we are continuing to see inbound and outbound transactions as dealmakers look for opportunities to invest in and grow businesses.
The Organisation for Economic Co-operation and Development (OECD) recently emphasised the role that foreign direct investment could play in supporting businesses and economic recovery following the pandemic. With any luck, we might look back at 2020 in another five years and marvel at how foreign it all was and how differently things were done then.
Kurt Ma, a corporate partner at Bryan Cave Leighton Paisner LLP (BCLP), looks at recent developments in the relationship between China and the UK. BCLP is a full-service law firm with 30 offices across Europe, Asia, North America and the Middle East, giving the firm global coverage for M&A transactions. BCLP's M&A and corporate practice is recognised by Chambers UK 2021 as a ‘[h]igh-quality corporate team with substantial expertise in domestic and international deal work, calling upon a strong international network for cross-border deals.'
Rising incomes in Asia will probably be the most important investment story of the 2020s. Asia is home to 60% of the world's population, with both China and India each accounting for about 18% of the global total.