Commentary on Political Economy

Wednesday, 11 November 2020


UK takes aim at China with revamp of takeover rules

© FT montage; Getty Images

Former chancellor George Osborne in 2015 promised a “golden decade” of business relations between China and the UK, but that pledge was effectively ditched by prime minister Boris Johnson on Wednesday.

The government published legislation giving ministers sweeping new powers to block overseas companies from buying UK businesses on national security grounds, in a move that appeared squarely aimed at Beijing.

Lord Patten, former governor of Hong Kong and a leading China hawk, welcomed the government’s “sensible” national security and investment bill that outlines the biggest overhaul of UK takeover rules in almost 20 years.

“It’s important to stop the sort of predatory buying up of important security interests in the UK by China or anyone else,” said Lord Patten. “China is not a country which you want to contain but a country that you want to constrain.”

The detente Mr Osborne unleashed between London and Beijing has dissipated over several years: it was former prime minister Theresa May who in 2017 began the policymaking that paved the way for Mr Johnson’s overhaul of takeover rules.

If you tried to buy an artificial intelligence firm in China do you think you’d be allowed so? Certainly not.

Lord Patten

Relations deteriorated further this year when UK ministers blocked an investor linked to China from taking control of the board of British chip designer Imagination Technologies. Mr Johnson also executed a major U-turn to ban Chinese telecoms equipment maker Huawei from supplying kit for the UK’s 5G mobile phone networks.

“The open, liberal common investor approach made sense up to 2012,” said Alex White, partner at Flint Global, a consulting firm. “Xi Jinping is the big change. It took time for people to realise that China was going to take a more aggressive approach.”

The shake-up of Britain’s takeover regime is consistent with changes introduced by western allies including partners in the Five Eyes network: the US, Australia, Canada and New Zealand.

Michele Davis, a partner at law firm Freshfields, said the UK was “late to the party”. “The UK regime has been a real outlier compared to what anyone else has been doing over the years,” she added.

Over the past decade, China has been busy acquiring British businesses, leading some bankers to warn that the UK’s new takeover rules might come too late in some strategic areas.

Jingye owns British Steel, while China Investment Corporation has taken stakes in Heathrow, National Grid and Thames Water. Other Beijing-backed bodies own large parts of UK North Sea oil production, and a stake in Hinkley Point C, a nuclear power plant under construction in south-west England.

Alok Sharma, business secretary, said he wanted to keep the UK “one of the most attractive investment destinations in the world” while also “shutting out those who could threaten our national security”.

Former business secretary Greg Clark, who worked with Mrs May on an early version of the revamped takeover rules, said investors should be reassured that the measures were not “draconian”. “The government has been meticulous in getting this right,” he added.

A Beijing foreign ministry spokesperson said the Chinese government expected countries to provide a “level playing field” for its companies, which would abide by host-nation laws when operating overseas.

“It’s not a friendly gesture but it’s also not an obvious provocation,” said Ding Chun, a European affairs expert at Fudan University in Shanghai, referring to the proposed new UK takeover regime.

However, any specific application of the revamped rules in a way that Chinese officials feel is discriminatory could prompt a backlash. After a rapid deterioration in relations between Beijing and Canberra this year, many Australian exporters have recently run up against a range of obstacles.

Under the UK plans, prospective overseas buyers of British companies, shareholdings or intellectual property in 17 sensitive industries will be required to alert a new government unit about the transactions.

British officials expect between about 1,000 and 1,800 transactions to be notified to the unit every year. Out of those, officials expect 70 to 100 to face “national security assessments”, with only a limited number being blocked or subjected to “remedies”.

That is a vastly more intrusive takeover regime than the current one, under which ministers only tend to intervene in acquisitions of UK companies with annual turnover of more than £70m, or where the merged business would have a market share of more than 25 per cent.

British officials acknowledged the cost of complying with the new regime could be as high as £330,000 for a single transaction involving a large company. A regulatory impact document published by the government suggested a total cost to businesses of about £40m a year.

Experts said the revamped takeover rules would raise questions about the UK’s hitherto open approach to inward investment, and those concerns are particularly acute given Britain is about to leave the EU single market at the end of December.

In dollar terms, the UK has the world’s second-largest stock of foreign direct investment after the US. Since 2007, and relative to gross domestic product, the UK’s FDI stock doubled to 73.6 per cent in 2019, with the US being the main acquirer of British companies.

However, the coronavirus pandemic has resulted in a sharp decline in all components of FDI. So far this year, there were 462 deals involving overseas companies buying UK businesses: 28 per cent fewer than in the same period in 2019.

“Post Brexit it is even more critical that we have to be open to trade and inward investment,” said Mike Rake, a City of London grandee who sits on the British board of Huawei and is chair of the International Chamber of Commerce’s UK arm.

“There will be countries whose political system or policies we don’t agree with but that doesn’t necessarily mean we don’t trade with them.”

Some business leaders complained of “mixed messages” from the government, noting how the new takeover regime came 48 hours after ministers launched a new office to woo inward investment.

But for Lord Patten, the revamped takeover rules are entirely logical. “If you tried to buy an artificial intelligence firm in China do you think you’d be allowed so? Certainly not,” he said.

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