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9 December 2020updated 04 Sep 2021 12:44pm

Can Britain afford to turn down Chinese investment?

The Anglo-Chinese “golden era” has been replaced by mutual suspicion, but Brexit – especially a no-deal Brexit – makes relations with the world's second-largest economy crucial.

By Amy Borrett

Since the 1920s, a company in Cambridge has supplied radio equipment to Britain’s armed forces, emergency services and the BBC. Founded in 1896 from Cambridge University’s physics department, Pye Ltd was acquired by Philips in the 1960s, and returned to British ownership as Sepura, which became the biggest supplier of mobile radios to the public security sector in 20 countries. But Sepura is no longer a British company; it was acquired, in May 2017, by Hytera, a Chinese company based in Shenzhen.

The sale of Sepura to a Chinese owner was unpopular in government, not only because an established British company was now owned overseas, but because its technology is used in the communications of the UK’s police, armed forces, emergency services, energy suppliers and transport networks. While there is no evidence that Sepura or its new owner have done anything wrong, the Home Office and another, unnamed party contacted the Competition and Markets Authority before the buyout to warn that misuse of Sepura’s technology could “directly prejudice the operations and security of the emergency services and other authorities, and have wider implications for national security”.

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There was little the MPs who objected to the sale could do, however, and it went ahead. But in the same year, Theresa May’s government concluded, amid growing concern about foreign interference in key industries, that the UK’s foreign investment regime was not fit for purpose.

Last month’s National Security and Investment Bill, which updates the rules governing foreign investment in the UK, is the government’s attempt to address those concerns as a newly ”global” Britain makes its way onto the world stage. It has been at least five years in the making; in 2015, a risk assessment flagged the increasing scale and complexity of national security threats.

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But there has also been a degree of hesitation about introducing legislation that may offend key trading partners as Britain leaves the EU. While the bill falls short of creating a blacklist, it is clear that it is at least partially motivated by a desire to curb Chinese influence over British businesses. The “golden era” of trade relations between Britain and China has come to an end.

Takeovers spiked during “Golden Era” of trade between China and Britain
Number of UK companies acquired by Chinese firms

Henry Jackson Society

Britain is not alone in tightening its oversight of foreign investment. America and Australia (partners with the UK in the Five Eyes intelligence alliance) have led a global crackdown, driven by national security concerns that have only been accelerated by the Covid-19 pandemic. The multinational law firm Linklaters has shown that 15 OECD countries have tightened foreign investment rules since March, with a further seven planning similar legislation in the coming months.

Nicole Kar, head of competition at Linklaters, says the shift in attitude reflects a “breakdown of that previous consensus around globalisation”. A surge in cyber attacks and the increasingly complex nature of global supply chains have forced nations to take a tougher stance on trade imbalances.

“There is a feeling [in Europe] that Chinese state capitalism is something different, and needs to be dealt with in a different way,” says Kar. The goal for many countries now, she says, is to “level the playing field, by taking mitigating actions for Chinese companies sponsored by subsidies from the government buying European industry”.

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A shift in China’s industrial policy has precipitated growing wariness of Chinese investors around the world. The advent of the “Made in China 2025” strategy, which centres on transitioning the country’s economy into a high-tech powerhouse, has redirected China’s outward investment away from businesses in sectors such as property and entertainment, towards the more politically sensitive acquisitions of technology companies such as Sepura and the chip designer Arm.

Since 2017, the government has intervened in four Chinese takeovers
Acquiring firm by country


The problem is that many technology companies are in the early stages of their development and so are small and cheap, leaving them outside the scope of existing legislation, says Charles Parton, a former UK diplomat and adviser to the foreign affairs committee.

“[We need to look at] small companies with technologies right at the start. The Chinese will buy up ten, in the hope that one makes a real difference,” he says.

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The National Security and Investment Bill looks to correct this by expanding the government’s power to block foreign investment in 17 “sensitive” industries, including artificial intelligence, quantum technologies and computing hardware, by mandating notification of any deal – whatever the size. This is the first major update to Britain’s foreign investment rules since the 2002 Enterprise Act was introduced by the Blair government. Over the past two decades, the UK government has only used the latter legislation to intervene in 20 deals, citing national security concerns in 12 instances.

Over 40 per cent of Chinese takeovers since 2010 were in a sensitive industry
Number of UK companies acquired by Chinese firms since 2010 by sector

Henry Jackson Society

Now, the government expects to be notified of more than 1,000 deals each year. Kar says this reflects a “sea change” in attitude as much as it does the expanded scope of the new law.

“It’s not a lack of arsenal, it’s the attitude of the soldier,” she says, adding that the “laissez-faire regime” of the past two decades is finished.

The retrospective powers granted by the bill, which allow the government to review deals up to five years after they have been completed, could also call into question some of the more contentious deals that have slipped under the radar. Kar does not expect the government to make extensive use of these controversial powers, which she describes as more of an “anti-avoidance measure”. But Sam Armstrong, director of communications at right-leaning think tank the Henry Jackson Society, says Conservative MPs would like to revisit some recent deals.

There have been 12 national security interventions in the past 20 years
Deal size (£m)


Linklaters; publicly available information

“They want [to look at] Gardner Aerospace,” (a supplier of parts to Rolls Royce and Airbus, which was sold to Chinese investors in 2017) he says, adding that MPs such as the members of the China Research Group “don’t like” the Sepura takeover. In both cases, he says, “they would have stepped in, had they had powers”.

But John Gray, a partner at leading M&A advisers Finsbury, points out that the power to decide on these deals resides not with MPs but with the Secretary of State for Business, Energy and Industrial Strategy (currently Alok Sharma). While the government has handed “a sizeable hammer to ministers”, he adds, “there is no guarantee that future holders of the office will not begin to see every politically contentious transaction as a nail”.

Gray points to America’s Committee on Foreign Investment (CFIUS) as evidence “that national security can quickly merge into economic and foreign policy, culminating in electoral policy”. Amid the deteriorating relations between the US and China under Donald Trump, CFIUS was given more funds and powers by the 2018 Foreign Investment Risk Review Modernization Act (FIRRMA) and has presided over a steep drop in inward investment into the US from China.

The US has seen a dramatic drop-off in Chinese investment
Chinese investment in the US ($bn)


China Global Investment Tracker, The American Enterprise Institute and The Heritage Foundation

But while MPs worry about security, business leaders worry about a return to what Nicole Kar describes as “1970s-style protectionism”.

Chris Southworth, secretary general of the International Chamber of Commerce (ICC) UK, echoes this concern, calling the UK’s new bill “heavy-handed and overreaching”.

“What it shouldn’t be is a pretext for protectionism [and] there is an element of what the UK is doing at the moment… that does have that twang, when you connect it to some of the stuff going on with Brexit,” he says.

The UK will need the US and China after Brexit
UK’s top non-EU trading partners (£bn)


Office for National Statistics

While the UK is an attractive place to do business, adds Southworth, the margin of advantage is small and there is a real risk of “chilling” investment by creating additional barriers. As Britain faces the prospect of leaving the EU without a trade deal, other trading partners such as China and the US become even more important.

“To imagine that this is not being noticed in Beijing would be extremely naïve,” he says. “We need the investment, particularly in areas like technology where we don’t have a critical mass of large companies able to provide these services.”


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