20 Jan 2012

The UK – from US poodle to Chinese shih tzu

As China’s sovereign wealth fund makes its first UK infrastructure investment, buying a stake in Thames Water, Channel 4 News looks at what the deal means for both countries.

From a US poodle to a Chinese Shih Tzu? (Getty)

It seems Chancellor George Osborne‘s courtship of China has paid off.

Just a week after his visit to Beijing to forge closer ties between China and the UK, China’s sovereign wealth fund has bought a stake in the UK’s biggest water and sewerage firm.

The China Investment Corporation (CIC) has bought an 8.7 per cent stake in Kemble Water, the holding company of Thames Water, in a deal thought to be its first UK investment.

Despite the fact that Kemble Water is already owned by a consortium led by Australian bank Macquarie, and that in December Abu Dhabi’s sovereign wealth fund also bought a stake in the company, the deal has caused ripples of excitement, and some trepidation, across political and economic spheres.

While most people accept that Chinese wealth coming into the UK can only be positive for our beleaguered economy, others raise concerns that China is on some kind of mission for global domination. The investment also begs the question: is the UK going from being America’s political poodle to China’s economic shih tzu?

You would have thought most countries would be grateful for any foreign investment they can get. Mark Hendrick MP

Not at all, one China expert told Channel 4 News.

Dr Kerry Brown, head of the Asia programme at think tank Chatham House, said: “When you think of the statistic – Japan has $100bn invested in the UK and China so far about $1bn – well, are we Japan’s poodle?

“If we present ourselves as an open, liberal economy with the benefits that brings, we have to feel confident that we can accommodate investment and have the confidence in our legal system to deal with those issues on a level playing field.

“If you give confusing messages – we want you, we don’t want you – in a way you are having your cake and eating it, and that won’t succeed.”

China has been pursuing foreign opportunities since the 1990s

Since the 1990s Chinese companies have been pursuing foreign opportunities as part of the country’s “going out” policy. This has only accelerated in recent years – Bloomberg TV’s economics correspondent and a fellow in economics at Oxford University, Dr Linda Yueh, told Channel 4 News the Chinese government reported that the country invested $116bn overseas in 2011, up 9.7 per cent from 2010.

But it is the state capital that other global economies are really after. China has accumulated vast foreign exchange reserves of more than $3tr – and deals like Thames Water offer benefits for both economies, Dr Yueh said.

“The benefit for China is to diversify its capital outflow and gain better returns than on government debt. The UK benefits from gaining investment funds at a time when budgets are tight and infrastructure spending in particular is squeezed.”

So there are benefits for both sides – but the predicted flood of capital into the west has never happened.

This is because China is a cautious investor, Dr Hong Bo, senior lecturer in financial economics at the School of Oriental and African Studies, told Channel 4 News.

Read more from Faisal Islam: China and the world rebuild our infrastructure

“They have a lot of money but they are not going to invest with no economic gains. They are not in a hurry,” she said.

There are other barriers for China. For example, it has tried in the past to invest in America but has faced setbacks and blockages from the US Congress, which has vetoed investments in ports and energy companies.

This is a concern which has been raised in the UK as well, and there are sensitive sectors where China could be blocked from investing, such as the telecoms industry or military technology.

Mark Hendrick MP, chair of the China all party parliamentary group, told Channel 4 News that while there should be some barriers, the UK should try to build a positive relationship with China.

“We should be saying, is China an opportunity or a threat? It can be both, but if you treat it as a threat it becomes a self-fulfilling prophecy. It’s important for western governments to look at how to work with China rather than to see it as a threat to their futures and become protectionist,” he said.

Is China the new America? (Getty)

And in the current economic climate for the UK, it is a case of beggars can’t be choosers – particularly as it is battling for investment against other countries with lots to offer.

“It’s amazing how poverty focuses the mind,” Dr Brown told Channel 4 News. “One of the other things is – does China have a mega strategy to control the world? To be honest, they have got huge internal problems with their own infrastructure and their own stability.

“This idea that there is a narrative of Chinese domination is a bit overblown. On the other hand, they are not experienced investors, they have no track record, and there could be issues of governance. But in the UK that’s not such a big deal because it is a well established investment environment.”

It’s amazing how poverty focuses the mind. Dr Kerry Brown, Chatham House

Dr Bo said that for China, the deal merely represented an opportunity to invest somewhere it could get better returns than bonds, and in an economy that is seen as marginally safer than the eurozone or the US.

She added: “From an economic point of view, everyone is chasing economies that have money, so if the UK can benefit from doing that why not do it. And it is not only the UK – in the near future we will see many more countries trying to do something with the Chinese government.”

It is this position – having cash – which has given rise to the concept of China as a “superpower”, Dr Brown said.

“Yes, in terms of raw economic growth China is a major power but in terms of its ability to influence global events, it is much more complicated. It is a significant regional power and it will become the dominant regional power but in terms of being the America of the next 50 years, that is not so likely.”

So China is not the saviour of the UK economy – but it’s not a threat either. It’s merely an investor looking for good returns, rather than a giant aiming for world domination. Or at least that is what some people think – others remain convinced that, in its unstoppable quest for power, its next buy could be the moon.