As an economic storm engulfs the Shanghai Stock Exchange (SSE), our Public Affairs team considers whether Chinese investment in UK infrastructure could be affected.
In just three months, $3 trillion has been wiped off the value of companies listed on the SSE. ‘Chinese Black Monday’ (24 August) - the worst day of the crisis so far – saw an 8.49% fall in share prices, prompting the Chinese government to invest ¥140 billion, cut interest rates and relax the banking reserve requirement ratio.
As investors and economists attempt to understand the long-term repercussions of this dramatic turn in the Chinese economy, so too will governments need to reappraise the solidity of investment commitments from the Chinese state and businesses. While the SSE is not globalised in the same way as the London or New York markets, such a major economy being in crisis puts the stability of world markets at risk.
China and the UK
Two years ago, at Peking University in Beijing, George Osborne told students that “There is no country in the West that is more open to investment - especially from China”. Indeed, between 2005 and 2013 Chinese investment in the UK totalled £18bn and over the next decade the UK is hoping to secure over £100bn more, predominantly for the energy, infrastructure and transport sectors.
The government has long been tempting Chinese investors with the UK’s relative stability, regulation and low corporation tax. The nature of investment has typically been low risk and fastened to revenue streams backed by the UK government such as a 10% stake in both Thames Water and Heathrow Airport, which suggest that China may be looking for safe ports for its wealth in assets already generating income. It is likely that Chinese capital will substantially finance a third runway at Heathrow, should approval be granted.
However more recent investments in brand new projects without a record of income generation, such as the £1bn redevelopment of the Royal Albert Docks and the China Harbour Engineering Company’s new contract to build the Swansea Bay tidal lagoon, represent a subtle break with this apparent preference to invest in established ventures.
Investment risk and the need for stable policy
The British government has been keen to secure financing for new projects, particularly in large scale and nationally-significant infrastructure. Commitments to complex flagship programmes like HS2 and the ‘northern powerhouse’ mean that political capital will be tied up in getting these off the ground, and Chinese financing is likely to play an important part in their delivery.
The question facing the UK government will not so much be whether investment will continue, but the nature of that investment and the readiness of investors to plunge money into sectors with unclear returns or where government policy is unstable. The Chinese economic crisis could therefore cause a retreat to safer ventures - and, in this context, investors will want to see transparency, long-termism and stability in government policy-making.
On Black Monday, Chancellor George Osborne sought to reassure the UK that whilst the stock markets were facing disruption, steady economic growth across the board signalled a positive global undercurrent. To an extent this is true as even the SSE still boasts huge net gains this year and China’s GDP is remains on course to grow by around 7%.
As the world markets absorb the impact of Black Monday, confidence in China will have been dented. But given that major infrastructure is an important part of the UK’s long-term economic strategy, in a period of ongoing austerity and a lack of capital from domestic sources, George Osborne will doubtless continue to seek out Chinese investors to help bring projects to fruition.
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