The UK is targeting China with a revision of takeover rules

The UK is targeting China with a revision of takeover rules

Former Chancellor George Osborne promised a “golden decade” of China-UK business relations in 2015, but that promise was effectively dismissed by Prime Minister Boris Johnson on Wednesday.

The government released laws giving ministers new powers to prevent foreign companies from buying UK companies for national security reasons. This clearly seemed to be aimed at Beijing.

Lord Patten, former Hong Kong governor and leading China hawk, welcomed the government’s “sensible” national security and investment law, which is the largest overhaul of UK takeover rules in nearly 20 years.

“It is important to stop the predatory buying up of vital security interests in Britain by China or others,” said Lord Patten. “China is not a country that you want to contain, it is a country that you want to restrict.”

The détente that Mr Osborne unleashed between London and Beijing has disintegrated over several years: it was former Prime Minister Theresa May who started policy-making in 2017 that paved the way for Mr Johnson’s overhaul of takeover rules.

If you tried to buy an artificial intelligence company in China, would you allow it? Certainly not.

Relations worsened this year when UK ministers prevented a China-related investor from taking control of the board of UK chip designer Imagination Technologies. Mr Johnson also made a major U-turn to ban Chinese telecommunications equipment maker Huawei from supplying kits for the UK 5G cellular networks.

“The open, liberal approach to joint investors made sense through 2012,” said Alex White, partner at Flint Global, a consulting firm. “Xi Jinping is the big change. It took some time before people realized that China would be more aggressive. “

The reorganization of the UK takeover regime is in line with changes introduced by Western allies including partners in the Five Eyes network: the US, Australia, Canada and New Zealand.

Michele Davis, partner at Freshfields law firm, said the UK was “late for the party”. “The British regime has been a real outlier compared to what others have done over the years,” she added.

For the past decade, China has been busy acquiring UK businesses, which warned some bankers that UK’s new takeover rules may be late in some strategic areas.

Jingye owns British Steel, while China Investment Corporation has acquired stakes in Heathrow, National Grid and Thames Water. Other Beijing-backed facilities own much of the UK’s North Sea oil production and have interests in Hinkley Point C, a nuclear power plant under construction in south-west England.

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

Former business secretary Greg Clark, who worked with Ms. May on an early version of the revised takeover rules, said investors should be reassured that the measures are not “draconian”. “The government has worked meticulously to get this right,” he added.

A Beijing Foreign Ministry spokesman said the Chinese government expects countries to play on a level playing field for their companies, which will abide by host country laws when operating overseas.

“It is not a friendly gesture, but neither is it an obvious provocation,” said Ding Chun, an expert on European affairs at Fudan University in Shanghai, referring to the proposed new British takeover system.

However, any specific application of the revised rules in a way that Chinese officials find discriminatory could result in a backlash. Following a rapid deterioration in Beijing-Canberra relations this year, many Australian exporters have recently encountered a number of obstacles.

UK plans require potential overseas buyers of UK businesses, equity or intellectual property in 17 sensitive industries to notify a new government entity of the transactions.

British officials expect between 1,000 and 1,800 transactions to be reported to the unit each year. Of these, officials expect 70 to 100 to face “national safety assessments” with only a limited number being blocked or subjected to “remedial action”.

This is a far more intrusive takeover system than the current one, where Ministers only intervene on acquisitions of UK companies with annual sales in excess of £ 70 million or where the merged company would have a market share of more than 25 percent.

British officials admitted that the cost of complying with the new regime could be as high as £ 330,000 for a single transaction with a large company. A regulatory impact document published by the government proposed a total cost of around £ 40 million per year to businesses.

Experts said the revised takeover rules would raise questions about the UK’s previously open approach to foreign investment, and those concerns are particularly acute as the UK will leave the EU’s single market in late December.

Expressed in US dollars, the UK has the second largest stock of FDI in the world after the US. Since 2007, the share of FDI in the UK relative to GDP has doubled to 73.6 percent in 2019, with the US being the main buyer of British companies.

However, the coronavirus pandemic has resulted in a sharp decline in all constituents of foreign direct investment. So far this year there have been 462 deals with overseas companies buying British companies: 28 percent fewer than in the same period in 2019.

“After Brexit, it is even more important that we are open to trade and foreign investment,” said Mike Rake, a Grandee of the City of London who sits on Huawei’s UK board and chairs the UK arm of the International Chamber of Commerce.

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

Some business leaders complained of “mixed messages” from the government, noting that the new takeover system came 48 hours after ministers opened a new office to attract foreign investment.

For Lord Patten, however, the revised takeover rules are perfectly logical. “If you tried to buy an artificial intelligence company in China, would you allow it? Certainly not, ”he said.

Additional reporting from Valentina Romei and Matthew Vincent