Chinese investment in the UK bounces back after slow year

Firms are again showing interest as the clock ticks down to exit from European Union

After a fallow year, Chinese investors are once again opening their wallets and heading to the United Kingdom to snap up assets.

Energized by a Brexit-battered pound, Chinese businesses poured more money into the UK between January and August than they did in the entirety of 2018, according to UK consultancy Deloitte.

This week, Shanghai-based conglomerate Fosun provided Thomas Cook with an estimated 450-million-pound ($550.6 million) rescue package, in return for a 75 percent stake in the beleaguered UK travel company's tour operator and a 25 percent share of its airline.

And another mammoth deal went ahead earlier this month, when Hong Kong-based CK Asset Holdings bought British brewer Greene King, for an estimated $3.3 billion.

"Interest from China, both mainland and Hong Kong, in the UK is bouncing back," Deloitte's vice-chairman and Chinese services group leader, Angus Knowles-Cutler, told China Daily. "2017 was the big year in terms of M&A, and then it fell off a cliff last year. The year to date, it's already up. It is coming back; perhaps not to 2017 levels, but there is a fair amount of a judicious, strategic interest from Chinese buyers in the UK. We remain the number one destination in Europe over and above any other country."

In 2019, non-real estate related foreign direct investment from China into the UK has reached an estimated $8.3 billion, compared with $6.1 billion for the whole of 2018, according to Deloitte.

Official figures for overseas direct investment into the UK for 2018 have not yet been released by the China National Bureau of Statistics, or NBS.

The big deals have been diverse. In February, Alibaba affiliate Ant Financial took over UK-based international payments company World First in a deal believed to be worth $641 million. And in June, Hillhouse Capital, the management company founded by Chinese billionaire Zhang Lei, snapped up Scottish whisky maker Loch Lomond Distillers for a reported $508 million.

The increased Chinese interest is partly due to currency fluctuations brought on by the UK's pending exit from the European Union.

The pound fell 0.7 percent against the dollar, to trade at around $1.221 on Wednesday after it emerged that UK Prime Minister Boris Johnson would ask the queen to suspend Parliament, a move that critics say is designed to thwart those wanting to block a no-deal Brexit.

Responding to the slide, Panmure Gordon's chief economist, Simon French, said the situation could worsen if a no-deal Brexit looks certain.

"We could see sterling trading down towards its all-time low of 1.08 pounds versus the dollar, a level hit 34 years ago," French told UK financial paper City AM.

The weakening of the pound has made assets more attractive in the UK this year and Chinese investment has picked up, relative to other large European investment destinations, including Germany.

But Knowles-Cutler also believes that 2018 was a year of consolidation for Chinese investors, who completed more than $35 billion in UK deals during the previous two years, according to the NBS.

"With the big tidal wave of Chinese investment in 2016-17, I think some of the investment was good and sensible," he said. "I think, also, in their enthusiasm to internationalize, Chinese businesses have made a number of poor investments as well."

Last year, a Deloitte analysis revealed that one in five UK businesses bought by Chinese buyers is loss-making.

"There has been a regrouping of Chinese interest, to make sure what the Chinese are buying is a sensible, strategic fit with their domestic business," said Knowles-Cutler. "They have wanted to make sure things are more thought-through. The consolidation of what they have already bought has distracted Chinese buyers, but now they are back."

The Thomas Cook purchase by Fosun provides an example of a strategy that augments domestic business.

Prior to the takeover, the two companies established a joint venture in January, involving the construction of two hotels in China, including a branch of the British travel company's Casa Cook chain.

Fosun also added French holiday group Club Med to its portfolio of tourism businesses in 2015 and invested in Israel-based online hotel booking startup Splitty in April.

Knowles-Cutler said the prospect of a no-deal Brexit may not deter future Chinese investment in British business and infrastructure.

"In my conversations with Chinese businesses around Brexit, I generally haven't got a sense that it's one of the major factors in their decisionmaking," he said. "Whereas, I think, Japanese businesses have taken Brexit very seriously and viewed it quite negatively, I think Chinese businesses are being a bit more commercial about the opportunities with the UK."