Private sector now pushing Chinese investment

It is no accident that the trend of Chinese investment in the United Kingdom is increasingly being led by the private sector.

It started over a decade ago with the liberalization of network industries in the UK, particularly the water sector. Cheung Kong Infrastructure and the Li Ka Shing Foundation are direct investors in water utilities and paved the way for the emergence of private equity and risk capital in primary and secondary, or refinancing, investments in infrastructure and also directly in industrial sectors.

Examples include Shanghai Automotive Industry Corp's acquisition of the Rover Group, and China Equity Fund's 37.5 percent stake in Aston Martin.

The UK is the preferred choice among European Union countries for Chinese investments in excess of $5 billion annually, mainly due to the accessible regulatory regime of mergers and takeovers, the less rigid employment laws and industrial relations frameworks, and the availability of a spectrum of investment opportunities. These range from megadeals in excess of $1 billion to middle-market transactions of about $500 million and small deals below $100 million.

Chinese private equity is also interested in the full corporate control cycle, which covers total control to passive investor status. The overall UK policy of open market access and freedom of establishment, which underpins international trade, has manifested itself in the continuous preference of Chinese investors, private and institutional.

Recently, China Life Insurance and China Investment Corp invested $2 billion in UK real estate, while Hony Capital invested $1.5 billion in the food sector, gaining control of Pizza Express. Recent investments in nuclear power exceeding $4 billion at the Hinkley Point C nuclear project and the Magnox station at Bradwell represent other significant commitments from Chinese funds in UK energy infrastructure.

The UK has an investment-friendly regulatory regime, which also serves as a springboard for EU-wide capital investment via private equity and sovereign funds. Chinese private equity is adapting fast to the international needs of capital investment. However, it is rather risk-adverse. It is attracted by long-term sustainable returns, which also have multiple dimensions.

Chinese private equity is aware of the flurry of investment activity in the EU in general. Over the past decade, Chinese market presence in the EU has grown through greenfield projects and organic growth expansions, with most of the investment value attributed to acquisitions. The EU represents the choice of Chinese outward direct investments, averaging $10 billion annually and currently exceeding $18 billion.

Traditionally, Chinese outward investment and private equity transactions emanated from the winds of free trade and EU market access. A more sophisticated approach was introduced a few years ago, which focused investments in either intellectual property gains or value chains.

Chinese investments have been diverted in a variety of industrial sectors over the past decade, such as energy ($17 billion), automotive manufacturing ($7.7 billion), agriculture ($6.9 billion), real estate ($6.4 billion), industrial equipment ($5.3 billion), and information and communications technology ($3.5 billion). Infrastructure investment is a method of ensuring market connectivity, in addition to significant geopolitical influence. This represented the first stage of outward investment according to the Belt and Road Initiative. On the part of China, the initiative is one of the most sophisticated policies of outward investment. It links investment with the outcomes of economic recovery, especially in parts of the world that have suffered market failures.

The private sector-led investment trend is also revealing a shift in the economic development priorities of China. As advisor to international institutions, governments and industry, I can quote the prime example of the Silk Road Fund, which helps Chinese investment interests coupled with the agenda of renminbi internationalization.

China's 13th Five-Year Plan (2016-2020), its economic development strategy, has provided a blueprint that prioritizes sustainable (economic, social, environmental) and scientific development, aiming to deliver further policy objectives toward improving energy efficiency, accelerating development of the services sector, particularly financial services, improving innovation in agriculture and industrial sectors, and establishing a more balanced and sustainable trade.

Another example is the European Bank for Reconstruction and Development, which is based in London and sponsors a number of selective investments in Eastern European infrastructure, in cooperation with the Asian Infrastructure Investment Bank. Preliminary estimates point to investment needs of 1.5 to 2 trillion euros ($1.63 trillion to $2.18 trillion).

Until 2020, an estimated 500 billion euros is needed for the implementation of the Trans- European Transport Network program. In the energy sector, public and private entities in EU member states will need to spend around 400 billion euros on distribution networks and smart grids, another 200 billion euros on transmission networks and storage, and 500 billion euros to upgrade and build new generation capacity. Another 38 billion to 58 billion euros and 181 billion to 268 billion euros capital investment are required to achieve the EU broadband targets.

The Silk Road Fund will provide a significant operation for the AIIB, which will bear the major part of financing infrastructure investments in Europe and developing countries along the Belt and Road trade routes. The Silk Road Fund will create unprecedented competitive financing opportunities in delivering infrastructure and creating assets that will provide public services.

This complementary investment activity is not coincidental of syndication or sharing of debt instruments between the two institutions. It forms part of the Europe 2020 Strategy, which has been greatly influenced and harnessed by British interests of market liberalization, privatization and public-private partnerships. The intention is to build a portfolio of transactions sufficiently diversified in terms of size and sector, so as to benefit from risk reduction.

We're now witnessing the transition of China's investment strategy from traditional industries, energy and infrastructure, which have been served through sovereign funds, to services and high-value interests, which are served primarily through private capital. The modality of such a transition is the role of private equity and institutional investors. This will be one of the most prolific trends for the years to come, and shows the private sector influence on investment decisions and outcomes.

The author is a professor of EU and international business law at the University of Hull Business School. The views do not necessarily reflect those of China Daily.