China to the Rescue?

The Financial Times reports on the attempt to buy the UK’s Horizon nuclear facility by a consortium of investors led by a Chinese SOE.  The UK arguably has been the most open OECD country to Chinese state investments; the report mentions chancellor George Osborne’s January 2012 visit to China, during which he actively sought Chinese investment in UK infrastructure projects.  Some politicians–and public opinion generally–do not seem to be squarely behind such investments:

The British government says the Horizon deal is a matter for the owners, Eon and RWE, the German utilities. However, some UK officials are closely involved and are aware that any bid would have to be acceptable to politicians and the ­public.

This sensitivity explains why officials would prefer the Chinese bidders not to hold majority equity stakes in Horizon and have ensured that they have partnered with companies from other countries. Yet the billions of pounds required to fund the construction of new nuclear plants – likely to come from Chinese lenders – means that in reality the successful consortium could be dominated by Beijing.

“They really are desperate to get this deal off the ground,” said one person familiar with the talks. “If the Chinese are the only option then they have no choice, but that doesn’t mean people aren’t uneasy.”

Similar sentiments were expressed in the US in late 2007/early 2008, as SWFs invested in US financial firms. Significantly, however, as the LSE’s Mark Thatcher notes in a recent paper,

Both Labour and Conservative governments have rejected new legal controls based on overseas state ownership. . . . today ministers [cannot block an investment, but] can only order . . . an investigation on much narrower grounds, notably a potential threat to national security, media pluralism or financial stability. Instead of legal restrictions, UK policy makers have sought an institutional framework based on voluntary ‘soft law’ instruments to protect ‘competitive markets’.

What this means, as a practical matter, is that while the UK and sovereign investors must still be sensitive to the public response to sovereign investment in UK enterprises, it has created a legal structure that has less risk of political holdup than under the foreign investment regulation of the US, Australia, and many other OECD countries.  Less risk of political holdup = more investments.  This result is borne out in Thatcher’s calculation of the total number of SWF investments in the US versus the UK (excluding Norway’s investments): 197 US, 341 UK.  To put the number in context, the World Bank reports a 2011 market capitalization of 15.6 trillion for US domestic listed companies (of which Apple makes up a large chunk!) versus a UK total market cap of 1.2 trillion.

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