At the time of writing, it remains unclear whether the United Kingdom will leave the EU with no deal, Prime Minister Theresa May’s deal, a Norwegian deal, a Canadian deal, another deal, or whether it will even leave at all. Given this uncertainty, there are understandable concerns around the impact Brexit will have on investment into the United Kingdom, including investment from China. The United Kingdom remains one of the largest recipients of Chinese investment globally, and the largest in Europe.

However, the story so far concerning Chinese investment may provide some encouragement. The specter of Brexit does not seem to have spooked Chinese investors. Chinese investment into the United Kingdom more than doubled to over $20 billion from 2016 to 2017, and business interest and real estate investment enquiries have continued to rise through 2018.

The investment of personal fortunes into UK residential real estate has made headlines, but there have been plenty of significant investments into global giants such as Barclays and BP and more domestic-oriented businesses such as Pizza Express and House of Fraser. Unlike the investments of foreign manufacturers in the United Kingdom such as Nissan or Airbus that rely on "just-in-time" frictionless trade, the rationale behind many of the Chinese investments in the United Kingdom appears not to have been directly related to EU membership.

Outside of the worst-case disaster scenarios, the attractiveness of London-listed equities for Chinese investors may not change drastically. In fact, the sliding sterling has resulted in some stocks rising, and while some London-listed companies will be impacted by restricted access to the EU Single Market, many of the FTSE100 companies draw their income from diverse international sources.

The reputation of the London Stock Exchange as well-regulated, especially for protecting minority investors, is indicative of the broader suitability of the United Kingdom as an investment destination – rule of law, pools of professional expertise and an educated population more broadly, and overall ease of doing business. Chinese investors such as Huawei have capitalized on this with continued investment in R&D and other procurement from the United Kingdom.

In any case, the City of London will be seeking to maintain its position as the preeminent international financial center – a prospect that may be unshaken, if not actually supported, by some Brexit scenarios.

Impact on UK economy

It is evident that unless the United Kingdom can guarantee frictionless trade with the EU, investment opportunities in businesses that rely on “just-in-time” supply chains or unfettered Single Market access will be less attractive. However, the United Kingdom’s relationship with the EU itself may not be the most important variable. Other factors – the consequences of Brexit for the economy, consumer confidence and foreign policy – could have a greater impact on the opportunities for Chinese investment and UK-China economic relations more generally.

The success and attractiveness of domestic-oriented investments, as well as the prospects for emergent Chinese consumer brands such as Xiaomi and Huawei (emergent in the United Kingdom, at least), will rely on the health of the UK economy and UK consumer spending power, which are not guaranteed in the more negative Brexit scenarios.

While a “Hard Brexit” would be disruptive, it may open a window of opportunity for foreign investors. If the UK economy takes a hit, a combination of lowered asset prices and a weak currency could be interesting for Chinese investors with a longer-term view.

Conversely, a deal that gives businesses certainty and opportunity could see Brexit’s potential negative impacts curbed, and investors who were holding off due to uncertainty may have the confidence to move forward.

External pressures

There are wider forces at work, too, which could impact on Chinese investment to the United Kingdom post-Brexit. As Britain goes it alone, it may find itself choosing, or being pressured, into much closer trade relations with the United States. Given the current US-China trade tensions, it is possible that Washington may seek to extend their own China containment policy through the UK’s trade policy. In this scenario, things may become very difficult indeed.

Another challenge that risks being overlooked is that coming from China itself, as companies are incentivized and encouraged to keep their cash at home. If this situation is exacerbated or Chinese companies are encouraged to engage more heavily in Belt and Road Initiative projects, the United Kingdom will need to find other ways to increase its attractiveness.

Whatever the shape of Brexit, it is highly unlikely that UK companies will abandon its positive sentiment toward China. The UK government will likely follow suit. However, though the United Kingdom should retain its traditional suitability for foreign investment, the health of the UK domestic economy could be the main variable based on the story of Chinese investors in the United Kingdom so far.

The author is head of Research and Advisory for Asia House, a London-based consultancy. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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