Brexit: China will be more prudent about UK M&A

Chinese companies will wait and see following the UK's decision to exit the European Union in terms of investments and acquisitions in the country.
NDRC chairman Xu Shaoshi speaks at the World Economic Forum in Tianjin
NDRC chairman Xu Shaoshi speaks at the World Economic Forum in Tianjin

Chinese companies will “wait and see” the impact of the UK’s decision to exit the European Union in terms of conducting investments and acquisitions in the country, the World Economic Forum heard in Tianjin on Sunday.

Brexit has led to more uncertainties and risks to the world’s economy… and [this will] make Chinese entrepreneurs wait and see before they invest or acquire [assets] in the UK. The event of Brexit is quite likely to trigger capital outflows and the falls of asset prices [in the UK],” Xu Shaoshi, chairman of the National Development and Reform Commission, said at the three-day event.

The view of the head of China’s top economic planner has been echoed by other Chinese officials, investment bankers and leading economists attending the forum, dubbed the “Summer Davos”.

“Chinese companies will become more prudent and they will wait and see [before they invest in the UK]. But this doesn’t mean they will give up on the UK,” Eugene Qian, UBS’s China head, told FinanceAsia on the sidelines of the forum.

“The pound might have dropped 10% today but it might be up 5% tomorrow. If anyone who cannot bear this kind of currency swings, I don’t think the person is ready for overseas investment,” he added.

Britain’s vote to end its 43 year-old marriage to the EU sent shockwaves across the world and hit global stock markets, which lost about $2 trillion in value on Friday. The pound also plunged to its lowest level since 1985, with investors rushing for less risky currencies such as the dollar.

The UK has for years positioned itself as Beijing’s “best friend in Europe”, which helped it secure a number of Chinese investments - mainly properties, infrastructure projects and financial services projects - to deepen ties between the two countries.

“Brexit is a sudden challenge but we cannot just panic,” Li Baodong, China’s deputy foreign minister, said during a panel discussion at the WEF, adding China will not pull its investments out of the UK amid market uncertainty in the wake of Brexit.

“We cannot give up on our partner in hard times… and I believe the Chinese business community will act responsibly,” he said.

Li Baodong, Chinese deputy foreign minister, speaks at the WEF in Tianjin
(Photo credit: WEF)

Last year, China poured $3.3 billion into the UK, making it among the top three European countries for Chinese direct investment alongside Italy and France, according to law firm Baker & McKenzie. Chinese private companies also either fully control British brands such as Pizza Express or own controlling stakes in British firms, including House of Fraser.

According to Huang Yiping, a professor at Peking University and a member of the monetary policy committee at the Chinese central bank, it is too early to assess Brexit’s direct impact on China’s economy.

He, however, voiced his concerns over the vote’s impact on China’s globalization process, as Brexit could represent a backlash against the trend. “China has benefited from the globalization for many years. If Brexit marks a reversal of the global integration, this would impact China in the long-term.”

Elsewhere at the forum, many Western corporate executives, bankers and economists also weighed in on the discussion of Brexit, arguably the most heated topic during this year’s Summer Davos. Among them is Michael Falcon, Asia-Pacific head of JP Morgan Asset Management, who said his bank expects more market volatility but not a recession in the UK.

“We don’t see this derailing the global recovery at this point. It’s a shock, not a crisis, and so far markets seem to be handling it well.”

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