China: Investment into the United Kingdom

Baroness Falkner of Margravine Excerpts

Wednesday 7th May 2014 Grand Committee

[Baroness Falkner of Margravine (LD)]

My Lords, I thank the noble Lord, Lord Wei, for that wonderfully powerful lobbying from a certain perspective—but that is what an APPG chairman is supposed to do—and I think that we were all extremely interested in everything that he had to say. I certainly will not disagree with anything he said, but I want to highlight a couple of different issues. Before I start, let me also say that this is my first interaction with the Minister, and I am delighted to be on the same side as him—but perhaps slightly opposed—in this very significant debate. I look forward to hearing what he has to say.

I want to pose a couple of general questions. One of the most important issues that should affect Britain’s economic and political considerations is where to draw the line between strategic interests and commercial interests. Not everything can be up for sale, and not everything can be sold to everyone. In the Dubai Ports World controversy in the US some years ago, a state-owned enterprise attempted to buy what was deemed a strategic US asset. At issue was the significant question of who controls US ports. By the way, this was not a right-wing Republican argument—one of the champions of the opposition to Dubai Ports World taking over US ports was one Hillary Clinton—as there were people on all sides who saw ports as a strategic asset and therefore vetoed the attempt by Dubai Ports World to take control. Ownership was not a significant issue, as P&O had ownership of the ports at that time, but ownership by a strategic ally is very different, in terms of public perceptions of security, from ownership by a non-transparent state-owned enterprise. The issue was ownership by a foreign power about which there were perhaps reservations, either about the state itself or about the record of the entity that was attempting to do the transaction.

Likewise, on the issue of Pfizer and AstraZeneca, we in the UK need to think long and hard about strategic assets and whether research and development, including scientific research, comes into the category of meeting the public interest test. I would argue that it does, not just because of the jobs and R&D spin-offs but because, where a primary purchaser is in a dominant position in relation to the state sector—that is, in the NHS—we need to ask whether we give disproportionate pricing power to a player in foreign ownership that would be in charge of that kind of strategic asset. I would say no.

Going back to the China debate, but keeping on that theme, one need only look at the ire or public sentiment that was aroused when another strategic industry—I shall use the example of UK water utilities—was privatised. The water companies were taken over by a state-owned enterprise, which in this case meant France’s EDF, and the profits reverted to the French taxpayer. There was considerable speculation about why, in an era of austerity, British schools could not be built but the French Government had sufficient in its coffers to do quite well with its public sector.

I have not mentioned any Chinese company as an example. However, the APPG report highlights that analysis of the growth in Chinese investment, which has increased by a factor of 13 since 2008, shows that much of the growth is due to a small number of M&A deals, which are dominated, it points out, by state-owned enterprises and sovereign wealth funds. So it is only a matter of time before we are caught in a controversy where a Chinese firm or a state-owned enterprise is involved, and hence the need for the Government to think through the broader principles in this area, particularly the security dimension. Needless to say, the manner in which an industry is run is critical to public acceptance. Where it is well run and the UK benefits from investment, there is usually little disquiet. However, when it comes to an issue where “rent seeking” is too blatant—which I think was the case in the water utilities—at a cost to the consumer, in my view there is cause for legitimate complaint.

A further strategic concern has to be around technology transfer. Only yesterday, noble Lords who take the Financial Times will have seen a report on security service chiefs expressing their concern about cybersecurity in the context of junior staff at IT companies being lured into positions through remuneration where they might be able to divulge vulnerabilities in IT systems to competitors. I should say that the description of a “competitor” in terms of cyberespionage is not usually the bread-and-butter business of the level playing field where there is healthy, market-led competition, but rather the ability of foreign powers to bring down assets in other countries. Estonia experienced that from Russia, the US from the Chinese, among others—that is well documented and recorded—and of course Iran from Israel and, vice versa, Israel from the Arab countries; that is just to name a few of the well known cases. The more overt commercial attacks, which can cause the economy much more harm, are often unreported for reasons of commercial confidentiality, although they have higher costs for the economy and the companies themselves. I wonder if, in answering this debate, the Minister will reflect on the question of how and to what extent we define strategic industries, particularly when the investor has low levels of transparency, there is no public accountability and our own leverage is potentially extremely limited due to the size of our economy in relation to that of the investor.

Another factor I want to touch on is not mentioned in the APPG’s report, but it touches on global trade and competition. I refer to the EU-China trade talks that have been embraced by the UK Government and for which they have become the cheerleader in the EU. I would not wish for a moment to appear to be opposed to the talks, and I am not, but I hope that we learn the lesson from the current crisis in the EU over Russian energy supplies to several EU states. It is serving to downgrade EU states’ resilience in security terms and some countries are virtually being held hostage by certain Russian companies in terms of pricing and the delivery of energy.

The lesson here is twofold. An overreliance by strategic sectors on one supplier gives the foreign owner too much power which it may exploit. Trade dependency is similar, and one must not get hooked on any one market. So, while we welcome investment from China and our investment in China, it is terribly important that we keep our eye on diversified markets and diversified investments. It may be exciting—in the case of China we are talking about a low base at this point; I accept that completely—and there is much to play for, but we need to keep an eye on the end game, which is that overreliance on either side may not be very healthy.

The second point is my final one, and it is about multilateralism. Over the entire post-war period, Britain has championed a multilateral, global, rules-based order, whether that was the establishment of the United Nations or the Bretton Woods system, the UNCTAD or the WTO. I am therefore sorry to see us taking a narrow focus on EU-China talks rather than EU-East Asian trade talks that would include the other powerful emerging economies in south Asia. That is what the APPG is about. My fear is that when large powers are allowed to break off from multilateralism into bilateralism, geopolitics comes into the frame and power is disproportionately distributed, thus disadvantaging weaker economies. I am really sorry that the APPG on East Asian business has not sought to battle for those other countries as well in this regard, but I am sure that it will do so in other reports. Indeed, I can see that the noble Lord, Lord Wei, is nodding his head, so I look forward to those debates.

In conclusion, I agree with all the conclusions that the report laid out, and I hope that the Minister will be able to take its recommendations on board, despite the omissions. On the emphasis of the noble Lord, Lord Wei, on having ambassadors within the UK, I should declare a very small interest. I happen to be chancellor of the University of Northampton and am delighted to report that, as of last year, the president of the Northampton students union has been the first Chinese national ever to be president of a students union in the United Kingdom. So we are an outward-looking university, just as we are a country.