January 20, 2012 9:44 pm

Open approach attracts Chinese investors

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China’s sovereign wealth fund tied up its purchase of an 8.6 per cent stake in Thames Water yesterday, amid signs that Beijing sees its expanding investments in Britain as a bridgehead for a much bigger expansion into the US.

The deal confirms Britain’s position as the most popular European destination for Chinese inward investment by value and follows a visit by George Osborne, chancellor, to Beijing this week to promote the advantage of putting money into the country’s utilities and infrastructure.

Lou Jiwei, chairman of the $410bn China Investment Corporation, wrote last year in the Financial Times that Britain offered a good starting point in its investments in western infrastructure, saying it had “one of the most open economies in the world”.

Chinese investment Thumbnail

Chinese investment Thumbnail

But British officials say that Beijing also regards the UK as a “demonstration project” to reassure sceptics in the US that it can be a reliable and valuable source of inward investment without compromising national security.

The US obstructed a bid in 2005 by the Chinese National Offshore Oil Corporation for Unocal, a Californian oil company, on national security grounds. More recently Huawei, a Chinese telecommunications equipment maker, has suffered similar problems in investing in the US market.

Mr Osborne’s pitch is that Britain is completely open and does not discriminate against foreigners, nor does it regard the rise of China as a threat. Politicians in countries including the US and France are often more hostile in their approach.

The chancellor’s team say officials in Beijing were also impressed by the government’s new “national infrastructure plan”, which sets out 40 priority projects including a new high speed rail link from London to the north, new ports, a broadband scheme and investment in energy networks.

“They seemed familiar with the idea of a national plan,” said one British official close to the talks, although Mr Osborne’s team joke that his Chinese interlocutors may find it slightly easier to drive through their own infrastructure plans. Chinese officials said they have asked Tim Geithner, US Treasury secretary, to come up with a similar list of projects.

Mr Osborne expects the CIC to announce new investments in British utility and infrastructure companies in the coming weeks.

Meanwhile he hopes that Industrial and Commercial Bank of China, with which he held talks this week, will act as an intermediary in channelling Chinese investment into longer-term “greenfield” infrastructure projects, possibly including high speed rail.

In the past Britain has often suffered by comparison with France and Germany in its ability to sign contracts to export industrial goods to China, but so far it is ahead of its two European neighbours in its ability to secure inward investment.

Mr Osborne also hopes that a close commercial relationship with China will boost Britain’s ability to export services – including legal, financial and education – to the expanding Chinese market, as well as high-end manufactured goods such as aircraft engines.

The latest Chinese purchase of a stake in Thames Water highlights Chinese investors’ preference for low-risk physical assets that carry steady returns.

Among the European stakes expected to come up for sale from sovereign nations are electricity transmission assets in Portugal and Ireland. These have attracted Chinese interest, say bankers.

More Chinese deals are expected this year as cash-strapped governments and companies put infrastructure on the auction block, particularly in the utilities sector, including power and water.

While Chinese power companies are relatively new to European markets, their spending power and close ties to Chinese financial institutions make them attractive partners for debt-strapped European governments.

China’s Three Gorges, the operator of the massive Three Gorges hydroelectric dam on the Yangtze, recently won a hotly contested bidding process for a stake in EDP, Portugal’s dominant power company. China’s State Grid, meanwhile, is in the final bidding round for Portugal’s REN, which operates power transmission and natural gas distribution networks.

“The eurozone sovereign debt crisis is leading to a significant change in investment strategy by those nations running a budget surplus,” said Pip McCrostie, global head of transactions at Ernst & Young. “It’s unlikely that Thames Water will be the only deal of its kind as cash-rich economies such as China refocus their investment strategy from government debt and market debt securities to hard assets.”

She adds that China’s strategy is based on a wealth preservation. “For China, the UK – with its triple A rating, non-euro based currency and low risk of default – is an attractive market.”

Britain is seen by some mergers and acquisitions specialists as one of the most open to the Chinese. “The price is right and sterling is cheap,” said one dealmaker. “The UK is uniquely open to Chinese buyers. Most mature markets have foreign investment regulations.”

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