London Calling!

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There are some that believe the apocalypse is coming. Those are the people that do not know the UK. For China, Brexit is an opportunity to make new partners and investments.

People think of a lot of things when they think about the United Kingdom. Some think of Mick Jagger and Johnny Rotten. Others think of Adele and Twiggy. The more politically attuned think of Churchill, Thatcher and Blair. In Hong Kong we think of Prince Charles and Governor Patten on the docks of Victoria Harbor back in 1997. However, in some circles of China the UK all comes down to Dim Sum Bonds, Green Covered Bonds and the internationalization of the RMB.    

Then of course there is the history – one of the most colorful and entertaining of them all. Names like Wellington, Elgin, Jardine, Cromley, King Henry, Joan of Arc, Richard the Lionhearted, Montgomery, Lawrence of Arabia – where does the list stop. Still, the importance of history is written from the eyes of many nations. And, for China, while that history has not always been pleasant, it has been based on the fundamentals of trade, market access, finance and a 99-year lease arrangement.

The end result of the long and illustrious interaction between China and the UK has led to today, and to one reality: these two nations need each other. China has no stronger relationship with the West than the one with Britain. So, when it comes to manage the internationalization process of its currency, one that is not readily convertible and in need of confidence and support, China turns to the City, the bustling metropolis of internationalism with structure built in blood and iron.

Xavier Rolet, the much-travelled CEO of  London Stock Exchange Group (LSEG), puts the case clearly, “We are simply getting on with business post-Brexit. We remain the leading international market, as we have been for centuries. Some US$2 trillion of international equity portfolios are managed here, twice as much as in New York. Governments and companies in search of capital who want to meet investors that truly understand their business come to us from around the world. They do so because we have the deepest and broadest pool of global capital housed in a robust market with integrity. Why else would China choose the UK to be its capital markets partner of choice in its high priority internationalization?”

Britain’s core industries underpin the new global economy: banking and finance, IT, fossil fuels and renewable energy, aviation and vehicle engineering as well as biotech. If not London, where would the cutting edge of British business land? The Eurocentric view suggests French and German cities, but to careful observers of modern history this seems misguided. Euro cities will undoubtedly absorb some slack, but Asia is the future, and China leads the pack for Britain’s business elite.

LSEG CEO Xavier Rolet joins Bank of China to celebrate the first ever Green Covered Bond.
LSEG CEO Xavier Rolet joins Bank of China to celebrate the first ever Green Covered Bond.

Trade Powerhouse

After all, despite the island nation’s modest population and limited natural resources, the UK stands as the fifth largest economy in the world – a US$2.7 trillion GDP behemoth. The British people built their former empire and modern economy by capitalizing on a knack to develop and broker trade deals with partners worldwide. Through setting up and systemizing trade channels, Britain has a long established competency in the building of institutional infrastructures, fundamental strengths that still remain firmly in place in the days of Brexit.

“The golden era in UK China relations continues to deepen,” suggests Chancellor of the Exchequer Philip Hammond. “With complementary bilateral trade ties, China and the UK remain natural partners, building on this relationship will form the cornerstone of this year’s dialogue. The mutual benefits are clear. China is the world’s second largest economy. UK exports to China have grown rapidly and Britain is home to more Chinese investment than any other European country, with a strong focus on infrastructure investment, trade and financial services.”

For China the course in dealing with the UK is unwavered, especially when it comes to the financial front. Brexit may bring changes to the European span and outreach of the City’s financial services, but the UK financial sector remains a prominent custodian for China’s ambition to internationalize the RMB. Home to some of the world’s first PRC-listed companies, the London financial center serves as the main trading hub for RMB initiated transactions outside of Greater China. In other words, the London-China nexus is firmly set in financial stone.

When people talk of Brexit’s dire consequences, it is easy to see why the Chinese are convinced they miss the point. China has seen it all before over its 5,000 year history and does not believe a society like that formed in the UK is going to fall overnight. As Royal Bank of Scotland CEO Ross McEwan puts it, “Despite the noisy fallout from the vote, many fundamentals remain true. The UK is still a large, well-developed economy with good long-term prospects.”

“The referendum result led to a sharp fall in the value of sterling, making British assets cheaper for Chinese buyers who see the UK as an attractive place to be – deals in areas like real estate continue apace,” points out Simon Bevan, Head of the China Britain Services Group at Grant Thornton UK LLP. “While uncertainty over exactly what the UK’s relationship with EU will be put some investors off, others have seen it as a prime opportunity to secure deals with
less competition.”

The recent takeover of Retlan Manufacturing, a leading truck and trailer maker by China International Marine Containers follows in short succession investments in a diverse group of assets. In the block were two ornate London five star hotels, next-gen games developer Splash Damage, Scotland’s Booking.com, UCI Cinemas, Wolverhampton Wanderers Championships League Football Club, the Nine’s Elms regeneration scheme and long-term commitments to Sheffield real estate.

LSEG is cultivating a strong relationship with China and its many debt and equity issuers.
LSEG is cultivating a strong relationship with China and its many debt and equity issuers.

New Age Rising

Britain’s impending divorce from Europe spells an once-in-a-lifetime opportunity for Chinese businesses to close “bargain basement” deals in an effort to fill the economic void left by retraction from Europe. In a centuries old rollercoaster bilateral trade relationship, this process promises a “new golden era” of opportunity. Tangible results are already bringing excitement to a range of sectors and industries.

Many UK financial players are busy serving the “buy side”, driven by a massive depreciation of sterling. The British currency fell at one point to 31-year low against the US dollar in what Brexit Secretary David Davis called a “flash crash”. The M&A and direct investment fees are welcome as financial institutions consider whether they can serve Europe from an isolated UK.

The economic impact of Brexit is expected to wear off as the dust settles. If so, picking up assets on the cheap is a solid investment strategy for those betting on the long-term future of Britain. Investors must act fast – and they are. Shrugging off Brexit uncertainty, Chinese investors are on a buying spree of historic proportions.

Amongst the City’s famed financial streets and alleyways, the Brexit solution is clear. Chris Cummings, CEO of The Investment Association, a UK trade body representing 200 fund managers collectively managing nearly US$7 trillion in the UK and around the world, sees “a golden opportunity for UK’s world-leading asset management companies. As China’s rapidly growing middle classes evolve from savers to investors, deepening financial and trade ties
are inevitable.”

LSEG’s Xavier Rolet agrees that current efforts in financial integration deserve praise and constitute “a significant step forward for UK-China capital markets,” emphasizing new ground in the Shanghai-London Connect. The planned London-Shanghai stock connect is a “new concept” in cross-border trade links that will enable Chinese and UK enterprises to access deep pools of international capital more easily.

This financial integration is one that reinforces the amazing headway in China of such financial bulwarks as HSBC, Standard Chartered, Royal Bank of Scotland, Barclays and Lloyds, not to forget now defunct names like Baring Brothers and Jardine Flemings. In Hong Kong and on the Mainland, UK financial groups have become entrenched as “glocal” institutions with a long tradition of respected service in China.

HSBC is perhaps the largest foreign bank, having invested heavily in its own operations and select Mainland financial entities like Bank of Communications. HSBC China employs about 6,000 staff, around 99% recruited locally, with 170 branches across more than 50 cities. This is the largest financial services network covering the widest geographic reach of any foreign bank.

Prime Minister Theresa May is counting on opening the country for business.
Prime Minister Theresa May is counting on opening the country for business.

Strong Fundamentals

Last year, thousands upon thousands of Chinese tourists descended on the small but quaint Oxfordshire village of Kidlington. An hour’s drive away sits London, the vibrant and bustling international financial center and longtime powerhouse of the Western world, a frenetic metropolis set amid the mingling of cultures, music, education and fashion. In many ways, Britain has come to represent sophisticated “old money” with new ideas in the eyes of Chinese entrepreneurs.

Grant Thornton’s Bevan believes the UK economy has remained resilient since the referendum vote and shows strong performance, despite a sharp intake of breath following the vote. While complex negotiations to leave the EU could take up to two years to finalize, trade relations with Europe will not
change immediately.

“The UK government is seeking the best deal possible and it is in Europe’s interest to have reciprocal deals,” comments Bevan. “We are confident that while there will be some change, there is a mutual economic interest. At the same time, the UK will seek to extend trading relationships beyond Europe. China is well placed to benefit from this new state of affairs.”

Since the end of World War II and the days of Winston Churchill, America and Britain have enjoyed a “special relationship” which has not always been the smoothest, but has endured without fail. China seeks a similar arrangement. “Special relations” reaching “new heights” and a “golden era” – these are the same terms British Prime Ministers and President Xi extolled each other with pre-Brexit. Such sentiments have not faded with a mere referendum ballot.

“I’m determined that as we leave the European Union, we build a truly global Britain that is open for business,” Prime Minister May reassured global partners recently. The bid to cozy up to Chinese investors was clear, with May seeking to “take the next step in this golden era of relations between the UK and China.”

 Xian Jiaotong Liverpool University
Xian Jiaotong Liverpool University

New Relationships

“A journey of a thousand miles begins with a single step,” as the old Chinese saying from Lao Tzu goes. That was around the 6th century BC. Nowadays the journey begins with a speech and how these words are acted upon is crucial. Since the OBOR project was announced in 2013, some US$1 trillion of deals have been struck or are underway, crisscrossing the world with efficient trade and logistic infrastructure.

Since taking office, May has lauded Asian opportunities and a visit to China. While such visits inevitably drag a trail of reporters and political baggage to appease home constituents, lower-level trade delegations often achieve more. The UK Minister for Asia and the Pacific Alok Sharma visited Beijing in February, meeting with the Foreign Ministry’s Liu Haixing and Kong Xuanyou to strengthen global partnerships and ties between the two nations. The three-day trip delegation led healthcare and life science business leaders across southern China to consider deals and One Belt, One Road (OBOR) infrastructure
opportunities.

China puts Britain on the OBOR map, literally. In a historic step, the first direct freight train from China to UK set off on New Year’s Day this year. The shipment from Yiwu in Zhejiang Province to London is a revival of the Silk Road route that connected China to the West from as early as 200 BC. The 8,000-mile journey traverses Russia, Central Asia and Europe and takes 18 days to complete. The volume is not yet noticeable, but this enormous accomplishment in geographic scale portends an equally impressive expansion in tonnage.

In another OBOR inspired move, President Xi accompanied the Duke of York to visit Immarsat, the world’s leading provider of global mobile satellite communications services. Xi wanted to understand how Inmarsat could contribute to the OBOR vision. Inmarsat signed a US$3 billion MOU with China Transport Telecommunication & Information Centre (CTTIC) to establish a strategic partnership to deliver Inmarsat-5 Global Xpress mobile satellite broadband communications connectivity throughout China and OBOR. The framework calls for an exclusive relationship to develop business opportunities in OBOR and provide global aviation passenger connectivity and safety services to
Chinese airlines.

Flourishing trade comes in many forms. The UK has a buoyant education industry with a 1,000-year history in providing world-class academia. China has the largest education system in the world, and its market value is expected to double to US$450 billion by 2020. Even a small segment of that value peeling off to study abroad represents huge numbers in overseas higher education. There are already hundreds of thousands of nationals enrolled in the UK education system and Chinese form the largest foreign student group. This number is slated to balloon and represents a formidable force of Mainland elite disposed to British partnerships for a lifetime.

Dean Stuart Perrin of Xian Jiaotong Liverpool University (above)sees a silver lining in Brexit for the education industry in terms of its attraction to Chinese students.
Dean Stuart Perrin of Xian Jiaotong Liverpool University (above)sees a silver lining in Brexit for the education industry in terms of its attraction to Chinese students.

Dr. Stuart Perrin, Dean of International Affairs at Xian Jiaotong Liverpool University, sees a silver lining in Brexit in terms of the opportunities it presents for Chinese cooperation in the long-term. “UK universities have no option but to look beyond the EU,” remarks Perrin. “Brexit will force British universities to be outward-facing, globally-embracing and business savvy.”

As Perrin well knows Britain’s strengths in technology, pharmaceuticals, innovation and precision engineering education exchanges should not be underestimated. They are invaluable to foster the next generation of initiatives in these fields, educating the creators needed to drive China’s R&D and high-tech sectors to fruition. Combine this with financial services might and a tradition of trade that extends centuries before the current globalization of the Middle Kingdom and you have a winning formula.

The same holds true for the all-important medical sector. This became evident when China Construction Bank (CCB) inked an Rmb60 billion (US$8.7 billion) deal with scientists at University of Oxford to accelerate research into diseases and treatments. China Regenerative Medicine International (CRMCI) signed the MoU that will see the three organizations provide a commercial route for promising medical breakthrough in regenerative medicine, stem cell research and tissue engineering.

Cooperation in the sports and cultural realm is a clear example of mixing business with pleasure. While business travelers to China are laden with culinary treats and baijiu alcohol, international diplomacy points are often earned with a simple panda exchange. The UK has fostered a relationship strong enough to partake in this game of panda politics. Only nine zoos abroad house these national treasures and for the UK this is a signal that it is part of a select group.

Even for everyday Chinese Internet users, the UK-China entertainment and soft-power romance is playing out advantageously. Skymoons, a leading producer of mobile games, has set up a base in Edinburgh to draw from one of the most talented and skilled games developer bases in the industry. China’s youth have developed a keen taste for mobile games, and Skymoons’ efforts have borne fruit. Its The Journey of the Flower production has garnered over 10 million users and generates a whopping Rmb200 million in monthly revenues.

“Capital flows are inevitably being disturbed by China’s recent exchange controls – and the UK is not immune from this,” concludes Bevan. “Still, government and business in China and the UK continue to view each other positively and there is a mutual desire to develop relationships. The UK continues to be the number one investment destination. The reasons are not solely due to its position within the EU, but due to the nations strong education sector, economy, transparent regulatory system and its openness to Chinese investments.”

Shanghai Business Review is the leading English language website and print magazine for business leaders conducting business in China.

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