China invests in UK as 'special relationship' with USA falters

How to invest in a post-Brexit environment
How to invest in a post-Brexit environment

The United Kingdom and United States have shared a "special relationship" that stretches back even further than when Winston Churchill coined the phrase in 1946. But in the wake of last week's Brexit referendum, a new rival — China — may increasingly compete for the U.K.'s favor.

The U.K. has long been seen as a strategic and powerful friend as Washington navigates foreign affairs with broader Europe. The language and in some cases the culture alone have encouraged leaders from both sides of the Atlantic to collaborate and exchange ideas. For the White House, London offered a window into European politics. The U.K.'s planned exit from the European Union shifts some of those dynamics.

"London has lost relevance to U.S. foreign policy," Charles Lichfield, a Europe specialist with research firm Eurasia Group, said on a conference call with media following the announcement of the referendum results.

President Barack Obama and Prime Minister David Cameron are known for being on friendly terms, and Obama even traveled to the U.K. to show his support for the remain camp ahead of the referendum vote last week. But Obama's efforts didn't help, and now Cameron is on his way out.

"Washington will not be pleased" with the U.K. leaving the European Union, Lichfield said. "Part of London's attraction for the U.S. was its role as a liberal voice within the EU."

British 'optimistic' about investments in UK

At the same time, China's financial ties to the United Kingdom are growing. China has already been a big investor in London — buying property and setting up operations across the greater city. Several Chinese banks, including China's Construction Bank and the Bank of China, have adopted London as their European financial center.

"The British are most inclined to be optimistic on where China is headed, given their economic and financial incentives are stronger than other EU countries," said Jennifer Harris, a senior fellow at the Council on Foreign Relations formerly with the State Department and the National Intelligence Council.

The United Kingdom has been supportive of China in various financial affairs, acting as a bridge between the Asian superpower and the European Union.

For example, when the Chinese-led Asia Infrastructure Investment Bank was launched in 2015, the U.K. was the first major Western economy to show its backing by applying for membership. This prompted concern from U.S. officials, who feared the the bank would interfere with the World Bank's international work and influence in global affairs.

"The UK's decision to join the AIIB as a founding member upset Washington but pleased China enormously, said Philippe Le Corre, visiting fellow at the Brookings Institution's Center on the United States and Europe and author of the book "China's Offensive on Europe."

Chinese President Xi Jinping literally got the royal treatment when he visited London in October, including a stay at Buckingham Palace, a banquet hosted by Queen Elizabeth II and a joint session with Parliament and Cameron.

China sees buying opportunity

A woman sits in a restaurant chair decorated with the British flag in Beijing on June 27. The Brexit vote added new uncertainties at a time when downward pressures on China's economy were mounting, Chinese Premier Li Keqiang said a day later.
Greg Baker | AFP | Getty Images

Chinese leaders have delivered statements pointing to economic instability that could follow the Brexit vote, but outside strategists say China may find the Brexit aftermath an opportune time to invest in U.K. assets.

"China is very interested in investing in prestigious projects in Britain — specifically in energy and infrastructure," Lichfield said in a telephone interview. Upping its investment in the U.K. could allow China to elevate its economic and political profile, which is one of Beijing's goals, he added.

Given the negative implications attached to the Brexit and the expected slowdown in investment from other global players including many European countries, further capital inflow from China will likely be encouraged by the U.K., which has seen its currency the pound fall to decades-long lows.

"The U.K. treasury's balance sheet will be stressed in the next few years, therefore Chinese investments will be welcomed," said Lichfield.

But attractive valuations alone could drive China to throw more money into the U.K. specifically from Chinese state-owned enterprises that have been in an acquisition frenzy this year.

"Given the history and so forth over time, the Chinese will not hesitate to take advantage of the fact that the U.K. will be less affiliated with their EU partners going forward," said Paul Holland, a former European software entrepreneur who now is general partner at venture capital firm Foundation Capital.

According to financial data firm Lipper, China has already acquired or taken a stake in 17 U.K. companies this year — amounting to $2.3 billion. That's already close to outpacing the total spent on U.K. deals in 2015.

"China is willing to increase its present in Europe, so this is a good opportunity, said Le Corre.

"Chinese could step in and buy properties and companies that are getting cheaper due to the pound," he said.