- Five FTSE 100 constituents amongst the most heavily exposed companies to China
- Stiffer provisions under the National Security and Investment Act 2021
Though UK defence contractors are being snapped up by various interests in the US, the government is taking a harder line with China. Business Secretary Kwasi Kwarteng has stepped in to block the takeover of a UK firm by Super Orange HK Holding, a private company based in Hong Kong. The target company, Bristol-based Pulsic Ltd, is engaged in precision design automation that can be utilised across a range of industrial sectors, with the tech in demand from the “leading semiconductor companies around the world”.
The Business Secretary invoked national security provisions within section 26 of the National Security and Investment Act 2021 (NSI), concluding that Pulsic’s intellectual property could facilitate the development of advanced integrated circuits that could end up in China’s military supply chain.
Super Orange HK was established a year ago by Nanjing Puxin Software Limited, which the South China Morning Post revealed is wholly owned by Shanghai Hejian Industrial Software Group, also known as UniVista. It is also a relative newcomer and is one of several Chinese companies which are seeking to break US dominance in the field of chip design toolmakers. China’s deficit in this area was laid bare by the Western crackdown on Huawei Technologies. Shanghai Hejian also has links to the state-owned Assets Supervision and Administration Commission of Shanghai Municipal Government, so it’s understandable why Kwarteng brought the hammer down.
The Pulsic affair seems like small potatoes compared to the government’s edict to remove all Huawei equipment from 5G networks by end of 2027. But it is emblematic of a deteriorating geopolitical backdrop, a theme that investors would do well to factor into their portfolio allocations.
Figures from the Department for International Trade show that the total trade in goods and services between the UK and China was worth £93.4bn in the four quarters to the end of Q1 2022, marking the People’s Republic as the UK’s third largest trading partner. However, the relationship is not favourable to the UK in terms of its trade deficit and the imbalance in foreign direct investment.
Less than 10 years ago, UK politicians were falling over themselves to try to curry favour with Beijing, but the fact that both Tory hopefuls, Rishi Sunak and Liz Truss, are now trying to outdo each other in terms of Sino-scepticism shows that the mood music has changed, not least because of China’s violent clampdown on dissenters in Hong Kong, but also because of mounting fears over the level of industrial espionage.
For investors, it’s worth remembering that the NSI legislation is concerned with more than just takeovers. It stretches beyond M&A to encompass a range of deals including minority investments, along with the acquisition of assets including land and intellectual property. It also relates to deals to acquire voting rights, specifically the compulsion to report any deal that entails the acquisition of more than 25 per cent of voting rights.
Companies are mandated to notify government regulators under the broad new provisions or risk significant financial and criminal penalties for failure to comply. And the risks are gathering. The UK government has stated that it will be more likely to intervene in deals under the new regime than was the case under the national security provisions of the Enterprise Act 2002.
In a sense, the UK is following the US line. Washington has prohibited US investments in many Chinese companies that it feels are unduly influenced by the Chinese state – the so-called Chinese Military-Industrial Complex List. Yet it’s debatable whether it is seriously committed to de-coupling from the Chinese economy because the trade disruption brought about by the pandemic highlighted US dependence on eastern supply chains. Nonetheless, geopolitical developments continue to point to risk in Chinese assets and research suggests it may be impossible to avoid.
Analysis of the issue by research fellows, Ties Dams and Xiaoxue Martin, of the Netherlands Institute of International Relations posits that “even investors without direct interests in China are or will be affected by China-related geopolitical risk due to the various forms of exposure of companies in the European home market”.
Five FTSE 100 heavyweights – Rio Tinto (RIO), AstraZeneca (AZN), HSBC (HSBA), BP (BP.) and Royal Dutch Shell (RDSB) - are amongst the 25 most heavily exposed European companies to China. And they, like the Chinese state, could run afoul of US sanctions and tariffs, to say nothing of the impact on trade relations with China due to the sort of intervention measures contained within the NSI. The research fellows go on to rightly recommend that “investors would be wise to seek greater transparency about European companies’ exposure to the Chinese market – and "get ahead of the curve”.
