Brexit could put Chinese buying of UK assets on hold
‘Only the brave’ would jump in to make unhedged investments right now, says one analyst
Chinese companies should hold onto their investments into the UK, or renegotiate terms for deals, according to analysts and senior government officials, after last week’s shock Brexit cast doubt over the British economy and its asset prices.
“Many uncertainties that surround Brexit will result in a near-term holding pattern for the mergers and acquisitions market in the UK.” said Brett McGonegal, chairman and chief executive of Capital Link International, a financial advisory firm.
“Deals that are currently in negotiation will result in an immediate step back, and most likely a complete overhaul of the renegotiation of terms.”
Keith Pogson, a senior partner at accounting firm EY, added: “Many participants are suggesting there may be further movements in foreign exchange rates, and hence ‘only the brave’ would be making investments unhedged at this point, as there is considerable volatility and almost unprecedented uncertainty.”
Xu Shaoshi, chairman of the China’s top economic planning body, the National Development and Reform Commission, told a panel discussion at Sunday’s World Economic Forum in Tianjin,
that any Chinese company considering an investment or M&A deal in the UK, was likely now to “wait and see before making the move at this time”.
The pound has dropped to decade lows, and stock markets continue to be volatile, after Britain voted last week voted to exit the EU.
Tycoons in the Chinese mainland and Hong Kong have until now been picking the UK as their favourite investment destination.
The annual report of CK Hutchison, run by Hong Kong’s richest man Li Ka-shing, shows almost 40 per cent of its profit was generated from Britain last year.
Wang Jianlin, the chairman of Dalian Wanda Group and the mainland’s richest individual, has also spent billions of pounds on commercial properties, cinemas and even a yacht maker in the UK.
But experts are now suggesting the recent events may well have put the buffers on that investment momentum.
Maurice Hoo, who co-heads global M&A and the private equity practice at law firm Orrick, said he expects volatility in UK asset prices will likely dampen acquisition interest there in the short term, “not just from China but from many international investors around the world”.
“Longer term, Brexit will likely create new legal uncertainties, such as whether certain EU rules still apply in the UK, therefore from a legal perspective, making a pan-European investment or acquisition will likely become more complicated.”
Total foreign direct investment from China into the UK between 2000 and 2015 was worth nearly £13 billion (HK$136.81 billion), the most in Europe, according to the Rhodium Group.
Data from Dealogic shows the value of M&As done by Chinese companies with UK based firms exceeded US$3.6 billion (HK$27.93 billion) in the first six months of this year, already surpassing the US$2.8 billion for the whole year of 2015.
Xu Shaoshi noted the impact of Brexit on China “will be limited”, and that the Chinese authorities had prepared contingency plans to offset any volatility.
Tsinghua University economist Li Daokui, a former member of China’s Monetary Policy Committee and external adviser to the International Monetary Fund, also told the World Economic Forum that current investments by China to the UK mostly fell into two categories: property and M&A deals with high-tech UK companies by Chinese finance houses .
“These two categories of investment are meant to benefit local economic growth of the UK, so they would not be impacted by the Brexit,” he said.
He added Britain may rely more on China in terms of trade, and also become more willing to cooperate with the Chinese companies as a result of Brexit.
He also said China is probably the world’s least-affected economy by any Brexit.
“In the long run, if Brexit comes true, the euro’s position will be weakened,” Li said.
“This means a new global currency is needed to compete with the US dollar. It is a chance for the Chinese yuan. And the world needs the yuan.”