China will invest more than £100bn in UK infrastructure over the next decade, sparking a new wave of joint ventures with UK firms, latest research has revealed.
The report by the Centre for Economics and Business Research (Cebr) for law firm Pinsent Masons, found that, of the £105bn to be invested by China in Britain by 2025, the largest chunk, £43.5bn, will go into the energy sector and projects such as nuclear, wind and solar photovoltaic power generation. The property sector will receive £36bn and transport £19bn.
UK and Chinese business leaders consulted for the report said they were already seeing a clear rise in the number of joint ventures between UK and Chinese firms, with recent collaborations including the Royal Albert Docks in East London, one of the largest real estate developments in the UK, and the Nine Elms development in Battersea.
Richard Laudy, head of infrastructure at Pinsent Masons, commented: “This level of investment is going to be a game changer for UK infrastructure. Over the past few years we have seen China’s role as an investor evolve from making indirect investments through sovereign wealth funds to Chinese businesses becoming co-funders, co-developers and co-contractors in major UK infrastructure projects. We are already seeing this happen, for example, Beijing Construction Engineering Group making a major investment in Manchester Airport City.”
Flow of Chinese outbound foreign direct investment ($bn)
Source: UNCTAD, Cebr
He added: “Four out of five of the world’s largest construction and engineering companies are now Chinese with a growing appetite for infrastructure investment and with the potential to invest vast amounts of capital in advanced economies in Europe.”
Britain ranks third in a list of 144 countries attractive to Chinese infrastructure investors, according to a list complied by Cebr and Pinsent Masons, and currently suffers from chronic underinvestment in infrastructure equivalent to around £500bn.
China, meanwhile, is expected to have savings worth $12trn in the coming decade, representing more than 30% of global savings.
Chinese investment in the energy sector is expected to see a continued increase and pick up pace considerably in the latter half of the next decade, says the report.
In contrast, the £19bn expected to flow into roads, rail and airports may not come until the 2020s due to uncertainties that need to be resolved, including policy on public ownership, planning policy and funding mechanisms, particularly related to project finance and investment returns and the restrictive effect that this can have on private investment.
Investment from China into UK infrastructure 2014-2025 (£bn)
Source: Pinsent Masons, Cebr
China is also expected to exploit its vast domestic manufacturing capability to export equipment and materials to the UK infrastructure and property projects where it is financing, radically altering the supply chain landscape, said the report.
Investment from China is expected to come in the form of institutional investment of government wealth, such as sovereign wealth funds or reserve managers, institutional investment of private wealth, such as insurance and mutual funds, and non-institutional investment, including foreign direct investment from private Chinese corporations, said the report. Of these, direct investment from official sources – sovereign wealth funds and foreign reserve managers – will be the main form of outward investment from China in the medium term.
China’s main official investors are the China Investment Corporation (CIC), and the State Administration of Foreign Exchange Investment Company (SAFE-IC), which manage part of China’s exchange reserves. Of the total $23.4bn invested in the UK by China between 2005 and 2014, $3.6bn came from SAFE and $3.8bn from CIC, a combined equivalent to 40% of China’s total foreign direct investment into the UK.
With UK public finances still under pressure, uncertainty around government support for infrastructure is still a key concern, warned Laudy: “If the UK wants to unlock Chinese investment to fill in the funding gap to modernise its ageing infrastructure, the UK government will need to address issues around policy and further develop the pipeline for investment – delay and lack of clear commitment on policy will only create uncertainty for investors,” he concluded.
