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China
July 18, 2017

UK Government should urgently consider new review process for Chinese investment in sensitive sectors

by
Henry Jackson Society

The UK Government should welcome inward investment from China, but ensure the national security of key infrastructure remains protected, our new report warns.

“Safeguarding our Systems: Managing Chinese Investment into the UK’s Digital and Critical National Infrastructure”, described by Sir Malcolm Rifkind as “authoritative and spot on”, analyses how large Chinese buy-outs of strategic assets are driving a debate among Western allies on the need to balance economic growth with national security.

The report findings include:

  • China’s investment into Western advanced economies – including that of the UK – is increasing and changing in scope. It has moved away from commodities in developing economies and moved to targeting key high-tech sectors and critical national infrastructure
  • China’s own stated economic strategy, Made in China: 2025, might threaten the long-term survival of UK businesses unless some sort of Government protection is afforded them or unless China affords British businesses more access to China’s home market
  • Because of cyber vulnerabilities, critical national infrastructure will be at the forefront of any future war
  • A formal investment screening regime is both necessary and desirable, both to protect the UK’s economic interests and its national security
  • Any new regime should be adequately resourced to carry out the difficult task of tracking FDI into the sensitive parts of the UK’s economy
  • The new regime should begin to coordinate more closely with the UK’s closest military and intelligence-sharing allies, including the Five Eyes partners and NATO member states
  • This review body should use a clear matrix to screen investment, perhaps using the three threat types identified by Theodore Moran for the Committee on Foreign Investment in the United States
  • Any new regime should carry out its review process in a judicious but swift manner, so that foreign investment in the UK is not hampered or harmed. This report suggests that the regime should be able to sufficiently pass its decisions within 30 days of receiving inquiry
  • Ideally, any regime should be overseen by a special committee in Parliament that ensures that it is adequately funded and resourced to carry out its activities, and that it is carrying them out in a legal, expedient, and sufficient manner

Commenting on the report, Sir Malcolm Rifkind (Foreign Secretary 1995-97, Chairman of the Intelligence and Security Committee of Parliament 2010-2015) said:

“John Hemmings’ report is authoritative and spot on in its analysis.

The massive increase of Chinese investment in the United Kingdom has not happened by accident. Much of it is a consequence of a strategy well developed by the Chinese Government. He makes the significant point that the Chinese are loathe to permit foreign investment and competition in comparable sectors of their own economy.

Much of that investment from China is as welcome as it would be from any other country.  But some of it has implications for our long-term security and for our Critical National Infrastructure.

John Hemmings’ call for a new standing body to be set up by the Government to review future investment proposals in the UK against national security criteria is long overdue.”

Sir Hugo Swire, former Minister of State at the Foreign & Commonwealth Office, said:

“In this day and age, where the UK’s economy and well-being and increasingly tied to trade and inward bound investment, it seems perverse to demand a review process for FDI. However, I think it is precisely because our need, and because of the strategic intent of some foreign state-owned enterprises with less-than-benign intentions, that we do need to have proper safeguards in place.  

The Government should urgently consider an investment review body to both safeguard our national interests and to coordinate with our allies who is allowed to own our telecommunications and future technologies.”

Nigel Inkster, the former Assistant Chief and Director of Operations and Intelligence at MI6, said:

“It’s a good report and timely. There is a lot of naïveté in regard to China by western governments and businesses alike. China knows it’s political model is unattractive in the West but it has found that it’s money exercises a powerful attraction.

It shouldn’t be forgotten that China is still heavily dependent on Western technologies but there is a clear set of strategies to redress that imbalance. That is not to say that western states cannot do business with China nor accept Chinese FDI. But they need to do so with their eyes open and with clear strategies of their own.”  

Lord Arbuthnot, former Minister of State for Defence Procurement and Chairman of the Defence Select Committee (2005-2014), said:

“The UK is entering a period in which we must warmly welcome OFDI into our economy. It’ll be good for jobs, good for rebuilding infrastructure, and good for our communities. However, this does not mean that we should welcome unfettered access to every corner of our high-tech economy and our critical national infrastructure. 

Britain needs an independent investment review body, which brings together our trade experts and our security experts, to screen foreign companies and state-owned enterprises attempting to buy access to sensitive parts of our economy. Big data, dual-use technologies, and the protection of our national infrastructure should be at the forefront of this new body.

The Americans have CFIUS, the Australians have FIRB, many of our friends and allies have review processes or units who help screen foreign investment into their infrastructure in an open and transparent manner. It is high time that the UK developed one too: for the protection of our infrastructure and technologies, and to give foreign investors more security and confidence in the process. “

John Hemmings, the Director of the Asia Studies Centre at The Henry Jackson Society and author of the report, said:

“The UK should of course welcome inward investment to feed the economy. Britain needs investment. But not at all costs. We have to ensure that foreign state owned enterprises are not compromising our most critical infrastructure or key future technologies. The UK needs to follow the lead of Germany and urgently put in place a robust review process that protects our digital and critical national infrastructure.”

Safeguarding Our Systems – Read the report in full here