David Green: Britain’s investment in China, not China’s in Britain, is the bigger threat to our national security

3 Aug

David Green is Chief Executive Officer of Civitas.

The former Australian Prime Minister, Tony Abbot, now a UK trade adviser, has warned the Government not to allow Chinese companies to buy British manufacturers that are vital to our national life.

He is surely right, but China buying our companies is not the biggest threat to our national security. It is money flowing in the opposite direction from UK companies to China. A recent analysis by the Department for International Trade shows that the stock of foreign direct investment (FDI) from China into the UK was £3.2 billion in 2019. The total stock of FDI by British companies in China was £10.7 billion.

When a company dominated by the Chinese Communist Party takes over one of our high-tech firms, we lose the technological lead, and the expertise falls into the hands of organisations that might be committing human rights violations against their own people, or who have links to the Chinese military.

The same is true when our companies build factories in China. The expertise changes hands, and companies fall under the influence of the Communist Party. There is no such thing as a genuinely private company in an authoritarian dictatorship. Managers must do as they are told.

Many Americans are now concerned about the flow of funds from America into China. The American Enterprise Institute (AEI) estimated that in December 2020 total American investment in China exceeded $1 trillion, mainly in the previous six years. The vast majority was portfolio investment, defined as amounting to less than a 10 per cent stake in the voting shares of the recipient company. These funds may not provide a controlling interest, but they help Chinese companies to out-compete Western rivals and to support the Chinese military build-up.

The total stock of US FDI (involving more than 10 per cent of the voting shares) was $198 billion in 2019 (including Hong Kong). Accurate figures for portfolio investment are not produced, but the US Treasury put it at $163 billion in 2017.

That figure, however, ignores the flow of funds through offshore tax havens, notably the Cayman Islands. In 2017, AEI estimated total portfolio investment at $745 billion, including investment in the numerous Chinese entities registered in the Cayman Islands. Investment via the Caymans surged after the election of Donald Trump in 2016.

At present, US Treasury figures treat funds flowing to the Caymans as investments there, when it serves merely as a conduit. AEI has called for full transparency, so that the final destination of funds is known. We should do the same, not least because the Cayman Islands is a British Overseas Territory.

There is a tendency to see the relationship with China through the prism of the Cold War with the Soviet Union, but Russia was not closely integrated with Western economies. It was rare for Western firms to invest in Russia and, forced back onto its own meagre economic and cultural resources, communism was unable to withstand Western competition.

Since joining the World Trade Organisation in 2001, China has become deeply integrated and has found a way of getting Western companies to fund their own ultimate destruction. A big chunk of China’s growing GDP has been the result of Western investment. The Cold War made the struggle for freedom and democracy against authoritarian dictatorship seem like a battle between economic systems. We can now see that we are in a moral struggle for human freedoms, civil rights and the ability to transfer political power without bloodshed.