Date: 13 Nov 2018
8 November 2018, Beijing — EY today released Geopolitical update: Brexit and US-China relations, which explores how Brexit and the increasing complexity of US-China relations is affecting Chinese enterprises’ overseas investments. Investors from China should pay close attention to the latest policy developments and develop a geostrategy to manage the risks and identify the opportunities amid this growing uncertainty.
Jon Shames, EY Global Geostrategic Business Group Leader, said: “While the world has moved into a new and unsettling geopolitical phase, Chinese businesses and investors cannot focus purely on risk mitigation. Change produces opportunities, and moving forward on value creation — with strategies and processes that factor in risks and create contingencies — is vital.”
Investors weigh challenges, opportunities posted by Brexit
Despite Brexit uncertainty and a decline in the UK’s relative attractiveness as an FDI destination in Europe, Chinese investors have continued to invest in Europe. This suggests that Chinese investors are seeking long-term opportunities with the expectation that they can manage or capitalize on near-term risks. However, it is harder to predict the long-term effects of Brexit. The EY report suggests that investors and businesses plan for a range of scenarios:
Businesses and investors should expect Brexit to take 7 to 10 years to unfold, which makes a wait-and-see approach not feasible for most investors. The UK will have to negotiate new bilateral agreements with numerous other countries, which could take years. But trade and investment with emerging markets, including China, could become relatively more attractive.
Rising inflation, currency depreciation, higher business costs, a lack of real wage growth, and weak consumer and business sentiment could emerge as serious impact to Britain’s economic vitality. Nonetheless, warnings about the slump of London as a global and regional business hub appear to be exaggerated, given the region’s enduring talent, infrastructure, language and business culture advantages. London has distinguished itself as a global hub for education, creativity, and innovation and this is unlikely to change in any scenario.
Greater scrutiny in the US over foreign investment amid trade dispute
Loletta Chow, EY Global China Overseas Investment Network (COIN) Leader, said: “The US is among the hottest destinations for Chinese outbound investment. For the current Sino-US trade dispute, many experts believe that the longer it lasts, the greater its impact on both China and the US. Moreover, the US has recently announced new foreign investment restrictions designed to protect itself against national security threats, adding further uncertainty and concerns for Chinese investors.”
Policy initiatives by President Donald Trump’s administration in 2017 and 2018 to spur growth, cut business taxes and reduce regulation have made the US even more attractive to global investors, with Chinese FDI into the US in 2017 totaling almost US$30b — up from nearly zero in 2009. Meanwhile, uncertainty in US-China relations has increased significantly in recent years. In addition to the ongoing trade dispute, investment from China is now subject to greater scrutiny. Therefore, as Chinese investors develop their strategies for 2019, they should pay close attention to several near-term issues that will shape the FDI landscape:
Geopolitics is a key issue for Chinese outbound investors and overseas operations. To effectively identify and manage geopolitical risks, business leaders and investors should develop a robust geostrategy. An effective geostrategy must assess precisely how geopolitics might compromise corporate performance and investment outcomes and should include measures to mitigate risk and seize opportunity. Investors should carry out systematic, in-depth reviews and evaluations of the local political, legal and social environment in the initial stage of overseas investment projects and monitor the environment throughout their investment horizon.