Nuclear Deal Delay Threatens Sino-U.K. “Golden Era”

Britain’s former Prime Minister and his Chancellor spent significant time and energy on forging “a golden relationship with China that will help foster a golden decade for this country.” Their alleged abandonment of human rights issues in favor of trade and investment drew widespread criticism, prompting some to ask if the country’s foreign policy was for sale. After Britain narrowly voted in June to leave the , and Cameron and Osborne subsequently fell from power, new questions about the relationship sprang up as the U.K. shed its strategic value as a beachhead to the E.U., and China lost two of its most eager partners and advocates in the bloc.

New Chancellor Philip Hammond has expressed eagerness for a free trade agreement with China to build on a strategic partnership that has been “about as far as we can go while we are members of the European Union.” But the golden relationship suffered a new blow late last month when incoming Prime Minister Theresa May delayed approval for Hinkley Point C, an Anglo-Sino-French project and a flagship Chinese investment. Despite repeated denials, security concerns over China’s role are widely believed to be behind the hold-up. Government sources have urged people “not [to] over-interpret the review”, which May herself has described as simply “my method,” but the delay appears to signal a broader rejection of Osborne’s approach and casts doubt over China’s greater role in another British nuclear plant in the future.

On Monday, The Guardian’s former China correspondent Tania Branigan examined the past few months’ reverse alchemy:

Less than a year ago, George Osborne boasted of a “golden decade” in ties with China. It was grand rhetoric for a cobbled together package of red carpet visits, a problematic nuclear energy project and deals like the £45m agreement to export the UK’s finest pig semen. But even the cynics didn’t expect the shine to come off quite so quickly. Britain has just blindsided Beijing twice: through its shock announcement that the centrepiece nuclear project is on hold, pending a fresh review, and by voting to leave the European Union.

[…] Though Beijing’s response so far has been muted, it will not have appreciated the embarrassingly last-minute nature of the Hinkley rethink, and the airing of suspicions about Chinese intentions. If the nuclear project is ditched for good, it is likely to be much more vocal.

[…] The price for Osborne’s unabashed embrace of China has been our credibility, at a time when we need it most. The relegation of human rights told Beijing that we would cave if pressed hard enough on an issue. It undermined Chinese activists and lawyers, made it tougher for other countries to tackle the issueand bolstered the argument that western concerns for rights are selective (which is often true) and another way of attacking it (which is not).

[…] They pursued their strategy without sufficient thought, adequate consideration of the repercussions or a deep enough understanding of our potential partners – at a time when Beijing has displayed increasing hostility to western ideas and a tougher approach to western businesses. The prime minister should learn from Osborne’s focus on China, without adopting his unalloyed enthusiasm, but her job has been made much harder by his compromises. [Source]

In an op-ed in The Financial Times, also on Monday, China’s ambassador to Britain Liu Xiaoming delivered what the paper called China’s “sternest warning yet” over Hinkley, as unidentified Chinese officials advised that the almost £40 billion in deals wrought during President Xi Jinping’s visit last year could also unravel. Liu wrote:

Right now, the China-UK relationship is at a crucial historical juncture. Mutual trust should be treasured even more. I hope the UK will keep its door open to China and that the British government will continue to support Hinkley Point — and come to a decision as soon as possible so that the project can proceed smoothly.

It has not been easy for China and the UK to have come this far. As long as both sides cherish what has been achieved and continue to expand and deepen our co-operation across the board, bilateral relations will maintain their strong momentum and work for the wellbeing of both the Chinese and British people. [Source]

South China Morning Post’s Cary Huang surveyed the implications of the deal’s possible failure amid the broader landscape of Sino-British relations, and suggested that it could even dent personal prestige:

Seen as a flagship project of bilateral cooperation and the highlight of Xi’s trip to Britain last year, the Hinkley Point joint venture, also involving France, served as a symbol of the friendship and cooperation between China and two major European powers against the backdrop of increasing rivalry between China and the United States for global supremacy.

Xi said the project had elevated Sino-British ties to an unprecedented level of warmth and cooperation. Analysts said failure of the deal would damage Chinese ambitions reaching far beyond the project itself.

Beijing saw it as a prestige project to showcase China’s technological prowess after Chinese nuclear firms were promised they could develop a future reactor, most likely of their own ­design, for another British plant.

Xi was hailed domestically for bringing home such a major infrastructure agreement. Beyond the financial boost, Chinese commentators saw the joint venture as a demonstration of renewed faith in the communist leadership’s economic management.

[…] If the deal is shelved, it may be seen as a blow to Xi due to his personal involvement in the project, given that he witnessed the signing of the deal with Cameron. [Source]

The new British government’s alleged security suspicions may be particularly galling to the Chinese side. Other possible explanations for the policy shift exist, including what critics have described as Hinkley’s “extraordinarily bad value for money,” but Reuters’ Kate Holton and William James reported last month that security fears appear to have been pivotal:

“When we were in government was quite clear she was unhappy about the rather gung-ho approach to Chinese investment that we had,” Vince Cable, Britain’s former business secretary, told BBC Radio.

He later told Sky News her concerns over China’s involvement were linked to national security. “This was an issue that was raised in general but it was also raised specifically in relation to Hinkley,” he said.

[…] Since taking office on July 13, May has been keen to state that Britain remains open for business following the vote to leave the . But she has also said the government should be able to step in to defend a key sector from foreign ownership.

China General Nuclear Power Corp (CGN) was set to hold a 33 percent stake in the Hinkley Point project, paving the way for the company to lead another project in Britain that would use Chinese nuclear technology.

Last year, Nick Timothy, May’s joint chief of staff, said security experts were worried the state-owned Chinese group would have access to computer systems that would allow it to shut down Britain’s energy production. [Source]

Timothy now wields very considerable influence: a minister told the Financial Times last week that under May, “it’s just the prime minister and two other people running the country,” referring to him and co-chief Fiona Hill. Beyond this triumvirate, party elder Michael Heseltine and former Foreign Secretary William Hague have backed May’s position, but Treasury Minister Jim O’Neill, who was “heavily involved” in Osborne’s overtures toward China, is reportedly “baffled”, and considering resignation.

In an article at Conservative Home on October 20 last year, Timothy expressed concern that “rational concerns about national security are being swept to one side because of the desperate desire for Chinese trade and investment”:

But what are the Chinese buying with their gold? The first thing on their shopping list is British silence on human rights abuses – and the Government has been only too happy to oblige. This summer, the British authorities tried to refuse a visa for Ai Wei Wei, the Chinese dissident now exhibiting his art in London. George Osborne’s visit to Urumqi, the capital of the troubled Xinjiang province, was criticised by Amnesty International for presenting a “major political coup” for China. And Chinese state media has been quick to praise the British Government for focusing “on business potential rather than raising a magnifying glass to the ‘human rights issue’”.

But human rights abuses are not the only concern about the British relationship with China. During Xi’s visit to London, the two governments will sign deals giving Chinese state-owned companies stakes in the British nuclear power stations planned for Hinkley Point in Somerset and Sizewell in Suffolk. It is believed that the deals could lead to the Chinese designing and constructing a third nuclear reactor at Bradwell in Essex. Security experts – reportedly inside as well as outside government – are worried that the Chinese could use their role to build weaknesses into computer systems which will allow them to shut down Britain’s energy production at will.

[…] The Government, however, seems intent on ignoring the evidence and presumably the advice of the security and intelligence agencies. But no amount of trade and investment should justify allowing a hostile state easy access to the country’s critical national infrastructure. Of course we should seek to trade with countries right across the world – but not when doing business comes at the expense of Britain’s own national security. [Source]

Motherboard’s Joseph Cox reported last week that researchers and industry experts appear “divided over whether Chinese financing of Hinkley Point is a legitimate concern or not”:

“I think it presents an opportunity to either collect intelligence or worse still to have some form of virtual control,” Alan Woodward, visiting professor at the University of Surrey’s Department of Computer Science, told Motherboard in a Twitter message.

[…] Even if Chinese agents didn’t surreptitiously plant backdoors into Hinkley Point, just having details about the facility and how the UK handles nuclear operations could be an intelligence resource. And cyberattacks don’t necessarily rely on leveraging or introducing vulnerabilities into systems. [Robert Lee, a former US Air Force cyber warfare operations officer and CEO of Dragos Security] pointed out that the hackers who hit a Ukrainian power grid in December 2015 were aided mostly by their knowledge of how the stations worked and how to cause a blackout.

But not all security experts agree that having a Chinese company involved in Hinkley Point would give the country extra intel useful for an attack.

“The fact that Chinese are putting in money isn’t going to affect the safety of the plant,” said Joe Weiss, managing partner of Applied Control Solutions, who has worked on the security of industrial control systems for over ten years.

[… T]he UK already has experience in working with Chinese companies on infrastructure. As Woodward pointed out, around 50 percent of BT’s 21st Century Network runs on equipment built by Huawei. “The UK government set up a special unit staffed by ex-GCHQ folk to trawl through every inch of the software (and hardware) to make sure there was nothing untoward in there,” Woodward said. [Source]

Ambassador Liu’s was not the first official expression of annoyance at British suspicions. From Reuters’ Ben Blanchard:

China “hopes that Britain can reach a decision as soon as possible, to ensure the project’s smooth implementation”, [Chinese Foreign Ministry spokeswoman Hua Chunying said], without elaborating. […]

But China’s official Xinhua news agency, in an English-language commentary, took a stronger line.

[…] “What China cannot understand is the ‘suspicious approach’ that comes from nowhere to Chinese investment in making the postponement,” it said.

[…] “For a kingdom striving to pull itself out of the aftermath, openness is the key way out,” it said.

“If history offers any guide, many China-targeted suspicions have been boiled down to diffidence and distortion. China can wait for a rational British government to make responsible decisions, but can not tolerate any unwanted accusation against its sincere and benign willingness for win-win cooperation.”

[…] Xinhua said people might think Britain was trying to erect a wall of protectionism.

This “will surely stain its credibility as an open economy and might deter possible investors from China and other parts of the world in the future”, it added. [Source]

Speaking to Politics Home, Vince Cable, the former business secretary, described the Xinhua comments as “more than a veiled threat, it’s a pretty unveiled threat that unless the thing is sorted out quickly and in their favour there will be trouble.” But in an op-ed for The Telegraph, RUSI’s Raffaello Pantucci argued that this may not be the case:

[…] These proclamations need to be tempered by reality, however, and a realization that China is a pragmatic actor which will continue to seek the best deal it is able to achieve rather than pursuing an entirely quixotic foreign trade and investment agenda.

[…] China is in fact a pragmatic actor in international affairs. When its companies have faced pushback due to domestic concerns, often they have continued forwards in other ways. China has quite rigid domestic restrictions about what industries outsiders can invest into, so finds it hard to overtly attack others for doing the same thing. Often the rhetoric does not match the action, and the new government in Downing Street would do well to understand this distinction and calibrate its response appropriately. […]

Handled badly, Britain’s relationship with China could suffer in the wake of the delay to the Hinkley Point deal. However, if care is paid to engaging China in ways that are of interest to Beijing and that advance British interests, it is possible to find a way forwards in which the UK can express its concerns while continuing to attract Chinese investment and trade. Beijing is seeking partners as much as the UK is, and in the current state of global uncertainty it would seem unwise to cut off relations with another G7 power. The trick will be to establish the contours of the relationship and make sure that both sides are telegraphing each other’s intent with clarity and with a view to the long-term. [Source]

Speaking to The Economist last week, David Martin of the China-Britain Business Council expressed similar optimism about the effects of both the Brexit and Hinkley decisions:

“It is going to need some skilful diplomacy to maintain this relationship,” admits Mr Martin. But he still thinks the pessimism is overblown. Chinese leaders last year launched an initiative called “Made in China 2025”, to deal with its declining competitive advantage in manufacturing by helping companies make better-quality products. The scheme is a chance for British firms to supply high-tech equipment, design and consulting.

British bankers, oilmen and consultants are also working with Chinese companies in third countries on multi-billion dollar projects as part of China’s “One Belt, One Road” initiative. The scheme aims to revive the ancient silk roads, connecting China with its neighbours and beyond, through investment. Much of this will be unaffected by Brexit or Hinkley. “The things the UK was good at on June 22nd [the day before the referendum], it was still good at on June 24th,” says Mr Martin.

Though some state-owned Chinese companies may think twice, private firms are likely to continue looking for growth in the West. China will triple its overseas assets from $6.4 trillion to almost $20 trillion by 2020, says the Rhodium Group, a consultancy. “China is eager to expand its presence in OECD countries such as Britain,” says Rhodium’s Thilo Hanemann. Attitudes across Europe are changing, he admits: in Germany, for example, some politicians opposed the purchase of Kuka, a robotics firm, by Midea, a big Chinese appliance manufacturer. But for every sensitive deal that draws opposition, he says, there may be ten that go through. [Source]

Indeed, a number of other agreements have been struck since the referendum, including a “60-year, billion-pound construction deal” between Sheffield city council and Sichuan Guodong Construction Group. China Daily highlighted this alongside seven others made since the Brexit vote.

Several Chinese quoted by the BBC’s Carrie Gracie also expressed optimism. But one expert painted a bleaker picture of prospects for Britain’s end of the bargains:

Joerg Wuttke represents the European Chamber of Commerce, and, while acknowledging the UK’s strong financial services, soft power and good will in China, he gave me a long list of reasons to be gloomy about what will happen when the UK finally leaves the EU and has to negotiate its own trade deals with China.

“It’s going to be difficult,” he says. “First, the Chinese hate uncertainty. Second, you have past promises that when you enter London you’re in the middle of Europe. This is not the case any more. Thirdly, if you invest heavily in the and then have your currency devalued by 10%, that already sends a message to Beijing.

“And the last point, Hinkley Point… is the UK a trusted partner when it comes to Chinese companies operating a nuclear power station or not? For China, this is very difficult to swallow possibly. Are we trusted partners or not?”

Is the list long enough? Mr Wuttke is also worried the UK does not have enough experienced trade negotiators to handle negotiations. And it is at this point that the real challenge begins.

“It will find it has no leverage,” he says. [Source]

At the University of Nottingham’s China Policy Institute Analysis blog, Oxford University’s Paul Irwin Crookes gave a broader survey of the U.K. and E.U.’s post-Brexit economic relations with China:

Despite the pledges from both EU and Chinese political elites at the recent EU-China Summit in Beijing that Britain’s departure from the European club of nations will not harm ties between the two economies, there are real and pressing issues that need to be analysed that will shape future policy priorities for China, for the EU, and for the UK. Three aspects stand out: economic instability and currency depreciation in China’s European export markets, the balance of power within the EU between free-traders and inherent protectionists over decisions that shape the EU’s trade relationship with China, and the challenges facing the UK as it gears up to take on direct bilateral negotiations in many policy areas hitherto pooled as a community competence to Brussels.

[…] The most obvious conclusion to draw from this analysis is that there is still much that is uncertain about the future, for all parties. It will take time – probably rather longer than is currently being predicted – for the new UK government to fully define its position regarding future relations with China, a more politically complex partner than any other Britain is likely to encounter. […] [Source]

And at Medium, Resolution Group’s Duncan Weldon explained what had made a “golden relationship” with China so alluring in the first place:

The outgoing Government’s policy towards China was certainly accommodative (I’m using a lot of willpower here to avoid the term kowtowing). The UK has made a push for closer economic and financial links — the first Western state to back the AIIB, luring overseas RMB bonds to London, promising a stock market tie up, showing an at times cavalier attitude to Chinese human rights issues and risking the displeasure of the State Department in the pursuit of monetary advantages. That might all be changing.

But it’s worth stepping back and asking what exactly drive what was in reality a major foreign policy shift. On one level it was the UK’s large current account deficit.

[…] Simply put the UK economy is reliant on large flows of foreign capital to keep it functioning in its current state.

The Governor of the Bank of England has commented that we are reliant on the “kindness of strangers”. Well, as Martin Weale has noted, it’s not really kindness — they do demand a return.

[…] Foreign capital is sometimes very useful to the UK economy — in the car industry a combination of foreign capital investment and better management have turned the industry around.

But it also comes with costs — costs in terms of selling successful British companies, large parts of the housing market leaving British hands and potentially pressure on our foreign policy. It’s hard to “take back control” when you are as reliant on foreign money as you’ve ever been. [Source]