£28 million tweet, Procurement Bill, UK-Japan, TikTok
A Beijing to Britain briefing
Hello,
Here’s how one tweet could potentially unwind a £28 million deal and put the Government under real pressure. Early Tuesday morning, Oxford China Policy Lab co-founder Scott Singer tweeted to his couple of hundreds followers: “A must-follow case for those tracking Newport Wafer Fab: the Cambridge-based semiconductor firm Flusso was acquired by Chinese entity in August of last year, with two PRC nationals immediately appointed to company leadership thereafter.” His tweet included a link to a story on the industry site UKTN, published some days earlier but not picked up in Westminster.
China Research Group and Foreign Affairs Committee Chair Alicia Kearns MP spotted the tweet. Moments later, she shared it and added “This is concerning. We’ve given ourselves the powers to protect our strategic companies from Chinese takeovers. We now need to apply them consistently. I will be writing to @grantshapps [the Business Secretary]- the opaque public announcement on this screams there are concerns.” The following morning, Kearns’ letter was published, urging Shapps to call the deal in for review under the National Security and Investment Act (NSIA). As we examine in this briefing, the entire episode took less than 24 hours (or roughly just over £1 million per hour if the deal ends up getting reversed) and looks likely to snowball.
Elsewhere in Westminster, social media giant TikTok has been asking to meet MPs who have raised concerns about the firm. In one private email I’ve seen requesting a meeting with a politician, TikTok’s UK Government relations team mention they have been engaging with the Government and officials at the National Security Cyber Centre. In absence of any dramatic change, I suspect few China-focused MPs are likely to take TikTok at its word. Westminster folk I speak to in this space are aware of TikTok’s battles in America and they are unconvinced about the separation of TikTok and ByteDance. TikTok’s hiring of ex-Parliamentary staffers remains, in my view, an under-scrutinised space. Also in today’s briefing, we’ve got an exclusive look at what changes China hawks are asking the Government to make to the Procurement Bill.
Finally, as 2023 opens, I’m watching three developing stories closely. First, Axios reports President Biden will soon announce an Executive Order imposing new controls on China projects by U.S. companies and investors, which will focus on quantum computing, artificial intelligence and semiconductors. To what extent this ends up impacting the UK remains to be seen. It will also be worth watching closely to see if the new House of Representatives Select Committee on China cuts through into Westminster. Second, and pinging around WhatsApp groups in Westminster - the news that a huge deposit of rare earth minerals has been found in Sweden. The AP has gone as far as asking if this is the “beginning of the end of Europe’s dependency on China”, even though it will take at least a decade to get the goods on the market. If this turns out to be true, two questions follow: how does this change Global Britain’s geopolitical and trade outlook and arithmetic, and are the good times over for Britain’s own fledgling critical minerals industry, which has been receiving significant Government loving over the last couple of years? And third, I’m detecting more interest from Westminster types about British investment funds and their exposure to Chinese equities some deem to be falling short of their ESG requirements. In a recent note, Sustainalytics, a sustainable rating agency owned by research house Morningstar, downgraded three Chinese firms - Tencent, Weibo and Baidu - to the category of “non-compliant with UN principles”. Given that these three companies alone are present in a number of British trusts, this theme will likely get more airtime in Westminster this year.
— Sam Hogg, Editor.
Order! Order!
Some of the more eye-catching questions and tweets from Westminster dwellers this week
Tom Hunt (Conservative) asked “the Chancellor of the Exchequer, if he will make an assessment of the potential impact of increasing covid-19 infections in China on the rate of inflation in the UK.”
Catherine West (Labour Shadow Minister for Asia) asked “the Secretary of State for Foreign, Commonwealth and Development Affairs, whether he has had discussions with Cabinet colleagues on the potential risks of the use of technology manufactured by Chinese state-owned enterprises in (a) Government and (b) local government properties.”
Politics
New Japan deal
Military might in the 21st century
On Wednesday, Prime Minister Rishi Sunak hosted Japanese Prime Minister Fumio Kishida in Downing Street to sign a landmark defence agreement which allows UK forces to be deployed to Japan. The British Government called it “the most significant defence agreement between the two countries in more than a century.” Kishida’s brief touchdown in Britain is part of his wider tour of G7 countries, which Japan chairs this year. Top of his priority list? A free and open Indo-Pacific, semiconductors, and Japan’s military buildup.
In simple terms, the Reciprocal Access Agreement (RAA) allows Japanese and British forces to work, exercise and operate together. It was first meshed out in May last year and is the latest in a series of agreements between London and Tokyo. Over the last 12 months, the pair have also announced the Global Combat Air Programme, held a military exercise in Japan, and inked an agreement to work together on digital issues from semiconductors to AI too. Good Parliament briefing here.
The agreement is handy for both parties. Under Boris Johnson, Downing Street declared Japan “our closest Asian security partner.” Despite the groundwork being laid before he was Prime Minister, Sunak now has another example he can cite when pressed by China hawks to show he is taking the Indo-Pacific and defence more seriously. Accordingly, these were points Sunak was keen to stress in his press release, and an article his team penned for him in Nikkei. For Japan, it’s another successful diplomatic win on Kishadi’s G7 trip, and a completed deliverable following the country publishing its first National Security Strategy since 2013, as well as a defence strategy and Japan’s first 10-year defence budget plan late last year. As the G7 prepares to meet in Japan later this year, the trip and corresponding media frenzy have allowed the country to focus its partners’ minds on the threat that China poses to the region. Writing in The Telegraph, Chair of the House of Lords International Relations Committee Lord Howell co-authored a piece claiming this to be the ‘Golden Era’ of UK-Japan relations.
Good news for companies and trade bodies: Sunak and Kishida also discussed the UK’s CPTPP bid and Japan’s own efforts to reduce economic dependency. Although obviously not covered in any Government press releases or communications, it will be worth keeping an eye on any indications the pair are working in tandem to express frustration over America’s blending of industrial and foreign policy under President Joe Biden. As the FT’s Alan Beattie summarised earlier this week, Biden is promoting domestic and industrial aims - such as products whose workers, especially unionised ones, might swing elections (steel) - with national security aims - like making the US self-sufficient/secure in critical goods. That’s great if you’re an American company, but Washington’s allies abroad are not as enthusiastic.
The brief visit speaks to Japan’s wider strategy. In London, Japan’s team briefed a number of journalists on its overall ambitions ahead of the G7 meeting. The key message? China is a serious concern, and we will be discussing it with that in mind during the G7 meeting later this year.
Hong Kong
Behaving badly
Every six months, the Foreign Office publishes a six-month report on the situation in Hong Kong. The latest, published on Thursday, covers January to June 2022, and opens with a foreword by Foreign Secretary James Cleverly. “Hong Kong’s autonomy is declining, and the pervasive, chilling effect of the National Security Law seeps into all aspects of society”, he notes, adding “we will work constructively with the new Chief Executive where we can within the wider relationship, but we will judge the Hong Kong government based on its actions. We call on the Chief Executive to respect rights and freedoms in Hong Kong, and to uphold the rule of law. It is in China’s interests that Hong Kong maintain its distinctiveness.” A few eyebrows were raised at the hush-hush tone of his standalone tweet, which just read: “Freedoms are being systematically eroded by Beijing on multiple fronts, tightening the restrictions on the lives of ordinary Hong Kongers.”
British NGO Hong Kong Watch (HKW) features prominently throughout the report, following its access being blocked in Hong Kong last year by the authorities. The group released a statement, saying they wanted the Government to increase pressure “for the release of Jimmy Lai, who is a UK citizen, and other political prisoners, as well as the removal of the remaining UK judges from the Hong Kong Court of Final Appeal”, and that they were “disappoint[ed] to read that the Foreign Secretary wishes to work constructively with John Lee, who as Chief Executive and previously Security Minister has rightly been sanctioned by the US for his ongoing role in the human rights crackdown and the destruction of Hong Kong’s autonomy.”
Catherine West, Labour’s Shadow Minister for Asia, tweeted “As expected, the report highlights the ever deteriorating situation in Hong Kong and the increasing erosion of the rights and freedoms promised to the people of Hong Kong. Labour has, and always will, stand by the people of Hong Kong and we will continue urging the Government to react robustly to China's continued non-compliance with their international obligations under the Sino-British Joint Declaration.”
The Chinese Embassy and Hong Kong SAR were quick to criticise, claiming the report “distorted facts, grossly interfered in Hong Kong affairs, which are China’s internal affairs, and seriously violated the basic norms governing international relations. We are strongly dissatisfied with and firmly opposed to it, and have lodged stern representations with the British side.”
On other Hong Kong matters this week, Jimmy Lai’s son Sebastian was in Parliament this week meeting with senior officials and politicians as part of an effort to ramp pressure on Sunak to act over Lai’s situation. Lai’s lawyers and son met with Minister for the Indo-Pacific Anne-Marie Trevelyan on Tuesday morning, and IPAC members Lord Alton, Iain Duncan Smith, Baroness Helena Kennedy, and Baroness Natalie Bennett on Wednesday morning. Hours later, Duncan Smith used a question at PMQs to pressure Sunak to act. He urged the Prime Minister to “direct his Government, particularly the Foreign Office, to warn the Chinese Government, as the Americans have already done, with the threat that if they persist, the use of common law in Hong Kong will be taken away?”, to which he received the response “He has my absolute assurance that I will remain robustly engaged, and I look forward to sitting down with him to discuss this particular issue in more detail as soon as possible.” There has been significant (social) media coverage of Lai’s case this week.
The Committee for Freedom in Hong Kong Foundation also applied pressure on the matter this week, asking Sunak to meet with Lai’s lawyers. They claim that earlier this month the Home Office promised such a meeting, but nothing materialised.
Spotted - politics
A short section of things we jotted down this week
The UK has agreed to deepen collaboration on critical minerals with Saudi Arabia, following Business Secretary Grant Shapps’ visit to the country earlier in the week. Industry bods have been talking for months about the role Saudia could play as governments look to diversify their critical minerals supply chains. At one conference last year, an expert suggested the Kingdom could focus on lithium processing. Saudi Arabian Mining Company Ma’aden recently signed an agreement with the Saudi sovereign wealth fund PFI to set up a joint company that will invest in mining assets abroad to secure strategic minerals.
A new House of Lords International Relations and Defence Committee report has urged the Government to consider carefully whether the “competitor” framing is still appropriate in the context of UK-China relations.
All Party Parliamentary Groups have come under scrutiny recently. These cross-party groups allow MPs to discuss and learn about issues they find important, and range from a Wine APPG to Dementia. However, Politico has honed in on two recently. First, the China APPG and the companies that sponsor it, and (with a brief mention), the Hong Kong APPG. Despite both publicly naming their sponsors for years, it has still generated headlines.
Christine Jardine, the Liberal Democrat MP for Edinburgh West and the spokesperson for Cabinet Office, Women and Equalities and Scotland, has appealed to the Chinese Consul General in Edinburgh asking them to “rethink” sending two giant pandas back to China.
U.S. Treasury Secretary Yellen chaired a meeting of the “Five Finance Ministers” which includes Australia, Canada, New Zealand, and the United Kingdom this week. They discussed “the need for cooperation to respond to the threat and use of economic coercion” and the Indo-Pacific, among other topics.
Following cuts under the fleeting Truss administration, the Great Britain China Centre has had some of its funding restored.
Senior representatives from the United States and the United Kingdom governments met in Washington, D.C. on Thursday for the inaugural meeting of the U.S.-UK Comprehensive Dialogue on Technology and Data. On the agenda: AI standards, semiconductors, data and much more.
In news that will shock readers, the British government said this week that a small number of people who were granted so-called "golden visas" for millionaire investors might have obtained their wealth through corruption or organised crime. The golden visa programme, which offered a route to residency for those investing at least £2 million, has long been criticised by MPs.
Business
Flusso
A new battle begins
As mentioned at the top of this Briefing, another British semiconductor company finds itself in the Parliamentary spotlight. Flusso is a University of Cambridge spinout that develops flow sensor technology, and which last August announced that it had been “jointly acquired” by a “company and global private equity fund focused on investing in semiconductor companies and other high-tech industries”, without naming either. Six months later, as UKTech.News [UKTN] explains, “Companies House documents filed on 6 January [2023] show that Shanghai Sierchi Enterprise Management Partnership, a special purpose vehicle, took 100% ownership of Flusso on 11 August 2022. That same month, Flusso appointed two Chinese nationals based in Shanghai – Dan Zhou and Feiran Shi – as company directors.”
More detail came via a South China Morning Post piece: “Chinese corporate registry information shows that Sierchi was a new entity incorporated in Shanghai at the end of 2021 and it is 80 per cent owned by Zhenxin Equity Investment Partnership, an entity based in southeastern Fujian province. Zhenxin Equity, in turn, is a subsidiary of Baoding Investment, a Shanghai-based investment conglomerate founded in 2000 with a number of private and state-owned backers.”
Speaking to UKTN, Flusso CEO and co-founder Dr Andrea De Luca said that “Sierchi did notify the UK government about their intention of acquiring Flusso, and Flusso supported Sierchi and the UK government throughout the entire assessment process before closing the transaction”.
Regardless, on Wednesday morning Chair of the CRG and FAC Alicia Kearns published her letter to Business Secretary Grant Shapps. Citing her concern over the deal given “the strategic criticality of semiconductors and the importance of the UK tech sector for self-sufficiency” among other reasons, she requested him to “please retroactively call in for review under the National Security and Investment Act this takeover.”
Reactive episodes like these have a funny way of snowballing. Beijing to Britain thinks one of three things will happen.
First: the deal gets called in for review under the NSIA and ends up being unwound. This would reflect poorly on the Investment Security Unit (which sits within the Business Department and is responsible for screening these sorts of deals). After all, they were apparently aware of this when it went through last year. It would also be a significant embarrassment for then-Business Secretary Kwasi Kwarteng and the Government more generally.
Second, the deal is called in but found to be completely fine. That reflects poorly on the politicians who rushed for the intervention - did they know enough about what they were talking about to urge the Government to get involved? Or did they just see the phrase ‘semiconductor’ and shoot from the hip? What impression does that give businesses looking to work in and around the UK?
Third, Shapps chooses not to respond publicly at all. In doing so, he would open himself and his department up to criticism from Parliament and accusations that he was keeping quiet because he knew the deal was a mistake. This seems the least likely outcome.
This entire incident also serves as a valuable example of why it’s so critical for companies to be plugged into what’s going on in the (virtual) Westminster town square. After all, “one tweet, deal obsolete.”