Scottish Mortgage Investment Trust comments on China, Newport Wafer Fab, BGI Group
A Beijing to Britain briefing
Hello,
Scottish Mortgage Investment Trust this week presented its Annual Results. The UK’s most popular investment trust has significant and deliberate exposure to China, and noted that “many of the challenges the world faces today are the negative consequences of two contentions.” These are China’s economic development, which is “disrupting the established world order”, and technological progress that has “created companies of increasing geopolitical importance.” Geoeconomics is geopolitics.
Back in London, a British think tank has published a report which should cause serious concern within Government HQ. Civitas analysed the NHS’s reliance on Chinese-manufactured goods, and its conclusions will not make for happy reading in Downing Street, where for the last two years a campaign is supposed to have been rolling out to find and fix supply chain weaknesses. A short stroll away, the Business Secretary is likewise still tossing and turning over intervening in the Chinese-linked acquisition of Welsh semiconductor firm Newport Wafer Fab. As the deadline approaches, a briefing campaign is well underway pushing for Government intervention.
‘Good’ PR for Government came in the form of a surprise announcement that the Business Department would be cutting the remaining overseas aid spend in China. Although this totalled just £13 million last year (or around 2.7% of the total amount of money the Government has so far lost to Covid loan fraud), the news was covered with jubilation by certain segments of Fleet Street. Slightly less good for a Government that has just committed to tackle “crime, crime, crime” is that a company formed by ex-police force members and backed on occasion by taxpayers’ money has been training Chinese police, some of which have ties to policing in Xinjiang.
Elsewhere in the City, as we suggested many months ago would happen, it looks like British politicians are beginning to ramp up pressure on the Government to freeze out the world’s (Chinese) largest genomics company. A group of cross-party MPs and Peers have called for it to be banned, citing links to Xinjiang. Two other firms could face similar political heat. And that cheering you hear? It’s the sound of estate agents clinking glasses: there’s been a remarkable 24.4% increase in the number of London properties owned by China-based individuals between January 2020 and August last year.
Welcome to ‘Beijing to Britain’ - a weekly overview of the ebbs and flows of the discussion in Westminster and the City around the UK’s relationship with China, and how it impacts politics, the private sector and society.
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A quick look at how China is being discussed in Parliament
27 mentions of China/Chinese, 1 mention of Xi Jinping, 24 mentions of Hong Kong, 3 mention of CCP, no mention of Taiwan, no mention of Tibet, no mentions of Xinjiang
589 out of 650 MPs (90.6%) have a Twitter account.
10 MPs’ tweets containing the term ‘China/Chinese’, 3 on ‘Hong Kong’, 0 on ‘Tibet’, 1 on ‘Taiwan’
Order! Order!
Some of the more eye-catching questions and tweets from Westminster dwellers this week
Tom Tugendhat (Conservative, China Research Group) tweeted “Taiwan should attend @WHO gatherings. Pandemics are too important to play politics with and Chinese Communist Party should learn off successful places, not lock them out.”
Alicia Kearns (Conservative, China Research Group) asked “the Secretary of State for Business, Energy and Industrial Strategy, whether his Department plans to take steps to protect nationally significant infrastructure projects such as large scale solar plants in line with the decision to remove China Nuclear Power Group from its involvement in the construction of the Sizewell Nuclear Plant.”
Politics
PPE and China, cuts to ODA, Newport Wafer Fab
PP-protect-Me
Unpacking the supply chain risks
Because China is so heavily invested in a huge number of essential supply chains and the global economy at large, governments can no longer view industries in silos. This became particularly obvious during the Covid pandemic when countries around the world battled for PPE to help save their own citizens - much of which came from China.
This week, think tank Civitas (who’s previous influential report in this space examined British universities and their relationship with China) published their analysis of the NHS’s dependancies of goods manufactured in the PRC. Putting aside the pandemic and its impact on buying from China, there’s figures in here that will cause serious discomfort in Downing Street. For example, 45% of bedside monitors now come from China, up from 0 in 2015. One sixth of medical supplies on the government’s Disaster Relief List, a database of the most vital medical products, depend on Chinese contracts. And the UK is sending £600 million a month to the PRC for critical supplies to keep the NHS going.
That the NHS and the UK health sector as a whole is overly reliant on China is not news in Downing Street. In 2020, Boris Johnson launched Project Defend, which aimed to identify key economic vulnerabilities, in addition to potentially hostile governments, and ensure critical supply lines are no longer dependant on individual countries. There has been no public update on any progress that has been made in this regard.
This approach is, as usual, not shared by the UK’s closest allies. As the report notes, President Jo Biden issued a 100 day review on ‘Building Resilient Supply Chains, Revitalizing American Manufacturing and Fostering Broad-based Growth’, last year, and Republican Marco Rubio and Democrat Elizabeth Warren produced the ‘U.S. Pharmaceutical Supply Chain Review Act’.
One of the suggestions put forward by the authors of the report is the creation of a ‘National Health Service (Security) Act’ to “provide for the security of NHS supply chains and all related devices and equipment.”
Writing in The Times, China Research Group co-chair Alicia Kearns committed the Group to supporting two fixes, both put forward in the Civitas report. First, map supply chains in strategic industries. Second, work with allies to improve shared-value chains in strategic industries - termed ‘ally-shoring.’ For all we know, both of these suggestions may well be underway in Government - but as usual, a lack of transparency around any approaches means MPs are left in the dark.
Cuts for All
ODA in the firing line again
"We'll work with China to tackle global challenges, but we can make a bigger difference spending UK aid where it is more needed," tweeted Business Secretary Kwasi Kwarteng as he announced his Department’s cuts to Overseas Development Assistance (ODA) in China. A longer statement was delivered by PPS George Freeman in the Commons that day. He noted that the cuts mean “technical assistance to China on climate change issues will be smaller in scale.” It follows a 95% cut from the FCDO on ODA to China last year, with a predicted spend of just £900,000 this year.
The issue, as is so often the case in this area, is one of (mis)perception. The popular view for the handful of MPs and commentators that think about China is that ODA spend in the country is a foolish waste. Commenting on the announcement in The Times, one pundit summarised - “Sending them [China] foreign aid to pay for projects like chicken-rearing robots was plain wasteful.”
The reality is different, according to expert groups that monitor the spend. Here’s how non-Governmental body the Independent Commission for Aid Impact (ICAI) characterised ODA use in China: “Much of the engagement relates to China’s role in developing countries and on global development, and is therefore intended to benefit other countries. Even where China is formally recorded as the recipient, most of the assistance goes to UK research and government institutions working with China and there is a strong focus on securing secondary benefits to the UK.”
So, two questions arise:
First, If the Government is going to make proper policy, it needs to ask itself - ‘what now?’ Last year, the ICAI asked departments how they were planning on dealing with this policy change on ODA, or how “they might engage with China on development issues beyond this date”. They were informed that “so far there has been little discussion on these questions.” Such uncertainty partly finds its roots in the Government’s jumbled China Strategy, and partly through the reactive, rather than proactive, nature of decision making so common at this time.
Second, for China sceptics urging for strategic engagement - what does that look like? If it’s not ODA offering bilateral investment in areas such as climate change, then what is it?
Newport Wafer Fab
Still not fab
As we approach the deadline for Business Secretary Kwasi Kwarteng to intervene on Chinese-linked takeover of British semiconductor firm Newport Wafer Fab (NWF), the pressure from Fleet Street and Parliament has ratcheted up.
The Financial Times ran two pieces on NWF this week. The first revealed that the as-of-yet unpublished Semiconductor Strategy kicking around Whitehall would warn the Business Secretary “that allowing the sale of a Welsh semiconductor company to a Chinese buyer would undermine one of the country’s strategic industries.” The second should be seen as the culmination of months of campaigning from the China Research Group and others to try contextualise why the sale of NWF is so important. It noted “the plant appears pretty irrelevant on a narrow view of national security and yet significant through the wider lens of economic strategy in a high-tech sector the government says it wants to develop.”
This gets to the point the CRG and the Foreign Affairs Committee have been so keen to express, and penned by Tom Tugendhat and David Davis in separate articles last week. Yes, NWF may not sell ‘bleeding edge’ technology, but the fact that is it is part of the first compound semiconductor innovation cluster in the UK, and that this cluster is at the heart of the Welsh “Compound Semiconductor Connected cluster”. As the CRG’s briefing note explains, the CSConnnected cluster aims to be the UK’s leading hub for compound semiconductor development and cluster members generate more than £600 million in revenue each year between them.
The Welsh Labour MP for the area, Ruth Jones, has accused the Government of using NWF as “political football” said her ‘priority is continuity, stability and further development here in Newport’, and has met Nexperia’s Managing Director to discuss the deal. In her view, there are 450 jobs on the line, and she’s encouraging the Government to be transparent and swift in their call.
Spotted - politics
A short section of things we jotted down this week
IPAC’s Lord Alton will be introducing a Genocide Determination Bill 2022 into the House of Lords on 6 June. Worth keeping a very close eye on, and the product of over a year of campaigning on various ‘genocide amendments’.
In a speech on the future of cybersecurity at Chatham House, Attorney General Suella Braverman QC MP said “Let me be clear. This means that when states like Russia or China carry out irresponsible or hostile cyber activity, the UK and our allies are always able to take action, whether or not the activity was itself unlawful. Today that might be in response to hostile cyber activity occurring in Ukraine, tomorrow it could be a response to hostile activity in Taiwan.”
In a long session with the International Development Committee, Foreign Secretary Liz Truss doubled down on her reasoning as to why the new International Development Strategy appears to be so China focussed.
Chair of the China Research Group and Foreign Affairs Committee Tom Tugendhat has written to Secretary of State for Health and Social Care Sajid Javid to reiterate that Taiwan be readmitted as an Observer to the World Health Assembly.
Business
Genomics, Scottish Mortgage Investment Trust
BGI Group
Business under fire
Way back in November 2020, Beijing to Britain identified a Chinese genomics company as being one that would likely draw the ire of Westminster MPs in the future. At the time, Chinese mega-firm BGI Group was partnered with ‘one of Britain’s fastest-growing genomics companies’, Congenica. We flagged this as an area to keep an eye on because BGI had been blacklisted by the American Government earlier that year due to links to Xinjiang.
Fast forward over a year and a half. This week, the Telegraph covered a letter from a collection British MPs to Health Secretary Sajid Javid urging him to ban BGI Group. Penned by IPAC member and Liberal Democrat Spokesperson on Home Affairs, Northern Ireland and Constitutional Reform Alistair Carmichael, it states “in a similar manner to how Hikvision’s technology is deployed by China for physical surveillance, and Huawei’s for digital, BGI is used for genetic surveillance in “Xinjiang” and elsewhere. The company has been referred to as a "global collection mechanism for Chinese government genetic databases” by the National Security Commission on Artificial Intelligence (NSCAI) in the U.S.”
Carmichael calls on the Health Secretary to ban the firm, and to meet sanctioned MPs and Uyghur APPG Chairs - himself and Nusrat Ghani - to discuss the matter further. In an accompany quote in the article, he adds “It is basic common sense that our government should not fund or enable Chinese firms implicated in human rights abuses in Xinjiang. If we want to be taken seriously as international defenders of human rights then this should not be a difficult action to take. We recognise the Government's work in stopping Hikvision from bidding for contracts with the Department for Health but we need a consistent approach to ensure firms like BGI do not slip through the cracks."
For their part, BGI Group said "BGI strongly refutes the allegations made in a May 18 letter by Members of the Parliament. BGI Group does not engage in unethical practices and does not provide gene technology for the surveillance of Uighurs. BGI Group does not condone and would never be involved in any human-rights abuses. The letter in large part relies on factually inaccurate information about BGI that has appeared in a number of media reports. BGI has previously refuted this inaccurate information."
We would suggest three key takeaways from this letter. First, it marks the first explicit call for BGI Group to be banned that has cross-party support (note that all the political signatories are IPAC members). Second, Hikvision’s apparent ban by Javid is now being used a spring-board to push for other Chinese firms to be banned in the UK. And third, human rights groups are playing equally notable roles calling for these bans. This letter was shared widely in Uyghur activist circles, and previous work on Hikvision has likewise seen popularity in civil freedom circles.
Last thing - keep an eye on Homebase and Amazon. Both were the subject of a Lord Alton tweet this week over their ties to China.
A tough year
Bad headlines all round
“We made wrong call sticking with China, says Scottish Mortgage Investment Trust”, ran The Times’ headline. ‘China bull Baillie Gifford warns of growing threat to foreign investors’ summarised the Financial Times. Both touch on one sentence from a much wider briefing note from Scottish Mortgage Investment Trust’s Annual Results.
The entire document is worth a read, and adds more complexity than the much-quoted sentence - ‘In retrospect, it has been a mistake to reduce our holdings in western online platform companies rather than their Chinese counterparts’.
For those who are time poor, here are three key quotes:
“We think many of the challenges the world faces today are the negative consequences of two contentions that have driven our portfolio construction over the last decade. Firstly, China’s economic development is disrupting the established world order. Secondly, technological progress has created companies of increasing geopolitical importance and a complex network of global interconnection. China’s rise has brought a vast swathe of humanity out of poverty and created opportunities for workers and investors alike. However, this success has fuelled greater geopolitical ambition and a challenge to US hegemony. Online network companies have built an infrastructure that creates economic opportunity for millions, but the scale of their impact raises questions of governance and tradeoffs to limit the influence of bad actors. It will not be possible to resolve these issues quickly or easily.”
“China’s economy is now approximately three-quarters of the size of the United States (larger when measured using purchasing power parity) and a multiple of any other country. Its technology companies are world-leading in some important areas. The Made in China 2025 plan aims to make good its shortcomings in others. Indeed, by denying access to American technology, the US government forces previously ambivalent Chinese corporates to develop domestic supply chains. China’s rise has been predictable, and it telegraphs its intentions using five-year plans. The change in recent times has been the deterioration in the China-US relationship. Worsening trade relations have been matched by an increasingly hostile attitude from the US cross-party defence and foreign policy establishment, which events in Ukraine have intensified.”
“The deteriorating geopolitical situation and significant job losses in the technology and education sectors have made the Chinese government’s aggressive regulatory stance less tenable. Vice Premier Liu He’s statement in March that the authorities should deliver ‘policies favourable to markets and be cautious in introducing contractionary measures’ may signal that the worst of the crackdown is behind us. The challenge now for western investors is twofold: incorporating the low but increased chances of future US sanctions into their evaluation of Chinese investments and considering how the Chinese state may limit the upside in stock prices for the breakthrough winners. Our Chinese holdings have remained largely unchanged through this period of turbulence.”
As of 31 March 2022, SMIT’s thirty largest holdings included several Chinese companies: Tencent, Alibaba Group, Meituan, NIO and ByteDance.
Spotted - business
A short section of things we jotted down this week.
A British policing company, on occasion funded by the British taxpayer, may have been inadvertently teaching Chinese police forces sanctioned by the American Government for human rights abuses in Xinjiang.
The Trade Remedies Authority has recommended new measures to protect the UK’s aluminium extrusion industry from dumped products from China.
BlackRock Inc. and UBS Group AG are among the five-largest holders of dollar bonds sold by Sunac China Holdings Ltd., the latest property firm to default, according to Bloomberg-compiled data based on filings as recent as mid-May.
The Mail has covered Hikvision and Dahua again.
The Government is now hiring for a Cyber Security Advisory Board member.