Who can take on China in the tech arms race?

The government’s decision to water down new foreign investment rules designed to protect national security casts serious doubt about its resolve to keep China out of the most sensitive parts of the British economy. Raising the threshold above which an overseas stake must be examined from 15 per cent to 25 per cent will sharply reduce the number of deals facing scrutiny.

The amendment to the National Security and Investment Bill, now wending its way through parliament, was presented by business secretary Kwasi Kwarteng as necessary to show Britain is still ‘open for business’. It follows intense lobbying by the Confederation of British Industry, which fears the new rules will deprive industry of investment just as it is emerging battered and bruised from the Covid pandemic.

Look no further than the 2008 financial crash to see where this can lead. In the wake of that meltdown, desperate and wobbly western companies turned to China for salvation. Beijing obliged with cynical precision. Opaque state-backed entities snapped up tech and infrastructure firms across Europe, driven by the Chinese Communist party’s strategic objectives as much as by commercial sense. For the grateful recipients, due diligence frequently consisted of little more than counting the number of zeros on the cheque.

The government says it wants the new rules to be ‘proportionate’ and insists it maintains a great deal of discretion in the way the powers are exercised — though that can cut both ways in times of economic stress. It also points to its resolve in excluding Huawei from Britain’s next generation 5G networks. That is true — as far as it goes. The Chinese telecoms giant remains deeply embedded in existing set-ups, and has rapidly expanded research collaboration in the UK, working with 35 institutes and universities — including funding advanced facilities at Cambridge, Edinburgh, Surrey and Imperial College London.