CRG Weekly: UK foreign policy shift and nuclear power
Behind the headlines: Britain pivots development spending towards countering China
This week, there was a notable strategic shift in Britain’s foreign policy in the direction of Asia. The Foreign, Commonwealth & Development Office’s (FCDO) development financing institution, the CDC, launched its new five-year strategy.
As reported in the FT, the headline news is that from April 2022 the CDC will be renamed British International Investment, with a focus on transparent, sustainable financing. Given it is being sold as “an alternative to Chinese loans”, this is a move worth understanding for those who follow the UK’s position on China.
In short, the UK is pivoting its main state economic development player from the “poorest and most fragile” countries in South Asia and Africa towards the Indo-Pacific. That is a big shift.
To put this move in context, the CDC receives about 5% of the UK’s overseas development budget, or somewhere in the region of £750m a year. It also reinvests returns, so its portfolio value exceeds $7bn. While the UK makes contributions to multilateral financing facilities and the World Bank, the CDC is the key driver: it accounted for 70% of the private finance mobilised by the UK from 2016-18, according to the ODI.
The CDC has only lent to South Asia and Africa since 2012, with 50% of new investment going into fragile and conflict states. From 2022, its geographical remit will expand to include projects in South East Asia and the Caribbean. The investment criteria has also been rewritten, and its portfolio investment return expectation has been lowered from 3.5% to 2% to reflect more high-risk investing.
This change in strategy raises two big questions. The first is exactly how the BII will deliver on its plans to ‘mobilise up to £9bn’ of financing a year. Given the CDC reports that it mobilised $550m of private capital in 2020 and $876m in 2019, that is a big jump.
The answer is unlikely to lie in further financial support from the FCDO. In 2017, DFID quadrupled the cap on the cumulative level of financial support made available to the CDC, but the current aid budget suggests that CDC’s funding is static for the next three years. The key opportunity presumably lies in the friendlier environment for mobilising private capital for climate projects and in South East Asia, compared to the “poorest and most fragile” countries where the CDC currently targets investment.
The second question is how effective this is as a way to counter China’s dominance in development financing. Even if the UK does manage to mobilise £9bn a year, a clear financial disparity remains, given China spends about $85 billion a year on overseas development financing, according to AidData.
But more charitably, a direct comparison misses the point - the UK is not acting alone. The CDC’s new strategy is being framed as part of the Clean Green Initiative, which is the UK’s snappily-titled contribution to the recent G7 pledge to increase infrastructure financing. Elsewhere, the Biden administration is said to be scoping out projects in Africa and South America. Few realise that Japan is actually the largest infrastructure lender in South East Asia.
This is an announcement worth paying attention to because the UK has just pulled one of the few financial levers available for its foreign policy, given hard budget constraints on additional spending. And that financial lever has been pulled in the direction of mainstreaming the UK’s tilt to the Indo-Pacific - and, by extension, a response to the rise of China. Aligning development spending with foreign policy delivers on the rationale behind the controversial merger of DFID and the FCO, signalling a new era of British foreign policy.
In brief
Boris Johnson confirmed China will play no future role in developing new nuclear power stations. At a forum hosted by the China Chamber of Commerce in the UK, investment minister Lord Grimstone told Chinese businesses with UK operations that there “is clearly a huge potential for Chinese investments to play a major part in the UK.”
The Sun revealed that Britain’s spy agencies have launched a recruitment drive for Mandarin speakers to repel Chinese cyber operations. CRG committee member Alicia Kearns MP said that the FCDO should also be investing heavily in increasing its Mandarin speakers.
Beijing blocked access to shipping location data in Chinese waters through Automatic Identification System (AIS) signal. The AIS was initially developed to help avoid collisions and support rescue efforts but also became a valuable tool to enhance supply chain visibility and for governments to track activity in overseas ports.
Cornish Lithium has secured an £18m investment to speed up the development of its mining projects as the UK attempts to wean itself off a reliance on Chinese minerals.
British car production slumped by 40% last month as manufacturers grappled with a shortage of semiconductors on top of disruption caused by the Covid pandemic, the Times revealed.
The WTA remained concerned over the whereabouts and wellbeing of Peng Shuai, despite the tennis player’s call with International Olympic Committee President Thomas Bach. This comes after China’s foreign ministry pressed 'certain people' to stop 'politicising’ the situation diplomatically in an effort to stop foreign countries like the UK and EU from questioning Peng’s wellbeing.
As Germany formed a new coalition, observers expect the job of foreign minister to go to Annalena Baerbock, the Green co-leader, who has argued strongly for a foreign policy “guided by human rights and values”. The coalition agreement indicated a shift in tone, containing more than a dozen references to China including the first mention of Hong Kong, Xinjiang, and Taiwan.
The EU is set to renew sanctions on Chinese officials for alleged human rights abuses in Xinjiang, while Italy’s Prime Minister Mario Draghi vetoed Zhejiang Jingsheng Mechanical’s attempt to buy the US-based group's screen printing equipment business in Italy on national security grounds.
China downgraded diplomatic relations with Lithuania to the level of charge d'affaires. The Baltic state urged Europe to brace against Beijing's economic "coercion".
The US government added Chinese-based technology firms to the so-called "Entity List" for their alleged role in assisting the Chinese military's quantum computing efforts and acquiring or attempting "to acquire US origin-items in support of military applications".
A new three-year blueprint for an improved state system to help China achieve self-sufficiency in technology was approved by President Xi Jinping.
JP Morgan boss Jamie Dimon apologised twice after saying that JP Morgan will outlast the Chinese Communist Party.
Five Chinese nationals were kidnapped in DR Congo after an attack near a mine, where relations between Chinese mining companies and local authorities are strained.
Weekend reads
China’s quest for greater ‘discourse power’. Distinct from general soft power, China’s discourse power – the ability to set and shape global narratives – is quietly on the rise. Hugo Jones. The Diplomat
Kevin Rudd: “China views the UK as weaker after Brexit”. Brexit hurt the liberal democratic order, says Australia’s former prime minister in an exclusive interview. Freddie Hayward. The New Statesman
Xi's confidence game. In recent months and weeks, Chinese leader Xi Jinping has displayed a growing sense of urgency. This is a sign of determination, rather than insecurity. Jude Blanchette. Foreign Affairs
Podcasts
China’s growing role in multilateral development banks. Yunnan Chen, senior research officer at Overseas Development Institute, talks to the China in Africa Podcast.
China’s nuclear strategy, capabilities, and build-up. Bonnie Glaser and Fiona Cunningham on China Global.
The Great Reconciler and the End of Chinese History. The Little Red Podcast.