China flexes its muscles over Hinkley Point

Posted on August 9, 2016

EDITORIAL USE ONLY File photo dated 14/08/14 of Chinese ambassador in London Liu Xiaoming, who has warned that Britain's relationship with China is at a "crucial historical juncture" as the Government prepares to make a decision on the Hinkley Point nuclear project. PRESS ASSOCIATION Photo. Issue date: Tuesday August 9, 2016. See PA story ENERGY Nuclear. Photo credit should read: David Parry/PA Wire©PA

Chinese ambassador Liu Xiaoming

China’s warning to the UK that the future of bilateral ties stand at a “crucial historical juncture” over the deferral of an £18bn nuclear project cannot be dismissed as mere rhetoric. Beijing has a record of rounding on countries that displease it. It downgraded its ties with Norway after the Oslo-based Nobel committee awarded a prize to the Chinese dissident Liu Xiaobo in 2010. Similarly, a meeting two years later between the Dalai Lama, Tibet’s exiled spiritual leader, and former UK premier, David Cameron, temporarily plunged London’s relationship with Beijing into the deep freeze.

The decision of Theresa May’s new government to review the proposed Hinkley Point power station imperils a project in which Beijing has invested a great deal of political capital. The deal was described by Xi Jinping, China’s president, as the “flagship project” in a new phase of relations lionised by both countries as a “golden era”. China’s stake in Hinkley is seen as a potential springboard for its nuclear industry, an important part of the country’s military-industrial complex, to broaden its international footprint.

    With this background, it is no surprise that Liu Xiaoming, China’s ambassador to the UK, warned London in an article published in the Financial Times that the deferral imperils the UK-China relationship. He urged London to approve Hinkley as soon as possible and expressed a hope that “the UK will keep its door open to China”.

    But while China’s disappointment may be understandable, it should not overreact. The long-delayed Hinkley Point is both a complex commercial project and a delicate political issue for several reasons that have little to do with China. For domestic considerations alone Mrs May’s government is justified in seeking a thorough review.

    There have long been doubts about the commercial merits of Hinkley — ones shared by this newspaper. The basic economics of power generation have shifted dramatically since the project was first proposed, as the costs of building a nuclear power station have risen while wholesale energy prices have dropped. This has left the UK committed to guarantee a price of £92.50 per MWh — more than double the current price in wholesale markets — for 35 years.

    There is, moreover, real political risk for the UK government in supporting a plant that has even split opinion at the executive level of EDF, the French utility that was due to lead its construction. These divisions reflect worries about the fragility of the French utility’s finances and its ability to bring the project in on time and within budget. EDF has experienced serious delays and overruns with nuclear reactors under construction in both Finland and France.

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    So China should be understanding even if the UK decides after its review to scrap the Hinkley project entirely. Beijing need only look at the swaths of its own domestic economy that remain resolutely closed to foreign investors to remind itself that Britain maintains one of the most open investment environments in the world. Chinese companies, as Mr Liu notes, have invested more in the UK than in Germany and France over the past five years. Beijing should not jeopardise the commercial interests of its companies by throwing a diplomatic fit of pique.

    For her part, Mrs May should seize opportunities ahead of and during the G20 summit in China in September to reassure Chinese counterparts that the UK’s new government values ties to China and Chinese business. After all, the UK’s pending exit from the EU makes a thriving commercial relationship with China indispensable.

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