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Liz Truss, the Foreign Secretary, wants fewer Chinese investments in sensitive areas of the British economy such as nuclear power and 5G technology. A laudable goal. But when do you know what’s a Chinese investment and what’s not?  

Recently it emerged that a sensitive Italian drone-maker had been acquired by a Chinese government-owned company — and that the buyer, knowing that the Italian government would not permit such an acquisition, had gone to extreme lengths to hide its identity. In the past couple of years, the UK and many other Western countries have strengthened their foreign direct investment (FDI) legislation. That makes it imperative to find the ultimate owners of firms wanting to buy or invest in sensitive companies.

“The way I would put it is that, of course, we trade with China. It’s an important trading partner of the UK. But it’s important that we don’t become strategically dependent,” Truss told The Telegraph last week. She explained that sensitive projects such as the construction of the Sizewell C nuclear power plant should be done with like minded partners, and said that investments in cyber security, artificial intelligence, quantum technology and 5G technology were areas in which involvement of Chinese companies should be “treated with caution”.

Fine. What Truss seems not to appreciate, though, is that being based in a Western country doesn’t imbue a company with Western values. Indeed, in today’s globalised economy Western companies are often owned by companies in another country – including China. Chinese companies wanting to invest in Western countries, in turn, may do so through a subsidiary based in a Western country. In fact, as more and more Western countries strengthen their FDI legislation to keep sensitive companies safe from Chinese takeovers such tactics are becoming more common. 

Consider the case of Alpi Aviation. In 2018, a Hong Kong-based company bought a 75 per cent stake in the Italian drone maker for 90 times its value. This was before Italy strengthened its Golden Power regulation, giving the government more power to scrutinise and reject takeovers and large acquisitions involving foreign companies. Last month an investigation by Italy’s financial police, the Guardia di Finanza, unveiled remarkable details from the acquisition. Alpi’s true buyer wasn’t the Hong Kong-based company that officially bought it but a Chinese government-owned entity, CCUI. 

The Guardia di Finanza hasn’t made its complete investigation public, but intelligence firm Recorded Future has conducted an open-source investigation that provides considerable detail. Alpi’s ownership structure turned out to involve no fewer than seven layers and 17 entities. This matters because a state-owned Chinese entity now has access to extremely valuable intellectual property, and it matters even more because soon after the takeover, Alpi began moving its production to China. 

How many other sensitive Western companies have been acquired by vanilla firms that are, in fact, owned by companies that should not get access to those Western companies? Nobody knows, because with few exceptions government regulators don’t investigate a potential foreign acquirer’s complete ownership chain. In 2018, for example, it emerged that three cutting-edge Swedish semiconductor firms had been acquired by Chinese firms, two of which have links with the People’s Liberation Army. 

And in the UK, the future of Wales-based semiconductor manufacturer Newport Wafer Fab now hangs in the balance. Earlier this year, it emerged that a Netherlands-based company was going to acquire the company, which immediately raised national security concerns — not just because Newport Wafer Fab makes a product that is vital to the functioning of digital devices, but also because the Dutch buyer is owned by a Chinese state-owned company that is itself part-owned by the Chinese government.

In the past two years, the UK and many other European countries including Italy, Poland, Sweden and the Czech Republic have strengthened their FDI screening. Germany, having learnt its lesson after a key industrial-robot maker was acquired by a Chinese firm and lost to Germany, had done so a bit earlier, and the United States strengthened CFIUS around the same time. All have realised that companies sensitive to national security go far beyond arms manufacturers, and they have also recognised that globalisation doesn’t work if some countries constantly exploit others’ openness. While the new laws have some variation, they all include more sectors in the definition “sensitive to national security” and task the government with scrutinising foreign takeovers and major investments in these sectors.

Truss and other politicians want more collaboration with companies from like minded countries, meaning the West. But which companies can be considered Western? There’s no doubt Newport’s buyer is based in the Netherlands, but like so many other Western companies it also has Chinese ownership. Many of Huawei’s international subsidiaries, meanwhile, are owned by Huawei Technologies Coöperatief, which is itself fully owned by Huawei. But officially Huawei Technologies Coöperatief is a Dutch company. Yet in most cases, the new laws don’t require full documentation of ownership all the way up to the ultimate owner. That means an entity may look “Western” even though it’s owned by a company in China, Russia or another country of which the West is growing wary.

Investigating such ownership scriptures is cumbersome, but it’s essential, because without it more crucial companies like Alpi could simply be acquired away. Indeed, just as scrupulous companies do their due diligence before committing to a deal, governments should require the same documentation for all corporate transactions that fall within their strengthened FDI legislation. Good companies that already commission due diligence investigations for their prospective partners could simply make such documentation available to the government. As for companies that don’t do their homework: well, they should. And that doesn’t mean producing a shoddy pile for government review simply to tick a box. Just as companies have to submit orderly audits, they should have to submit to the government’s orderly due diligence investigations of any party wishing to acquire them or buy a major stake.

Shady business transactions are nothing new. Today, however, China in particular is exploiting the openness of Western economies in a way that is causing serious harm to Western countries. Germany has lost a key industrial-robot maker, Italy has lost a key drone company, Sweden has lost cutting-edge semiconductor firms: the story goes on. Only if governments know the full chain of entities involved can they make an informed decision as to the wisdom of such a takeover or major investment. As the Recorded Future analyst’s reconstruction of Alpi’s acquisition shows, finding the information isn’t insurmountable. Without such details, the UK could end up with Chinese presence in the very areas where Truss wants to eliminate it.