Meltdown expected?

The new British Prime Minister Theresa May currently has two Chinese nicknames: Aunty Plum Blossom and the Second Iron Lady (after Margaret Thatcher).

Her decision on whether to build a controversial Chinese-financed nuclear power station at Hinkley Point in Southwest England might decide which one sticks.

Beijing, of course, wants it to go ahead. The two Chinese firms involved in the deal might only be providing funds this time (a third of them) but if they get this British deal they are automatically considered for two more – one of which involves using their own nuclear technology.

It would be a massive coup for the Chinese nuclear industry which has made winning international contracts one of its core priorities.

But on the British side there are concerns. EDF, the French company leading the Hinkley project, is in financial difficulty and its unions don’t support the board’s decision to finance a third of this £18 billion ($23.5 billion) project.

Many have doubts about the technology itself – which as The Economist has pointed out has been “plagued by problems” with two similar reactors still unfinished in France and Finland.

The plant is scheduled to open in 2025. If the project goes ahead Britain has agreed to pay a guaranteed price of £92.5 per megawatt hour for 35 years, which is looking increasingly expensive as the cost of other power sources including renewables comes down.

And that’s all before you get into the thorny issue of Chinese involvement in a strategic sector. There are fears that Beijing could build “backdoors” into two future plants at Bradwell in Essex and Sizewell in Suffolk that would allow it to switch them off if China and Britain ever became deeply hostile to each other.

But let’s roll back a bit.

The fate of Hinkley Point should have been agreed already. On July 29 to be precise. That was the date officials from EDF and the two Chinese companies – China General Nuclear Power Group (CGN) and China National Nuclear Corporation (CNNC) – were meant to travel to Hinkley Point in Somerset to sign the final contract.

But at the eleventh hour May’s new British government called the ceremony off saying it needed more time to make a final decision.

Officials at EDF were outraged. Only the day before they had pushed through a difficult board vote to approve the deal. But at least they were notified by someone sufficiently senior on the British side. Indeed, the Financial Times reports that May herself told French President Francois Hollande that she wanted to review the project one more time.

There seems to have been less importance attached to informing Chinese officials. Writing in the Evening Standard Labour Party grandee and president of Great Britain-China Centre Peter Mandelson said the Chinese only heard of it from a junior member of the British embassy in Beijing.

On the day of the proposed signing the FT quoted an official from the Chinese nuclear industry as saying: “We are really questioning what’s going on. We were all set to go over when it was suddenly pushed back. It seems the UK government has a lot of doubts, we aren’t sure where all this is coming from.”

Nuclear is one of several high tech industries, including high-speed rail and mobile networks, which the Chinese government is using so as to rebrand the nation as an exporter of innovative products and affordable infrastructure.

Argentina has agreed to buy one of its Hualong-1 reactors but so far Pakistan is its biggest customer with two Chinese-designed nuclear reactors in operation and two more under construction.

If Hinkley Point goes ahead it will allow CGN and CNNC to attach their names to a first world project and open the door for a Chinese-designed reactor in Britain, at Bradwell, in the next decade.

Needless to say the Chinese are treading a careful line in the six-week period May has asked for to make her final decision.

Some Chinese media commentaries have said it is “understandable” the new prime minister needs more time after the “earthquake” of Brexit and many have said whatever the decision, it won’t affect Sino-British relations. “Hinkley Point is an individual case. It doesn’t represent Britain’s attitude to China. Sino-British relations are multifaceted and multi-layered,” Xinhua said in a soothing commentary.

And if Hinkley Point is rejected on the grounds of being too expensive or the technology being questionable then it might be that that calm tone is maintained.

If, however, the project is scrapped because of Chinese involvement and security fears, then the “golden era” of Sino-British relations, as begun by May’s predecessor David Cameron and his chancellor George Osborne, will look to be well and truly over.

There was a hint of that in the FT article written by Liu Xiaoming, China’s ambassador to the UK, on August 9. Titled “Hinkley Point is a test of mutual trust between UK and China” it said Sino-British relations were at “a crucial historical juncture”.

“I hope the UK will keep its door open to China and that the British government will continue to support Hinkley Point — and come to a decision as soon as possible so that the project can proceed smoothly,” he added.

Liu also pointed out that many of China’s nuclear reactors are built in cooperation with Canadian, Russian, French and American companies.

“Thanks to the safeguards of international standards, there has never been a concern that foreign companies might control China’s nuclear reactors,” he said – his only real acknowledgment of the security concerns.

Last year when Cameron and Osborne were wooing Xi on his state visit to the UK – and incidentally signing a trade agreement that included Hinkley Point – May’s now Chief of Staff, Nick Timothy, had some pretty choice words to say about doing business with China. “No amount of trade and investment should justify allowing a hostile state easy access to the country’s critical national infrastructure. Of course we should seek to trade with countries right across the world – but not when doing business comes at the expense of Britain’s own national security,” he wrote on the political blog ConservativeHome.

This week May tried to calm the waters by directly writing to Xi Jinping to confirm her presence at the G20 leaders’ summit in Hangzhou early next month. Alok Sharma, Britain’s minister for Asia, who is in China for four days, delivered the note, reports Bloomberg.

Downing Street refused to release a copy of the correspondence, saying it was “personal” but the Chinese foreign ministry said it expressed Britain’s desire to “strengthen cooperation with China in economic, trade and global affairs”.

Many in the British media are unconvinced that the plant makes sense. For example, The Economist refers to the proposed scheme as “Hinkley Pointless”, a view it takes based on the level of subsidy the power plant will require over the next 35 years based on current energy price forecasts. (That said, that magazine’s longer term readers will know its judgements on future energy costs have been famously wrong – such as in 1999 when it speculated the oil price would fall from $10 to $5 a barrel when it instead rose to about $145 in 2008.). Such arguments may also miss the bigger picture. Post-Brexit Britain badly needs a free trade deal with China, especially one that plays to its advantages in services. Over the next 35 years the value to the British economy of a good trade deal or no deal (a potential Chinese response if Hinkley Point is scuppered) would likely have more upside or downside than the subsidy.

It was for that reason that UK government minister Jim O’Neill was reported by the FT late last month to be deeply concerned, feeling that backtracking on the nuclear agreement would cast the UK as a “fair-weather friend” and damage overall economic relations.

(Indeed, China’s propensity to get upset over a snubbed deal was evident this week when Australia’s Treasurer Scott Morrison blocked the sale of electric utility Ausgrid to two Chinese bidders on national security grounds. He declined to reveal to media what these security concerns were, but his move drew the ire of China’s commerce ministry which said “this kind of decision is protectionist and seriously impacts the willingness of Chinese companies to invest in Australia.”)

At her talks on the sidelines of the Hangzhou summit, May will likely discover how steely her Chinese negotiators can be. Indeed, that was something the original Iron Lady also became aware of in the early 1980s when she too had to agree a major deal with China.

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