China and the UK National Security and Investment Act – Implications for Business and Investors in 2025

Between around 2010 and 2020 was the so-called ‘golden era’ of UK-China relations, epitomised by former Prime Minister David Cameron taking Xi Jinping in October 2015 for a pint in his local pub.

However, in more recent years the relationship cooled significantly.  The geopolitical backdrop for this decline is multifaceted, and culminated most publicly in 2020 when the Boris Johnson Government announced that Huawei would be stripped of its role in the UK’s 5G network.²

This deterioration of relations was further compounded by the Integrated Security Refresh in May 2023 under the previous Conservative Government, which described China as an “epoch-defining challenge” to the international order which has implications for “the everyday lives of British people”.³

However, warmer relations seem to be returning.

Following a change of Government in July 2024, in October 2024, the new Labour Government launched a Green Paper on its industrial strategy called ‘Invest 2035’, clearly signalling that investment in the UK was the core pillar to its self-proclaimed number one mission of “growth”. Indeed the Government has further stated that “securing investment is [ ] central to the government’s mission to deliver economic growth”.⁴ As part of this mission of growth, there has also clearly been a significant and rapid change with regards to the UK’s stance on China.

In November 2024 British Prime Minister Keir Starmer met Xi Jinping in person at the G20 summit in Brazil – the first in-person meeting with a Prime Minister since David Cameron.  This was followed by a meeting between Chancellor of the Exchequer Rachel Reeves and Chinese Vice Premier He Lifeng on 11 January 2025, with potentially more high-profile meetings in the pipeline.

Reeves’ meeting with He Lifeng also resulted in the publication of a policy paper called ‘2025 UK-China Economic and Financial Dialogue: policy outcomes’⁵ containing further warm words around the future of the relationship and investment climate.  It was expressed that China and the UK are “committed to a fair and open investment environment that avoids arbitrary discrimination” and to “support investment in key growth sectors…where national security considerations can be mitigated by both countries’ investment regulatory framework”. This shift has added further delay to the UK’s China Audit, which as recently as November last year had been due for publication in early 2025⁶ but now looks more likely to be completed nearer the summer and may not be published at all.

In the face of an uncertain geopolitical climate, perhaps these are the early signs of the Labour Government seeking to rekindle the golden era of relations with China.

However, while the Government is keen to improve its economic relationship with China, there remains scepticism from some, including Parliamentarians. These warming relations come at a time of increasing pressure on the Government to bring forward legislation on forced labour in supply chains. At the same time there is a new US President who is threatening the increased use of tariffs amid tense US/China trade frictions. The role of Chinese entities in the Russian economy is also a complicating factor amid the on-going war in Ukraine.

The Government’s international economic policy is having to navigate increasingly complex and unpredictable geopolitical waters.

As part of the Government’s attempt to ‘turbo-charge’ investment from around the world into the UK, it has focussed on eight ‘growth-driving’ sectors, which include advanced manufacturing, clean energy, defence, digital and technologies and life sciences.⁷

One key area for investment is artificial intelligence (“AI”), which was addressed by the UK’s ‘AI Opportunities Action Plan’⁸, the findings of which were fully-endorsed by the Government in January 2025. This plan recognised that securing investment – including from the private sector – will be key to achieving the objectives outlined in the plan, as well as achieving the Prime Minister’s objective to ‘unleash AI’ in order to further boost growth.⁹

Under previous governments, strategies were also published in relation to the semiconductor¹⁰ and critical minerals¹¹ industries, focusing on the importance of diversified supply chains and maximising the UK's presence in these areas. The importance of advanced technology, and investment in these sectors, will continue to be a clear focus for the Government as part of its industrial strategy.

In addition, the UK’s Net Zero commitment¹² will require further investment in green energy projects.

While external investment will clearly be required to drive growth in each of these sectors, given their nature, the Government will also have to balance its enthusiasm for growth against the current legal framework.

The National Security and Investment Act (“NSIA”) already regulates investment and acquisitions across the entire UK economy, with a focus on national security considerations.  Where a ‘target’ company is active in a defined ‘sensitive sector’, which includes most of those identified above as requiring investment to grow, a mandatory notification may be required which suspends the ability to close a transaction or investment.  The Secretary of State in the Cabinet Office has the unilateral power to clear transactions, block them entirely, or otherwise impose conditions to allay national security concerns.  Although advised by the politically impartial civil service, the decision is taken by a single politician.

There are also other recent regulations which have signaled increasing scrutiny taking into account national security considerations.   For example, the Procurement Act 2023 has increased the focus on supply chains and enables authorities across the public sector to reject bids from any supplier that poses a threat to national security.  Similarly, the Telecommunications (Security) Act 2021 imposes greater national security-related obligations on actors in the UK telecoms industry.

Unlike other countries, at present the UK does not have specific outbound investment screening or restrictions in place.  Notably the US has placed restrictions on investments in certain types of technology – such as semiconductors, microelectronics, quantum computing and AI – into “countries of concern”, including China.¹³ It remains under review whether the UK would implement something similar.

As is illustrated above, there is a tapestry of regulations and legal implications across different sectors for investment in the UK, which need to be carefully navigated – none more so than the NSIA.

At the time the NSIA was introduced in 2021, the International Relations and Defence Committee found in its report on the UK’s security and trade relationship with China that the timing of the NSIA may have led to a perception that it targeted China.  In particular, the Committee heard evidence that the NSIA “was introduced when the UK was banning Huawei from the 5G network” and that it would probably “dampen, to some extent, the enthusiasm of Chinese companies for investing in the UK”.¹⁴

While in theory and practice the NSIA applies to transactions and investments from all jurisdictions (including those from the UK), the early application of the regime has only supported the notion that the regime is in practice primarily targeting China.

Based on the available statistics, since the regime went live in 2022, there has been an emphasis on Chinese investment being subjected to in-depth scrutiny.  While a relatively small number of notifications being made had any link to China (indeed the highest proportion are consistently from the UK and US), it is acquisitions and investments associated with China that are most susceptible to being called in for an in-depth national security assessment.  For example, in the reporting period 1 April 2023 to 31 March 2024, although less than 5% of accepted notifications had a Chinese acquirer, these represented 41% of the call-in notices issued.¹⁵ For more information about this most recent annual report, see our article here.

In relation to Final Orders (i.e. orders to prevent a deal or impose conditions) also demonstrate a focus on China.  Of all the Final Orders issued to date, 40% have been where there is a Chinese acquirer.  For Final Orders resulting in a prohibition or unwinding being required, the proportion is even higher, with five of the six having some link to China.

Outbound direct investment (ODI) from China has dropped sharply from the mid-2010s, which has coincided with a decrease in the UK and Europe generally.  In line with this, investment from China into Europe has dropped in recent years back to levels seen in 2010.¹⁶ At the same time, there has been a distinct decline in FDI from China into the UK – statistics from 2023 indicate that the stock of FDI from China in the UK was £4.2 billion, 1.6% or £67 million lower than in 2022.¹⁷ More recent statistics do not paint a clear picture, but indicate that investment may have further declined in the UK despite potentially some rebound in Chinese ODI levels.¹⁸

Is this a coincidence?  On the face of it, no: it is reasonable to assume that at least far as the UK is concerned the application of the NSIA regime has contributed to a chilling effect on Chinese investment in the UK, either for fear of onerous conditions being imposed (and being branded a threat to national security), or an expectation that acquisitions will not be permitted in certain sectors.

The position does, however, appear to be changing. In the past year or so, there has been a noticeable change of emphasis in how the regime has treated Chinese investment – at least with regard to Final Orders. While there have continued to be conditions imposed on deals, an increasing proportion of those deals involve non-Chinese acquirers. Indeed, conditions have been imposed on deals where acquirers are from the US, France, Czech Republic and even the UK. And although there has been one unwinding order relating to a Chinese acquirer (see our article on that here), that related to an acquisition which occurred in 2021 (before the regime even came into full effect) and so may be an anomaly as the only block of a deal since the new Government has taken power.

It is difficult to know whether this trend of apparent decreased intervention for Chinese-linked acquisitions is as a result of less Chinese investment into the UK, such investment being more selectively made (e.g. into greenfield projects or other areas) to avoid sectors of perceived heightened sensitivity, or a softening (or maturing) of the stance of the UK Government to Chinese investment in such sectors.  In all likelihood, it is probably a combination of all these factors and more.  But what is clear is that Chinese FDI continues to come to the UK, including in the sectors where the Government wants investment to support growth.

This investment appears likely to continue and, if the Government’s wishes are granted, increase.

Most recently, the policy outcomes from the UK-China Economic and Financial Dialogue in January 2025¹⁹ indicate an agreement between the UK and China to support investment in “key growth sectors” including “clean technologies, life sciences, digital technology, and financial services” and a commitment to “engage constructively on economic or security issues to provide certainty for business".

This suggests that the current Government may be more inclined to clear transactions involving Chinese investment which fall under the scope of the NSIA regime with conditions, rather than blocking the deal or issuing an unwinding order (which are rare in any case) –  or indeed to allow investment to go ahead unhindered.  The political climate has certainly shifted dramatically over the past year.