Asia analyst: UK judged international mood better than US over AIIB

Dalian in China (pictured) was ranked 82 by the Economist Intelligence Unit in 2012 for its overall global competitiveness. Maxim Tupikov / Hemera/Thinkstock

Dalian in China (pictured) was ranked 82 by the Economist Intelligence Unit in 2012 for its overall global competitiveness. Image copyright: Maxim Tupikov/Hemera/Thinkstock

Asia analyst: UK judged international mood better than US over AIIB

06/08/15

By Duncan Innes-Ker

The upcoming visit of the Chinese president, Xi Jinping, in October represents a milestone that provides a welcome opportunity to examine UK-China ties

The bilateral relationship is one that has changed significantly over the last 10 years. Much of this transformation reflects the way in which the UK and China have, themselves, developed over that time.

However, it is also true to say that the two governments are beginning to get a better feel for areas in which the relationship can move beyond being merely mercantile or reactive, as they find ways in which ties can be leveraged for strategic advantage.

The most obvious change over the last decade or so has been that growing depth of the economic relationship between China and the UK.

The Chinese economy has, of course, grown hugely over the period—and continues to expand rapidly, despite the slowdown in headline GDP growth.

In line with this, UK goods exports to China have risen from £2.4bn in 2003 to £13.2bn in 2013. Services exports have also climbed, from £1.1bn to £4.2bn, and tens of thousands of Chinese students attend university in the UK.

Such numbers sound impressive, but the UK still supplies only 1.2 per cent of China’s merchandise imports, and there is much room for further growth.

Shipments from China to the UK have also risen spectacularly in recent years, reaching £33.9bn for goods and £1.4bn for services in 2013.

The UK is China’s third biggest market in Europe after Germany and the Netherlands (the latter a hub through which many products are shipped onwards to other countries). UK demand supports thousands of Chinese jobs in cities from Taiyuan to Shenzhen.

Focus shifts from booming trade to rising investment flows

Economic ties are increasingly moving beyond trade. Chinese firms are beginning to invest serious money in the UK, and in doing so are appreciating the country’s open attitude when it comes to investment.

While Canada, the US and Australia have all been tightening restrictions on purchases by Chinese firms, particularly state-owned ones, the UK retains a relatively relaxed approach.

Partly as a result, the UK has emerged the clear leader within the EU in attracting FDI from China.

Sectors such as transportation and energy have been particular beneficiaries of this deepening engagement.

Chinese money is supporting some of the UK government’s key infrastructure projects, including new nuclear plants and the HS2 high-speed rail link.

Nonetheless, investment from China still plays a minor role compared with that from the US or the other big EU nations.

UK government figures put the stock of Chinese investment in the UK at £49.1bn in 2012, up from £6.7bn in 2003, but far behind the £902bn from France, let alone the £3.3trn from the US.

Similarly, UK investment in China has risen, but remains modest compared with that in more established partners.

The under-developed state of bilateral investment reflects the fact that Chinese financial markets remain largely walled off from those of the rest of the world.

However, that is changing as China seeks to liberalise its capital markets and turn the renminbi into a global currency—two of the key elements of the Xi administration’s economic reform agenda.

One of the most exciting aspects of the bilateral relationship at the moment has been the growing co-operation to expand the use of the renminbi in international markets.

According to international payments firm, SWIFT, the renminbi was the fifth most used international currency as of June 2015, and the UK the third most important offshore centre for such transactions after Hong Kong and Singapore.

Striking a new balance between economic priorities and human rights

The progress in developing economic ties represents an impressive achievement by the current UK government and its predecessor, which have both made a conscious decision to prioritise this aspect of the relationship over issues such as human rights.

While the UK government still raises human rights with China, particularly within the context of promoting the rule of law, it tends to do so in a low key fashion. Its determination not to rile its Chinese counterparts has at times led to unedifying behaviour.

When UK parliamentarians were banned (presumably on the instructions of the central Chinese government) from travelling to Hong Kong to monitor progress under the 1980 Sino-British Joint Declaration of 1984, which the UK views as being an ongoing obligation, the Foreign Office’s response was disappointingly muted.

This is the sort of behaviour that prompted the US to bemoan the UK’s “constant accommodation” of China, after the UK signed up to the Asian Infrastructure Investment Bank (AIIB) in March this year.

Yet the UK had judged the international mood better than the US over the AIIB, as the rush of other developed nations to join the bank subsequently illustrated.

A relationship that must look to the future

Indeed, the co-operation over the AIIB ultimately shows the sort of path that UK-China relations may be able to forge in the future.

China’s dream of national resurgence is being fulfilled, and has the potential to bring huge benefits to the Chinese people, Asia and the world.

However, if those benefits are to be realised, foreign governments need to adapt to the reality of China’s rise. For now, that means according China a greater say in global institutions—especially economic ones—and engaging it positively in international co-operation over fields such as the environment.

The UK can do much to nudge this process along, both under its own auspices and through its influence within the EU.

However, the bilateral relationship needs respect and reciprocity on both sides.

The UK and Chinese governments are making slow progress towards a more reciprocal arrangement when it comes to visas, but China needs to do a lot more to open its markets to British businesses.

As it courts Chinese investment for British infrastructure, the UK government should remember that, in the longer run, it will be unacceptable for Chinese firms to invest and sell so freely into the UK if so much of the Chinese economy remains barred to British companies.

Duncan Innes-Ker is Regional Editor for Asia with the Economist Intelligence Unit, heading up a team of analysts producing the company’s economic and political forecasts for the region. He is a frequent commentator for news services such as the BBC and Reuters, and has spoken at many conferences and briefings for senior corporate executives, academics and diplomatic officials. Duncan joined the Economist Intelligence Unit in 2005. He speaks Chinese, and has a Masters degree in Pacific Asian Studies from the School of Oriental and African Studies and a BA in Chinese Studies from Oxford University. Duncan was born in Hong Kong and raised in Asia. He first lived in China in 1995.

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