At a turning point in both countries’ development, Britain and China share strong reserves of common ground. Now, at a time of epochal international shifts, when the war in Ukraine has riven the world and America stands on the brink of a new and unpredictable Donald Trump presidency, it is worth examining how the two countries can combine forces in some key areas.
Despite the competitive strains and potential strategic conflicts accompanying China’s spectacular 40-year economic ascent – and the more recent geopolitical inflections under President Xi Jinping’s rule – there are many propitious areas for co-operation. In reaction to full-frontal competition between the US and China in industry and manufacturing, China faces a major threat through heavy tariffs on American imports likely to be imposed in the early days of the Trump administration. Britain will not be able to be sidestep these pressures. Indeed, it may be more exposed to strains than other countries in Europe.
However, in financial services, Britain has some important comparative advantages. If applied in the right way, with due sensitivity over China’s positioning vis-a-vis the US, Russia and the global South, these can bring benefits for both countries.
Progress is likely to become more evident with resumption in 2025 of a high-level economic and economic dialogue between the two countries. Rachel Reeves, chancellor of the exchequer, is due to visit China early in the new year for the first such governmental exchange since 2019.
Need for political surefootedness and strategic vision
The British will treat some aspects of the relationship with circumspection for fear of damaging delicate arrangements with the US in defence, intelligence-sharing, military technology, advanced computing and artificial intelligence. Nothing can be taken for granted, but both countries should make a substantial effort to achieve mutual benefit – both for their own good and to help advance the interests of a wider international community.
In the struggle for supremacy between the superpowers, Britain may find itself more or less at the epicentre – a position from which it might suffer considerable discomfort as well as reap palpable rewards.
Trump’s policies towards China – how ‘Trump the deal-maker’ will co-exist with ‘Trump the competitor’ – are bedevilled by uncertainty and unpredictability. The unsavoury reality for Europe is that both the US and China are likely to resort to similar ‘divide and rule’ tactics to separate individual European countries – including the UK – from the European mainstream.
Britain’s financial deal-making capacity in bargaining with the US and China
Britain’s opportunities for flexibility with China are subject to clear limits. But it can use its ability to strike public deals with the Chinese in the financial sphere and elsewhere as a component of bargaining in relations with both the US and China. There is a broad platform available for greater co-operation.
The last session of the UK-China ‘economic and financial dialogue’ in June 2019 finished with bold assertions about the future. The two countries proclaimed ‘support for multilateralism and a shared goal of strong, sustainable and inclusive global growth’. And they promised to ‘strengthen their economic co-operation, boost bilateral trade and investment, and deepen financial links’.
Neither the UK nor China has any interest in further fragmentation of the world trading system. At a more specific level, one big area will be in social security, in line with a new-found Chinese concern about its long-term weakness in safety-nets needed to protect retiree incomes. UK asset management and insurance companies can work with their Chinese counterparties to improve the running of the Chinese pension system to help overcome social and economic problems from the decline and ageing of the Chinese population.
Sustainable investment capabilities in transition finance
Forging sustainable investment capabilities, particularly in pooling expertise in the field of transition finance, is another important point of focus – furthering the work of the UK-China Green Finance Centre. Co-operation in building resilient, transparent and reliable carbon markets would help realise China’s ambition to become an important international force in decarbonisation. There would be special value in marrying Chinese and British technological knowhow and financial expertise in low-carbon technologies, for example in developing the hydrogen economy where China is a world leader or in carbon capture and storage systems.
In banking and credit markets, Chinese banks might be able to play a greater role in North Sea wind energy and hydrogen projects. More generally, Chinese entities – including its largest banks as well as the China Investment Corporation, the sovereign fund and the NSSF – might act in support of the newly founded British National Wealth Fund to compensate for some of the investment lending lost as a result of Britain’s withdrawal from the European Investment Bank.
Further work on internationalising the renminbi
Multilateral and European co-operation will be essential in further progress on internationalising the renminbi. The UK could repeat its performance in 2014 when it became the first non-Chinese sovereign issuer in renminbi. This could enhance a trend towards greater use of the Chinese currency in international borrowing aided by relatively low Chinese interest rates.
Further support could be given to sovereign borrowing by the Chinese government in London, as well other sovereign issuers, following the landmark China offering in 2016. The UK Treasury would be keen to encourage China to issue ‘green bonds’ in London, in line with the UK’s ‘green gilts’ programme.
Chinese and UK banks and government entities could work on providing facilities for foreign central banks to hold renminbi on deposits in London as well as in Hong Kong and mainland China – building on the roughly 80 central banks estimated to hold the Chinese currency in their reserves.
Joint mission on productivity in both countries
One of the major challenges for Britain, like other European economies, is weakness in productivity. Alongside the problems of an ageing society, overstretched public institutions and high public debt, low productivity growth will generate big future social, economic and political problems.
Unquestionably, China’s helter-skelter expansion of the last 30 years is now giving way to a change of economic gear – a switch that could be accompanied by both domestic and external political strains. China will rely less on investment-fuelled exports – especially if trade wars with the US and barriers to its exports on other markets accelerate this shift – and more on internal consumption. This much-discussed transition was in evidence from 2009-18, but has stalled since that time, in line with the country’s overall growth slowdown.
Despite the depredations of Covid-19 and the subsequent growth slowdown, China’s GDP in current dollar terms has risen by $3.6tn, according to the IMF. This is equivalent to the total size of the UK economy in 2024. Whatever Trump 2.0 trials are in store, this statistic needs to be borne in mind in considering future UK-China co-operation. Assembling the manufacturing, technology, trade and financial resources of the UK and China on a joint mission to build productivity in both countries would be a worthy task for the years ahead.
David Marsh is Chairman of OMFIF.
This article is an excerpt from a longer essay on the opportunities for co-operation between China and the UK. Read the full essay here. OMFIF’s third China-UK investor forum is taking place on Wednesday 4 December in London. Register to attend here.
