Today sees the start of the state visit to the UK by the president of China Xi Jinping and the UK government is certainly providing red carpet treatment for him both literally and figuratively. It would appear that the relationship between the two countries is shifting and in overall terms I welcome that as the UK establishment has for too long stared myopically at Europe to the exclusion of pretty much all else. We have long needed a more global strategy and one which realises that the economic axis of the world shifted towards the Orient and Pacific some time ago. However there are issues here as doing something does not necessarily mean doing the right thing and also one is dealing with an authoritarian regime with a poor human rights record. Sadly there is rarely a shortage of them.
The UK’s current economic relationship with China
Let us first look at where China stands as a UK trading partner. We do not have to look far down the list of exporters of goods to us as China is at number 2 on that list. If we look at 2014 we see that we imported some £37.3 billion of goods from China or 8.9% of our total. So immediately we learn that the UK has importance to China as a provider of demand for its goods.
The other side of the trade balance sheet is how much we export back in return and that immediately provides some food for thought as we export back some £15.5 billion of goods or 5.3% of our total exports. So again we find ourselves as not only gross contributors to Chinese output but net ones too as our trade deficit in 2014 was £21.7 billion.
If we look back we see that the trade deficit has been reasonably constant over the past three years and this represents progress. This is because our exports being much smaller have increased at a faster rate (37%) than our imports from China (17%). However it would appear that 2015 has seen a change in that and it is not what you would give red carpet treatment for as UK exports to China have fallen back. There were dips in both the first and second quarters of this year and this trend really picked up in the latest three months (to August). UK exports to China fell by some 16.4% on the previous three months and by some 18.4% on the same period in 2014.
So we have yet another sign of the economic slow down in China as we mull also the fact that in an economy like that they may also be sending us a message. Whatever the reason our trade position looks as though it is deteriorating further.
What about services?
These numbers are more out of date which is frankly a disgrace considering how important they are to the UK. But whilst we have a surplus with China it fell from £2.9 billion in 2013 to £2.2 billion in 2014 and in the first half of this year was only £1.01 billion. So we seem to be losing ground here too.
The Finance Sector
There is much talk of a boom for the UK here and there have been developments on this front. Back on the 22nd of June 2013 this was announced by the Bank of England.
Governor Zhou Xiaochuan and Governor Mervyn King have signed an agreement to establish a reciprocal 3‑year, sterling/renminbi (RMB) currency swap line. The maximum value of the swap is RMB 200bn. The swap line may be used to promote bilateral trade between the two countries and to support domestic financial stability should market conditions warrant.
The bilateral trade bit does not seem to be going so well for the UK anyway as we have just seen.Nonetheless we agreed to extend and increase it only last month although being a political decision the details are still vague.
The UK does have plans to be a centre for offshore Renminbi based trade. But the official statement from the 21st of September merely points that out as a fair bit would go through London anyway.
China recognises that London is one of the most vibrant and important RMB trading centres and offshore RMB markets…..London accounts for around 2/3 of all RMB payments outside of China and Hong Kong.
Today there will be some symbolism on this front as China issues a UK Pound £ denominated bond. From the Financial Times.
The People’s Bank of China will sell one-year bills with initial price guidance at 3.3 per cent, according to a term sheet seen by the Financial Times. The sale is expected to raise Rmb5bn (£509m),
We got there first as just over a year ago the UK government did this.
The UK government has today successfully issued a sovereign bond in China’s currency, the renminbi (RMB), becoming the first western country to do so and issuing the largest ever non-Chinese RMB bond.
It would not cover our balance of payments deficit for long would it? So mostly symbolic and let us hope that it remains that way as there is no particular reason for either sovereign government to borrow in the others currency.
This part of the arrangement is quite a can of worms. Ordinarily one would lay out the red carpet for foreign investment of the form of say Japan’s Nissan in Sunderland which turned out to be quite a success. But there are issues with this for example.
The UK has approved a Guarantee worth up to £2bn for Hinkley Point C, paving the way for Chinese investment in UK nuclear and helping secure the UK’s power supply into the future.
Clearly power and especially nuclear power is a strategic resource which in the past we have financed ourselves. Now we kick that particular football abroad to France and China especially and it does beg a question which can be simply expressed. Why?
One reason is simply the desire to manipulate the public borrowing and national debt figures as this is a type of off-balance sheet borrowing. Ironically it is more risky than borrowing ourselves as the risk is switched to a foreign currency which we seem to be guaranteeing! If I was in charge I would count it as public borrowing which would soon stop it.
Genuine investment like Nissan yes please, balance sheet obfuscation no thank you.
It is probably not a coincidence that so many UK steel operations are closing right now. Indeed yet more bad news has arrived this morning. From Bloomberg.
Tata Steel announced plans to shut three U.K. production facilities with around 1,200 job cuts…….The company said a shift in market conditions caused by a flood of cheap imports have led to the changes, and it also cited a strong pound and high electricity costs.
Who will get the blame for flooding the steel market with cheap imports? I think we know. Also though likely to be ignored is another issue which is that if you raise electricity costs due to green changes then you are at risk of losing business in industries which are price competitive.
Also this from Transport Scotland about the new Forth Road Bridge tells a familiar story.
The first fabrication is taking place at Crist in Gdansk, Poland which will produce 4,200 tonnes of steel to form the project’s massive caisson foundations. Around 8,500 tonnes for the steel bridge sections will be fabricated at Tecade-Megusa in Seville, Spain and 24,500 tonnes will be fabricated at Zhenhua Heavy Industries in Shanghai, China.
There is much to consider about the UK’s economic relationship with China. I welcome the fact that the UK establishment is taking more of an interest although there is of course an irony that we are doing so at not the best of times. But nonetheless China is an enormous population and potential market. The catch is that we need to plan what we do as they certainly will! There are issues around us importing infrastructure investment in issues of national security especially from a country with a reputation for cyber crime. Actually this is also a deeper issue as we import military equipment from the United States where it could do the same. Obviously the US has been our friend and ally for many years but that does not mean that we will be in agreement on everything.
In some ways we have been our own worst enemy as our consumption culture has sucked in cheap Chinese imports and flattered our inflation if not our trade figures. But we do have some power here as in a slow down this would be the last moment China would want to see a reduction in external demand.
As for the hopes of the UK establishment did T’Pau get it right all those years ago.
Don’t push too far your dreams are china in your hand
Also there was a moment of unintended humour in the last UK trade effort back in 2013. From the London Evening Standard.
David Cameron secures £45m pig semen deal between UK and China…..Exports of trotters could be worth as much as £7.5 million a year to industry in Britain.
The latter presumably does not mean Del-Boy,Uncle and Rodney….