What is the UK’s economic relationship with China?

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.

Infrastructure Investment

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.

Steel

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.

Comment

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….

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20 thoughts on “What is the UK’s economic relationship with China?

  1. I can think of many more eye problems worse than myopia. At the time of our scramble to get into Europe we abandoned the Commonwealth. In timely fashion we cut or reduced our strong links with Australia, New Zealand, India – all Orient or Pacific based. We did much the same to Canada which I suppose is also Pacific based even if I think it Atlantic.

    China will cynically throw us scraps and use us to the point where it has no further use for us. Hmmm – might be much as Europe and the USA are doing.

    Bad day today.

    • Hi chrisrick

      I completely agree about the Commonwealth which we should never have abandoned in the way that we did. Ironically the Chinese have shown us the way by prioritising commodity supply in recent years. What are Canada and Australia in particular full of? Even worse we already had a good relationship with them

    • Hello, chrisrick. I agree with you that Canada is a Pacific-based country; we were one of the countries that participated in the just negotiated Trans-Pacific Partnership. It is not clear yet if the incoming PM, Justin Trudeau, will support it.

  2. A couple of points Shaun.

    The UK’s services surplus reducing may be linked to decreased Chinese financial activity within Europe.They’ve been a net seller of Western paper for some time now I believe.Looking at the results from Morgan Stanley,adding 2+2 and making 5 etc etc.It does seem a coincidence.

    The issue with Chinese investment in nuclear power is a different problem altogether.Besides questioning the logic of investing in expensive nuclear power when the outlook for commodities is so poor,one should really be asking whether on the grounds of national security,it’s appropriate and proportionate.I have my doubts and I’m sure there are many in the security community wondering the exact same thing.

    I think you’re absolutely right about balance sheet obfuscation and again,it does draw my attention to those we have in govt who seem so lacking in real world experience,pretty much leaving Oxbridge and heading straight for their respective central office wonk job before taking a safe seat somewhere in the boonies.

    Dangerous times.

  3. On the matter of the forum I mentioned yesterday Shaun.I have learned a lot from my time surfing various forums where posters discuss issues and provide links to new avenues of thought.

    Obviously,quite often,subjects mentioned here emerge in the wider press,or a new angle emerges relevant to an old debate and it’d be interesting to be able to see those posts in the context of the previous development of thought in that thread.The Gilts Thread on HPC would be a good example.

    Steve Keen used to have a forum(which was a touch too high brow for me at the time),as did Karl Denninger (he’d post a lead article and his commenters would then post views and links-there was a forum as well but it was more for technical traders/uber bears and I rarely found much of interest).

    To my mind,there’s a significant gap in the market,where people who are interested in learning about unorthodox economic viewpoints aren’t being catered for.It’s not about money,but the development of ideas that offer real solutions to our current problems.If you know of any,then feel free to post them.

    I’ve learned so much about imputed rents/inflation calcs/unemployment stats etc on here and it would be nice to enable continued discussion on certain topics as at the moment the conversation stops with the posting of a new article.

    I’d keep the blog as is and then post the lead article on a forum by the side and then as people wish to comment,then that thread goes back to the top of the pile.It may or may not lead to others posting on the forum.

    I’m not a techie so I don’t know how easy it would be to do.

      • No worries.

        Like I said,create a ‘donate’ button and I will.

        These discussions need leading and preferably by someone who knows what they’re talking about.

        Keep up the good work.

  4. Hello Shaun,

    If Camel’son thinks the Chinese have forgotten the last century then he is a fool .

    As far as it goes I would posit part of the lack of Chinese interest is that we have nothing to steal or copy any more

    I do recall certain French and German companies stating that they get the contract for one build , then the Chinese copy or steal and build the rest ( nuclear power stations , cars , etc)

    China views us just as one more western paper tiger

    And then with the rest of SE Asia , why aren’t we pushing for India trade ?

    As for all the Queen , guns and pomp – well wouldn’t that remind them of the Opium Wars ?

    As Dutch pointed out , we really do have fools in charge …..

    Forbin

    PS : yes as I’ve pointed out before , theres many signs of world recession or slow down going on – Where for art thou , QE?

    PPS: I wonder if they tried to sell the overheated ( Battersea? ) London Property to them ? Bet the Chinese wont bite ! 😉

    • “An NAO briefing, released last month, says: “In the short term using private finance will reduce reported public spending and government debt figures.” But, longer term, “additional public spending will be required to repay the debt and interest of the original investment”.

      But this doesnt matter as its the next guy who has to pay !

      grand can kicking ,……

      and the OBR ? where are you ?

      ( tumbleweed)

      Forbin

    • Hi Jim, unfortunately I was in Public Sector back then but was a lone voice when I expressed concern over the open ended contracts being signed, pointing out too many of the terms allowed the companies to impose new terms further down the line and the financing numbers didn’t add up unless you were on the private sector end of the deal. I was told I was “negative and cynical” and didn’t understand the complexities of the deals as they were actually good and cheaper than Public Sector could do them. 20 years later I thought “if you can’t beat em, join em” and included infrastructure investment funds in my portfolio, my how I have been proved right! Except now I benefit from them!!

      Sad, I know, but at the end of the day, if the idiots won’t listen and you’re the one being persecuted as a Public Sector worker through poor pay and prospects worsened by below inflation pay rises and erosion of pensions the time arrives when you have to start thinking about yourself, leave and invest in the areas you know are a licence to print money. The establishment got itself.

  5. Great column, Shaun, as usual. Your analysis of Chinese investment in the UK was very interesting, as their investment here in Canada has certainly been controversial. A Canadian PM has to tread carefully here as there are now a considerable number of Canadians with roots in mainland China rather than Hong Kong (my nephew Mark Baldwin’s wife, Polly Ling, is one of them). An aggressive stance against Chinese investment could understandably be interpreted by them as hostility to Chinese people tout court. In his biography of our PM, John Ibbitson wrote: “In 2012, Harper personally took charge of the vexed challenge from the Chinese state-owned firm CNOOC (China National Offshore Oil Corporation) when it sought to acquire the Canadian petroleum firm Nexen. Sidelining Industry Minister Christian Paradis, Harper worked on the issue for weeks, before finally deciding that the acquisition could go ahead but that any future takeovers from state-owned enterprises would almost certainly be rejected.
    By the way, since PM Harper resigned as Conservative Party leader early today, the following musical link seems appropriate, from the incomparable Sarah Maclachlan:

    • Hi Andrew

      I am not surprised to read that China has been trying to move in on Canada’s business sector especially the commodity sector. In essence that is plan A for China these days. Do you think that the incoming Liberal government will change policy towards China?

      Are the Trudeau’s forming something of a family dynasty in Canada?

      • Shaun, thank you for your interest. International trade relations are not my area of expertise, but I think it is already pretty clear that the incoming Trudeau administration will not be as assertive in raising human rights issues with the People’s Republic of China as the Conservatives were. In Mr. Trudeau’s view, Conservative foreign policy towards China, at least in the early years of the Harper regime, have needlessly jeopardized our trade and investment links with China.
        http://www.canadianbusiness.com/economy/justin-trudeau-friend-or-foe/
        As far as dynasties are concerned, this will be the first time that the son of a Prime Minister has become PM in Canada. Since Pierre Trudeau was PM from 1968 to 1984, except for Joe Clark’s brief term of office, and Justin Trudeau is guaranteed at least four in power, the word dynasty is probably appropriate.

  6. Hi Shaun,

    “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?”

    Because Gordon Brown sold off the last of our power station nuclear expertise with Westinghouse. What could possibly go wrong by doing so?

    The nuclear power station security is a major issue and knowing Chinese expertise in hacking it is IMO inevitable that backdoors will be created and ready to be exploited as required. I hope we don’t do what the US did employ them for the power station maintenence and give them all the main passwords to allow them to do this job. In the US a Chinese contractor won the contract to maintain the computers and databases of all government personal records including security cleared ones. What could possibly go wrong apart from the Chinese now having copies of all of these!

    The West does not seem to be taking cyber-security seriously, especially the US, hence the Chinese F35 copy!

    • Hi Rods

      I know of at least one City firm which had worries about the number of Chinese working in crucial areas with key company specific data. It is a genuine risk although of course with employment legislation as it (rightfully) is there are issues in dealing with it.

      Mind you copying does not always work as the Concordski proved for Russia. Let us hope that China copied the bits of the F-35 that have had to be reworked.

      • Mind you copying does not always work as the Concordski proved for Russia.
        ___________________________________
        It did; both were failures.

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