What are the prospects for China-UK economic ties?

China-UK relations have continued to deteriorate since 2020. This deterioration has been prompted by disputes over Hong Kong, Xinjiang, the Covid-19 pandemic, Huawei, and the nature of Chinese investment in the UK. Many people are now pessimistic that the ‘Golden Era’ of China-UK relations is over.

Nonetheless, despite a worsening political relationship, trade between the UK and China remains robust. According to the UK Department of International Trade, the value of total trade between China and the UK rose every year between 2012 and 2021, other than in 2020. In 2021, total trade reached around £93 billion, almost double the level of 2012. Total trade in goods and services between China and the UK from the second quarter of 2021 to the first quarter of 2022 reached approximately £93.4 billion, an increase of 5.5% compared to the same period the previous year. Total UK exports to China amounted to £27.1 billion, an increase of 7%, whereas UK imports from China were £66.3 billion, an increase of 5%.

China is the third largest trading partner of the UK, its sixth largest export market and third largest import market. It accounts for 6.9% of the UK’s total trade. The data above shows that China-UK economic ties are highly resilient and can withstand political uncertainties.

On 25 October, 42-year old Rishi Sunak succeeded Liz Truss to become prime minister of the UK. Although he has supported economic ties with China, he has also described the country as ‘the biggest-long term threat to Britain and the world’s economic and national security’.

He has confirmed plans to revise the ‘Integrated Review’, a document articulating official UK national security and international policy, published last year, most likely to take a tougher stance on China, and list China as a ‘systemic challenge’ for the first time ever.

During his campaign to be leader in July, he pledged to conduct a review of all UK–Chinese research partnerships which unwittingly assist China’s Made in China 2025 strategy.

Since becoming leader, he has proclaimed that the ‘Golden Era’ is and said that the UK will reject ‘short-termism or wishful thinking’.

Tom Tugendhat, the UK security minister, recently confirmed that the UK government would indeed ban Confucius Institutes in UK universities, as Sunak promised during his leadership campaign. Whether Sunak indeed goes through with his stated plans to significantly change the UK’s relationship with China remains to be seen.

Hostile political sentiments toward China damage Sino-British economic relations

The first impact is that some British companies have recently started to see Chinese-related supply chains and reputational standards as unreliable. The Director General of the Confederation of British Industry said that all the British CEOs he knows are ‘increasingly switching business links from China to other countries’ because they expect that the UK will ‘inevitably accelerate towards a decoupled world from China’.

Regarding reputational risk, the investment management firm BlackRock points out that a tough stance towards China will make Western companies, including British ones, face ‘two-way risks’ on issues such as ‘forced labour’. Some companies may face anger from Chinese and Western regulatory authorities and consumers.

Second, it has weakened public sentiment towards China, which is crucial for the sound development of Sino-British economic relations.

According to recent poll data released by the British Foreign Policy Group (BFPG), among all the forms of engagement the UK could have with China, British people are more supportive of ‘challenging China’s human rights record’ (40%), followed by ‘collaborating on shared challenges’ (33%). Only 19% and 12% respectively support Chinese economic and financial investment in the UK and funding for UK infrastructure projects.

Third, there has been a series of security reviews of Chinese firms. The UK government on 4 January 2022 implemented the ‘National Security and Investment Act’. This empowers the government to halt or terminate acquisitions of UK companies by foreign entities when deemed detrimental to national security. On 20 July 2022, the then Secretary of State for Business, Energy and Industrial Strategy Kwasi Kwarteng announced that the UK will block a Chinese firm from licensing visual sensing technology to a UK university, citing the National Security and Investment Act. On 17 August, he announced that to ‘reduce security threats,’ the UK had blocked the acquisition of a UK electronic design company by a Hong Kong firm.

Temporary political uncertainty has seemingly worsened the prospects of China-UK economic ties. However, there is still reason to believe that the bilateral relationship is resilient enough to withstand this. The buttress of this resilience is the foundation laid by the two countries in the ‘Golden Era’, touted in Xi Jinping’s state visit to the UK in 2015. Although there have been significant political and geopolitical changes, there are still great prospects and opportunities to be grasped in UK-China economic relations.

Resilience of the bilateral economic relationship

First, China and the UK have highly complementary economic and trade sectors. China’s electromechanical, textile, chemical, metal products, clothing, and other industries are competitive internationally. And the UK has advantages in high-tech sectors such as transportation, energy, chemicals, machinery manufacturing, information, and bioengineering. Secondly, there is huge potential in two-way direct investment between China and the UK.

Hard numbers demonstrate the confidence of each side in the other’s market. According to data released by the China-Britain Business Council (CBBC) in August this year, the UK is the most popular destination for Chinese direct investment in Europe. Similarly, according to the ‘Confidence Survey Report of British Enterprises in China’ released by the British Chamber of Commerce in China in December 2021, 52% of surveyed countries were optimistic about their development prospects in 2022. 46% of British firms in China planned to increase investment in 2022. Additionally, many Chinese students choose to study in the UK. Around 216,000 Chinese students studied at UK universities this year, contributing around 7% of the UK education sector’s income. Lastly, economic and trade exchanges between enterprises and at the non-government level are the cornerstone of China-UK economic and trade relations. As founder of Crayfish.io, Zhang Ting, says: “No matter what happens at the political level, if businesses in both countries can ‘keep calm and carry on’ by creating more collaboration, big and small, then together we can hope positive influences will emerge from the bottom up and prevail in the end”.

Conclusion

The British government should pay attention to these voices, especially as the UK currently faces high inflation and energy shortages. Some have described this as the worst economic crisis in the UK in a generation. This means that the new government’s foreign policy vision should also focus on boosting the UK’s domestic economy. We hope that the new UK government can seize the opportunity, abandon ‘ideological thinking’, and adopt more a pragmatic cooperation with China, which will truly benefit both Chinese and British people.

2022 marks the 50th anniversary of the establishment of diplomatic relations at the ambassadorial level between China and the UK. Over the past half-century, thanks to the hard work of countless friendly people from the two countries, China-UK relations have continued to advance.

There are reasons to believe that complementary economic and trade structures, market demand, and solid ‘grassroots’ foundations will not disappear in a vacuum due to temporary tensions in the geopolitical situation or manipulation by individual Conservative politicians. Thus there is hope that China-UK economic ties can weather the political storms.