Britain, with one of the world’s largest service sector economies and the second biggest financial centre, has much to gain from a deeper economic relationship with China given its scale.
The first Economic and Financial Dialogue between China and the UK for more than five years takes place in Beijing this coming weekend. The chancellor leads the UK delegation. The aim of the last dialogue, in June 2019, was to deepen strategic economic collaboration, boost bilateral trade and investment and strengthen financial linkages.
A reaffirmation of longer-term goals is welcome, with the UK keen to see increased inward investment and deeper financial ties. The government’s approach is that there are areas where the two countries will co-operate, challenge and compete. A successful dialogue can provide opportunities to co-operate.
Central to this should be trying to differentiate between strategic and non-strategic areas — strategic areas are where the government sees China as a perceived threat. However, the geopolitical climate and the increasing blurring between economic and national security interests makes this harder.
Nonetheless, sectors such as finance, trade and large parts of the business community offer much opportunity to both sides and can help address shared economic challenges.
The next stage of China’s economic development points to slower trend growth as its population ages. Growth may be more volatile too, given an overhang of local government and property-related debt, high youth unemployment and the challenge of tariffs and sanctions.
China’s economy needs to move up the value-curve, boosting consumption and higher-quality growth. To help facilitate this, just over a year ago the Chinese authorities outlined their focus on five inter-related financial areas of technology, green finance, digitalisation, financial inclusion and pensions. Success necessitates deeper and broader capital markets, which is why making a success of this dialogue is as important to China as it is to the UK government.
Six years ago the City’s focus was on seeing the offshore renminbi market grow in London. Yet offshore liquidity is still lacking, given China’s overall capital account restrictions. London still needs to see more issuance of renminbi bonds, increased trading plus more renminbi deposits and loans. Encouragingly the infrastructure is in place — including a bilateral swap line and clearing bank — for this market to evolve.
Now, the City’s focus is on boosting connectivity with China. This dialogue can deliver on this by improving two-way capital flows. City-based asset managers and insurance firms see opportunities in greater access to the Chinese market. A resumption of the London-Shanghai Stock Connect could boost dual listings. The last year has seen continuous developments in China’s bond market and opening this up further should cement UK-China ties, as domestic rules move into line with global standards.
The green agenda, too, may be an area for co-operation in 2025. The UK already sees investor appetite for green finance but needs a liquidity pool and more investable assets, helped by increasing renminbi green bonds in London and developing carbon market links.
There are likely to be future workstreams where both countries can collaborate as a result of this weekend. Alongside the dialogue, for instance, financiers from both countries will attend a financial services summit focused on capital markets, pensions and savings, technology and innovation, and the green agenda. The aim is to share expertise and deepen co-operation in these areas, as well as in tax, combating cyberthreats and financial regulation.
Hopefully, the dialogue can provide some concrete quick wins, as both economies could benefit from it.
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