Friend or foe? What might the UK’s relationship with China look like in the future?

Downing_Street_huawei

Business Leader looks at the current UK and China business relationship and asks – what opportunities are there for UK firms and what does the future hold for its relationship?

Many pundits like to paint China as a mythical, seductive, and dangerous force that is about to unsettle the tectonic plates of world power and usurp the friendly, freedom loving USA. But it is still yet to attack another country in a military sense – it is still yet to have its ‘Vietnam’. Its actions in Hong Kong are of course brutal and serious but nothing on a par with past American conquests across the globe.

However, critics of its rise to power point to its mineral exploitation in Africa, its domestic suppression of dissenting voices and its unorthodox international diplomacy and perceived malign influence on many matters. All valid points maybe; but you could argue no more controversial that many of USA, Russia or even the UK’s tactics past and present; in the battle for global relevance and power.

Many argue that China just wants prosperity for its people, but others say it is ruining the manufacturing base of the Western world.

Whether hypocrisy or just to criticise China’s progress, the fact remains that it represents a huge opportunity for UK businesses thanks conversely to its expanding middle class and low manufacturing cost base.

So how is the UK and China business relationship really holding up?

In this article we will look at the current issues surrounding the two countries and to do this, let’s set the scene for a moment in relation to COVID-19, Huawei and Cyber and political tensions around Hong Kong – and how they are shaping the UK and China context.

Regarding Huawei, Business Leader spoke to Tamara Makarenko – COO & Head of Global Investigations for global risk consultancy Sibylline and regular UN advisor – to talk about the potential consequences of the UK government’s decision to block Huawei from its 5G network.

Tamara explains: “If questions over Beijing’s initial handling of the COVID-19 outbreak had nudged the UK-China relationship onto a downward slope, then Whitehall’s U-turn to exclude Huawei from the UK’s 5G network has undoubtedly shut the door on what was heralded as the ‘Golden Era’ of close bilateral economic ties.

“The Huawei decision will further raise the stakes in the already simmering tensions between the UK and China. Beijing, which views Huawei as a poster child of Chinese technological innovation, had repeatedly warned London not to politicise the matter.

“In retaliation, Beijing will likely seek to reduce investment in the UK. Indeed, the message from China’s Ambassador to the UK, Liu Xiaoming, made it clear that China would no longer view the UK as “a business-friendly, open, transparent environment”.

“Heeding to the advice of its government, it is also highly probable that Chinese business will roll back on UK-based deals and projects in the foreseeable future. The technological sector is likely to be at the forefront of this move.”

No Tik Tok London HQ

Tamara continues about the impact on the tech sector: For example, Tik Tok, which itself was caught in this fast-evolving geopolitical dynamic due to its Chinese ownership, announced that it would suspend plans to build a new headquarters in London.

“Huawei, although no longer involved in the 5G rollout, has a significant and long-standing presence in the UK. It reports that it established its first office here in 2001, employs approximately 1,500 staff, has a research and development centre, and has invested over £2bn since 2012.

“This tech giant will almost certainly downsize its US operations, and it may seek a more business-friendly environment elsewhere as a long-term alternative to its UK R&D sites.”

China policy and Hong Kong

Tamara also says that should UK and China relations worse, UK businesses operating in China could have it hard.

She explains: “As Boris Johnson’s government recalibrates its China’s policy amid a hardened stance on Beijing across Westminster, we can expect further deteriorations in UK-China ties, which will ultimately trigger a stronger response from Beijing.

“It is expected that we will see Beijing take firmer action on Hong Kong, where China has passed new national security laws. Beijing has made no secret that it considers sovereignty and non-interference of internal affairs as one of its diplomatic ‘red lines’, thus any British interference would be regarded with a degree of disdain.

“In perhaps more spectacular news, it appears that China is looking to target HSBC in retaliation to Westminster’s Huawei decision and stance on Hong Kong. HSBC has already found itself caught in the middle of this political quagmire, as its share price fell earlier this month after the US looked to punish it over its endorsement of China’s new security law.

“The pressures placed on HSBC exemplify what can perhaps act as a litmus test to ‘lesser’ British businesses operating in China.”

Tamara continues: “Within this maelstrom, British businesses not directly caught in the crossfires of Beijing or Westminster, may find themselves caught in the crossfires of public opinion. Of the approximately 8,000 British SME’s in China, it is unlikely that any would be directly targeted by Beijing’s punitive sanctions; this is a tool that is best directed against multinationals that would yield greater political significance if China really wanted to set an example, or seek to exert greater influence on Whitehall.

“With that said, the potential secondary impact on British SMEs from further deteriorating bilateral ties could be disproportionately higher, as SMEs are less resilient to geopolitical risks. For example, those that are over or solely reliant on Chinese customers could be significantly hit if public sentiment turns against the UK and British brands.

“On the flipside, SMEs – if they are adept at utilising intelligence within their operational and strategic decision-making – could be nimbler in adjusting their China strategy.”

UK and China trading opportunities

This has painted a picture of headwinds that UK and China are facing – Hong Kong, COVID-19, Huawei, perceived cyber threats. It is a complicated puzzle but there are still opportunities for UK firms looking to trade in China. To find out more, we spoke to Dr Maria Rana from Salford Business School and Dianne Francombe – CEO at Bristol and West China England Bureau.

How would you currently assess the UK and China trade relationship?

Dr Maria Rana: “Historically, the UK has run a trade deficit with China, and 2019 has not been an exception. Exports from the UK to China, in fact, amounted to £30.7bn, while imports from China were worth £49bn with a consequent second-largest trade deficit of £18.3bn. As in previous years, the relatively small surplus on trade in services was offset by a larger deficit on trade in goods.

“To put in context, in 2019 China was the UK’s sixth largest export market (accounting for 4.4% of all UK exports, after US, Germany, Netherlands, France and Ireland), and the fourth largest import market (accounting 6.8% of all UK imports, after Germany, US and Netherlands). (ONS data).”

Dianne Francombe: “I think it is important to distinguish between government-to-government trade relations and those experienced at grassroots levels by UK and Chinese companies, large and small.

“At government level, the current relationship can best be described as somewhat tetchy with the UK trying to steer a course between strong US anti-Chinese pressure and the political need to be seen to be standing firm on issues such as Hong Kong and the Uighurs issues, and the inevitable ‘blowback’ from the Chinese government.

“Of course, much of this posturing is for domestic political purposes on both sides and the actual message being delivered to UK firms by the Department for International Trade (DiT) is that it is ‘business as usual’.

“From a UK SME’s perspective, the dichotomy between what they are hearing and seeing in the media and the message from the DiT has caused a certain amount of confusion and perhaps exporting to China has slipped down the priority list for some companies as a result. I am hopeful that the new administration in Washington will bring with it a new pragmatism in US-China relations, and that UK-China relations will settle down in their wake.”

With Brexit now appearing to be drawing a conclusion – how should firms be connecting with Chinese investors/ markets?

Rana: “Chinese global outward Foreign Direct Investment (FDI) kept falling in 2019, and early data suggest that this trend is continuing in 2020 with indication of the lowest outbound of FDI from China in a decade. However, over the past 20 years, the UK has been the most attractive country in Europe for Chinese investors (i.e. €50.3bn as opposed to €22.7bn for the second most attractive country in Europe: Germany).

“Within Europe, the Chinese investments are mainly focused on the consumer products and services sector, as well as tech-related and automotive sectors, with an increase in R&D collaborations in the most recent past.

“UK investment in China has hugely increased since the 2016 Brexit referendum (£2.9bn in 2018, which is 150% higher than 2017), with investment mainly focused on: consumer, pharmaceutical, automotive, financial, technology, design and educational sectors.”

Francombe: “On a macro level,  Brexit puts clear water between the UK and the EU which, of course, has its own issues with China at present. This could be a good thing for UK-China trade if our government continues to take a pragmatic approach, which I think it will, and this may make the trading environment a little easier for South West firms going into 2021.

“On a micro level, the added layers of complexity that UK SMEs now face when exporting to the EU are making firms look further afield for new export opportunities and China may well be on their radar for the first time. With the same procedures, export documentation and effort now broadly applying to a UK export to say, Belgium, with a population of 11.5 million and China with 1.4 billion, it’s not hard to see how many boardroom negotiations will progress when new markets are being discussed.”

What has been the impact of the pandemic on relations between China and South West businesses?

Francombe: “There has undoubtedly been an increase in anti-Chinese sentiment among US companies and with public opinion, but I do not see much evidence, if any, that UK firms share the same negative views. If anything, it’s the opposite, with many business leaders I speak to empathising with the Chinese people and expressing admiration for the way their government has brought the pandemic under control and turned the economy around in just a few months, while we are facing a second wave and months of uncertainty.”

Are there any sectors that are particularly active in China now – that businesses should be looking at?

Rana: “According to a recent survey, the Chinese sectors considered to be most promising in the aftermath of the COVID-19 pandemic are, not surprisingly, the following: medical education, AI, internet, e-commerce platforms, delivery and logistics, health care, live streaming, scientific research, data service, software technology.”

Francombe: “Agritech and aquatech is a high priority sector for the UK in general. This also happens to be a high priority sector in China, as the state seeks to feed an increasingly affluent population through improved agricultural productivity and a wider of choice of foodstuffs.

“Other sectors that have great potential in China include training and knowledge transfer services and, of course, education. It is also worth noting that Xi Jinping has recently committed China to peak its CO2 emissions by 2030 and reach net zero by 2060, which will massively accelerate its transition from fossil fuels to clean energy.”

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