As the Queen welcomes the President of China to Buckingham Palace today for a state visit, both leaders can reflect on the significant progress made in UK-China relations. Indeed, much has changed. The Chinese economy, despite its slowdown, has grown massively in recent decades; it is eight times larger today than in 1999, when the Queen first hosted a Chinese President at the Palace.
It is no accident that President Xi will be coming to the City of London tomorrow for the UK-China Business Summit, since business, trade and investment lie at the heart of the future agenda for developing relations between the two countries.
While deals are expected to be signed across a range of sectors, and there is anticipation of further cooperation in financial markets, there are five key elements in the future of UK-China economic relations, which can be encapsulated in the following acronyms: RMB, CIPS, OBOR, AIIB, and FTA. These are the steps on the ladder to help the UK achieve its stated objective of becoming “China’s best partner in the West.”
First, the Chinese currency, the RMB, is rising in importance, and the City of London is well positioned to be the primary trading centre in the West. As it becomes more internationalised, it will assume a greater role as a payment, trading and investment currency. Earlier this month, the RMB overtook the Japanese yen to become the fourth ranked payments currency, while it is now the second most used currency in trade finance.
China is on a journey to open its capital account, and London is primed to be a beneficiary. Already over 60 per cent of all RMB trading outside of China takes place in the UK. Just over a year ago, the British government issued an RMB bond, making it the world’s first non-Chinese sovereign offshore renminbi bond. Later this year, the IMF will decide whether to include the currency in its special drawing rights basket of currencies, and we are fully supportive of this, as it will carry important symbolism and also encourage more central banks to hold RMB.
Second, the development of the China International Payments System (CIPS) is welcome. It is expected to make trading RMB more efficient for payments in and out of China. As things stand, it is already helping foreign corporates. Within the last month, Standard Chartered China successfully completed an RMB clearing transaction from China to Luxembourg for Ikea, the bank’s first transaction launched through the CIPS.
A third policy area which has aroused interest in the UK and around the world is One Belt One Road (OBOR) since it was launched by President Xi on a visit to Kazakhstan in 2013. It is a strategy to build infrastructure in parts of Asia, the Middle East, Africa and Europe, along the old Silk Road trading routes. Its importance will be highlighted in the signing of a Memorandum of Understanding tomorrow at the London Metal Exchange.
OBOR will benefit the countries in which roads, railways and ports are built, but will also require several partners, including Chinese construction companies, and potentially the skills and expertise of UK financial and professional services. We predict that multilateral and Chinese institutions could invest $1 trillion over the next 10 years. OBOR presents opportunities for different sectors in the UK, as does its British relation the “Northern Powerhouse”, which aims to attract Chinese investment and will be the theme of Xi’s visit to Manchester.
Fourth, the UK government gave early support to the AIIB (Asian Infrastructure Investment Bank), a move which was noted in Beijing. The bank will have initial capital of $100bn, and aim to support infrastructure projects in Asia. Again the UK financial services sector can play a role in supporting this.
Finally, FTA refers to the potential for an EU Free Trade Agreement with China, along similar lines to ones reached recently with Korea and Singapore. Last month, the UK and Chinese governments agreed a feasibility study to look at this. China’s might as a trading power cannot be ignored. Today, 123 countries have China as their leading trade partner, vastly outnumbering the equivalent number of countries for the US (64). However, the UK’s trade volumes with the Middle Kingdom remain disappointingly low, notwithstanding progress in the past five years. There is a target to increase exports to China from £25bn to £30bn annually. However, Xi’s visit should encourage British companies to consider China as an export destination, with its vast market of over 1bn consumers, and a rapidly rising middle class.
China has scarcely been out of the news in recent months, and the economic troubles of the summer have placed it under the microscope. Its economy is slowing, but as the economy shifts from an emphasis on investment to a greater reliance on consumption and services, this rebalancing will be healthy for China and beyond.
The UK has a chance to give this week’s lofty diplomatic words some commercial weight, by establishing stronger business, trade and investment connections with China. The alphabet soup of RMB, CIPS, OBOR, AIIB, and FTA may not roll off the tongue, but has the potential to transform our relations with this modern economic power.