In a recent visit, George Osborne and Boris Johnson rolled out the red carpet to Chinese businesses and banks. Among other deals, Osborne surprised many by leaving the door open for Chinese banks to operate as branches rather than subsidiaries in London, which would enable them to avoid being regulated by UK regulators. Kerry Brown writes that the UK stands to gain much from China’s eventual liberalization of its capital account as long as it positions itself intelligently now.
There is one good reason why a British Chancellor and the Mayor of London might justify a visit to China in the same week, almost 18 months after high level contact between the UK and China was frozen because of the Prime Minister and Deputy Prime Minister both meeting with the Dalai Lama in London. This is simply that with a defrost in relations now occurring the centrality of the UK’s financial services and the role they play in the British national economy and in trying to address the trade imbalance with China, has never been more important, despite the impact of the global economic crisis from 2008 onwards. And London remains the overwhelming home for this one sector in which the UK remains globally significant. While there are plenty of other sectors, from creative industries, to niche manufacturing and other high value added areas, it is in finance that the UK stands the best chance of catching China’s interests. A week in which this message is repeated by high profile British politicians twice is therefore tactically sensible.
London as a finance centre however is having plenty of competition. Others have signed RMB trading deals with China, from Taipei to Sydney. Expectations of a liberalization of the capital account by Chinese authorities is growing, despite all the cautious language being deployed about how this might happen in Beijing. The simple fact is that internationalisation of the Chinese currency, the RMB, is now a question of not if, but when. And London stands to gain well from this move as long as it positions itself intelligently now.
When he was in Beijing this week, the Chancellor George Osborne announced that Chinese banks would be given an easier route if they wanted to come to the UK. He also announced easier visa access for tourists. His statement that many in Britain needed to see China as moving beyond a manufacturing base that was the source of most cheap imports in the UK was part of this strategy of preparing for a China where service provision to its growing middle class consumers will be critical. The mentality of business elites in the UK needs to change towards China to reflect these new realities.
This does not mean being naïve about the challenges of operating there. The EU Chamber of Commerce in China’s annual audit of the business environment for European companies in China remains as critical as ever. There are large areas of business that are simply closed to outsiders at the moment, and companies that operate in strategic sectors from automotive to information technology face a raft of regulatory and commercial interference. Getting more UK businesses ready to work in China and handle these frustrations and challenges is going to take huge effort and time.
There is an area of mutual interest however that might help in climbing this steep learning curve. The era in which China was focused mainly on attracting capital is over. It is now clearly a country that is going to deploy capital outside itself in increasing amounts. But its companies, whatever the basis of their ownership, are ill prepared for this era of Chinese globalisation. For all the loud commentary and speculation, China remains a small international investor. But all the indications are that this is changing rapidly. Partnership will be at the heart of this era of global China. Chinese enterprises lack international experience, technology and brand awareness. But they have capital. Whoever manages to find partners going out from China who are also willing to help with inward access are the ones who will be best placed to benefit from this period of global China we are now entering.
For all their differences, politicians and business people dealing with China have to be very tactical, because of the complexity of its internal governance and economic structures, but also because of its difference in terms of political identity. The UK visits in mid October therefore only make sense if they are tied to a longer term vision of where this relationship is heading. Being a high value service provider to China during the era of its economic transition to a more developed model is a narrative that makes sense for the UK. But while the politicians do the talking, it is the businesses in the UK and China that will have to make the deals. Just how much of an impact visits like this make to this bottom line is hard to assess, and in any case, it will be months or maybe years before it is really clear whether the UK offer of this sort of partnership has really been picked up.
This article was originally published on the PSA’s Insight blog.
Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.
Kerry Brown is Executive Director of the China Studies Centre and Professor of Chinese Politics at the University of Sydney.