The UK, far from kowtowing to China, could be criticised for failing to exploit its relationship more, argues Joseph Mariathasan

Chinese president Xi Jinping’s recent state visit to the UK has been a success despite criticism that Britain’s lavish welcome represented a kowtowing by a major European nation and close ally of the US to China. To treat international relationships between the major powers as one-dimensional existential stand-offs is to revert back to the ideological Cold War battles that collapsed with the Berlin Wall. As Philip Hammond, the UK’s foreign secretary, pointed out in response to criticisms: “We don’t think we are being naive – we go into all relationships with our eyes wide open.”

China represents an enormous opportunity for the UK that is not just a function of the relationship between the leaders of the two countries. Trade and tourism should continue regardless of disagreements at the political level. Chinese visitors to Europe represent both a commercial opportunity and a political one, as the visitors return to China with what we hope is a better appreciation of European culture and the liberal political environment.

The UK, if anything, can be criticised for not exploiting its historical relationships more, despite the still lingering after-taste of the opium wars and the annexation of Hong Kong that Chinese school children learn about at school. But they also learn the poem ‘On saying farewell to Cambridge, again’, written in 1928 by Xu Zhimo, one of the most renowned 20th-century Chinese poets, who studied at King’s College Cambridge. The college has a memorial stone dedicated to the poet in its gardens that attracts a steady stream of Chinese visitors. 

Meanwhile, British boarding schools are attracting increasing numbers of mainland Chinese students whose parents want their children to become proficient in English and benefit from what they see as a more balanced education. They will also pick up a set of ideas, values and relationships that should encourage closer ties in the years to come.

Yet, despite the benefits of having large numbers of high-spending Chinese tourists, the UK is still struggling to set up a visa regime that can facilitate visits easily and cheaply. Instead, Europe’s Schengen area is a more attractive route for Chinese tourists undertaking a European tour, which too often by-pass the UK given the hassle of having to obtain an extra visa.

The press this summer has produced a tremendous amount of China-related hype about short-term market movements. But it does appear the real issues have been ignored. What is the macroeconomic set-up behind China’s currency, current account and monetary policies? What meaningful market and policy developments have already occurred and are in process? And what actionable investment opportunities are likely to result from all this?

Economists Robert Mundell and Marcus Fleming argued that an economy cannot simultaneously maintain all three policy objectives of an independent monetary policy, fixed exchange rates and a free capital account (the Mundell-Fleming Trilemma). In China’s case, the decision to liberalise the capital account and the currency was taken in principle long ago, with the remaining question being only sequencing. The major end-game for China will be the liberalisation and maturation of the domestic financial sector – China’s Big Bang.

What is important is the UK’s strategy of taking advantage of this by trying to develop London as China’s principal offshore base for finance. The announcement that China will issue short-term debt in London is just another step towards this objective, as is the UK government’s issuance of a CNY3bn (€430m) bond in 2014. This may have been a token amount in terms of the UK’s overall debt programme, but being the first Western country to issue this debt had tremendous symbolic significance.

For China and the world at large, open Chinese currency and investment markets would be beneficial, eliminating mis-allocations and price distortions and raising real economic growth worldwide. It should only be a relatively short period of time before the renminbi is floated, albeit with some capital controls in place. A mature and functional finance industry, including capital markets, is a pre-requisite for successful currency and capital-account liberalisation. The better financial markets work, the greater the benefits of liberalisation.

For the UK, playing a major role in China’s Big Bang is an objective that ultimately could shape its attitude towards its negotiations with the EU and even its relationship with the US. Will it damage the special relationship between the UK and the US, assuming it still exists? Will the UK’s position as an offshore centre for Chinese finance be substantially reduced if it leaves the EU? These are questions that may require wider discussion in the future.

Joseph Mariathasan is a contributing editor at IPE

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