China is on track to become the leading global economic and trading super-power this century, an opportunity not to be missed for UK exporters.
Enter the dragon
The world’s most populous country, home to 1.4 billion people, and now its second-biggest economy, China’s ambitions show no sign of abating. After enjoying stellar growth in recent decades, fuelled by its massive manufacturing and export sectors, it is now on course to overtake the USA as the world’s greatest economy, perhaps within a few short years according to some estimates.
Looking back, it is something of an economic miracle, with near double-digit growth every single year since around 1990. That’s especially so given that in the post-war decades, China lagged far beyond the accelerated recoveries seen in neighbouring Japan, and also Germany in Europe, as the USA settled into its position as the dominant global power of the 20th century.
All the while, China’s ruling political class engineered a revival of their own. That was not an easy task considering where the nation had come from, stagnating for many years under the rigid totalitarian socialism of founder Mao Zedong, since the formation of the People’s Republic of China in 1949.
But reforms to the economy along partly capitalist lines paid dividends, with growth surging since opening up to foreign trade and investment and implementing free-market reforms, initially back in 1979. This trend has only intensified under the current stewardship of President Xi Jinping.
Once more a great trading nation — a throwback to its ancient history that dates back 4000 years — China is now a major overseas investor, both in the UK and worldwide, while its factories produce cheap goods for global consumers, from cheap toys to high-tech gadgets. Increasingly, this capacity is turning to more advanced, high-cost products from electronics to renewable energy parts.
But this economic muscle has also spawned an increasingly assertive foreign and defence policy, which has brought with it friction in its relationships with the West, notably the USA. That includes verbal sparring with US President Donald Trump who is pushing for a readjustment of trade relations between the two sides. Tensions have been further heightened amid the coronavirus pandemic, which is widely believed to have started at a food market in Wuhan, in China’s vast interior.
For UK companies and exporters, the market holds immense appeal given its size and rising affluence, although navigating this somewhat unsettled political backdrop presents unique challenges too. Trade talks are similarly in a state of flux in the post-Brexit era, with business relations likely to shift in the coming months and years on the back of any new bilateral deals.
There is already a long trading history between the two sides that dates back hundreds of years to the colonial era and the establishment of bustling centres like Hong Kong and Shanghai — now among the world’s premier commercial hubs. Indeed, HSBC derives its initials from the Hongkong and Shanghai Banking Corporation, an indicator of its early origins.
Other major blue-chip investors with a strong presence in the China market include the likes of British Airways, Standard Chartered, BP and Diageo. Many other smaller firms have likewise enjoyed trade and investment success, with the UK Government keen to foster greater trade ties.
Again, the 1997 handover of Hong Kong to Beijing, after a century and a half of British rule, highlights both the history and some of the potential complications of doing business. China’s new security laws for Hong Kong have been criticised as breaking the handover agreement which called for “one country, two systems” until 2047.
Indeed, the emerging risks posed by China and its rising global influence dominated discussions as a July defence and security review attended by UK defence chiefs and government ministers. This suggests that future business ties may well be impacted, at least to some degree, by overarching geopolitical concerns.
This is no better illustrated than the controversial role of Chinese telecoms giant Huwei in rolling out the UK’s 5G infrastructure — with the UK Government up against pressure to halt the company’s involvement after a similar move by other Western allies, including the USA.
This has gained further traction in the wake of China’s decision to impose tough new security measures in Hong Kong, which Prime Minister Boris Johnson called a “clear and serious” violation of its treaty with Britain.
Trade and investment
Against this somewhat sensitive backdrop, an enormous amount of trade and investment is still going on, across nearly all industry sectors. It is a huge and growing market for thousands of British firms: in 2018 alone, the UK exported over £23 billion (US$28 billion) of goods and services to China.
With rising incomes and over 100 cities of more than a million people, it is an increasingly sophisticated market too. Rising numbers of middle- and high-income consumers are focusing more on high-quality products, with the UK and its products enjoying a favourable reputation.
Despite the distance from the UK (eight hours ahead of GMT) and China’s distinct culture, the country is streamlining rules to make business easier for English-speaking firms. It climbed the World Bank ease of doing business ranking by 15 places in 2019 and is now higher than some European countries.
Key opportunity areas include retail and consumer products, technology, education and training, and health and life sciences, according to the Department for International Trade.
As Chinese companies expand overseas, UK firms are finding work supplying services and expertise to support them. One UK-based engineering firm, Rautomead, recently sold one of its continuous casting machines to Shaanxi Sirui Advanced Materials, in a deal supported by UK Export Finance. It will be used to produce complex copper chrome zirconium alloy rods at Shaanxi Sirui’s factory in Baoji City and feed into China’s giant industrial machine.
And in the other direction, China has been selling vast amounts of technology and consumer goods to the UK for years, from popular Huawei phones to cheap mass-produced clothing for the high street.
A London-based PR firm, Consulum, also recently pocketed a lucrative one-year contract worth £5 million (US$6.1 million) from the Hong Kong Government in a bid to counter negative coverage of the territory in the international media.
And it seems many Chinese investors are here to stay as well, to become the lead players in the high-end London property market, in hot spots such as Knightsbridge and Belgravia, overtaking Russian and Indian buyers.
The links could expand further still with up to three million Hong Kong citizens potentially being given the right to live and work in the UK as a result of the enactment of the territory’s new security laws, which would give Britain a big, new talent boost.
Despite any frictions, there remains a great depth to business ties and also ongoing innovation into how China and the UK are keen to nurture things going forward. That includes in the financial markets, an area in which the UK is traditionally a world leader, a point of interest to ambitious Chinese firms.
The 2019 launch of the London-Shanghai Stock Connect, which brings together one of the world’s largest domestic capital markets (Shanghai Stock Exchange) with the world’s leading international market (London Stock Exchange), illustrates this potential. Stock Connect means for the first time, foreign companies will be able to list in mainland China, while Shanghai-listed companies will be able to raise capital abroad.
The bourse has already brought with it huge new business opportunities, despite the upheaval to global markets in the early part of 2020 — most notably, China Pacific Insurance Co. (CPIC) completing the largest fund raising on the London market in three years, worth US$1.8 billion, following its debut in June.
“The listing will support our expansion into new markets and facilitate the company in introducing high-quality investors around the world,” said Kong Qingwei, CPIC’s chairman and executive director at the time.
The potential for similar transactions is simply huge. There are almost 1500 companies listed in Shanghai, over 260 of which are potentially eligible to take part in Stock Connect and list in London. It is also estimated that China will reach over US$17 trillion in assets under management by 2030, up from just US$2.8 trillion in 2016.
With the likes of HSBC, Standard Chartered and other institutions already familiar with the market, there remains immense scope for UK partners going forward.
While the coronavirus crisis may have unsettled economies worldwide, there are indications that business in China is largely back on track.
Recent data suggests that manufacturing output is recovering well in the wake of the pandemic. China’s services sector expanded at its fastest pace in a decade back in June after the easing of coronavirus-related lockdown measures. The services sector accounts for about 60 per cent of the economy and about half of all jobs in urban areas.
It is a testament to the nation’s resilience and sheer will — the home of the Great Wall, the only man-made feature on the planet to be visible from space. Indeed, China’s new-found confidence is no better illustrated than in its own space programme, among other flagship projects. Perhaps the grandest of all is the so-called Belt and Road infrastructure initiative to connect Asia with Africa and Europe, via land and maritime networks along six corridors, with the aim of improving regional integration, increasing trade and stimulating economic growth.
There are still concerns at home, with Chinese firms and workers also experiencing job losses and pay cuts, as in the UK and elsewhere, though there’s undoubtedly an underlying confidence too. Chinese stocks reached five-year highs in the summer as the nation emerged from the economic blows of coronavirus.
Whether China is able to sustain its export-driven economy in the face of reduced demand elsewhere is another matter, through some analysts remain upbeat.
“China's economy is going through a V-shaped rebound,” said Hu Yifan, chief China economist at UBS Global Wealth Management. It says gross domestic product (GDP) is expected to grow by more than eight per cent by the first quarter of 2021. China’s economy grew 6.1 per cent year on year in 2019.
There remain very practical challenges too, from language and logistics, through to intellectual property rights infringement and red tape. In one recent business survey, a third of respondents said that bureaucracy remains the number one concern when trading with China. But for a market of such scale and clear long-term potential, these may well be challenges worth getting to grips with.