Priming for future

With Theresa May set to visit China as Brexit looms, Sino-UK friendship and trade relations are expected to reach higher ground in 'golden era'

China's future relationship with the UK after it leaves the European Union will come under focus, with UK Prime Minister Theresa May set to make a visit to China next week.

The prime minister will be aiming to build on the "golden era" of relations between the two countries that was forged when President Xi Jinping made a state visit to the UK in October 2015.

May will lead a delegation of leading business figures, including many from the banking sector, with the UK wanting to promote its expertise in financial services.

Her visit, which was announced by China's Ministry of Foreign Affairs on Jan 25 will be from Jan 31 to Feb 2. It will follow that of another leading European politician, French President Emmanuel Macron, to Beijing earlier this month. It will be May's first visit to China since attending the G20 Summit in Hangzhou in September 2016.

Lady Barbara Judge, chair of the Institute of Directors, one of the UK's leading business organizations, who was visiting Beijing ahead of May's visit, says May coming to China is particularly important for the UK, with Brexit looming. The UK is scheduled to leave the EU in March 2019.

"No one is yet sure of the ultimate outcome of the Brexit negotiation, but whatever happens, both the friendship and trade relations between the UK and China will be paramount," Judge says.

"The fact the prime minister has chosen to come here with a big business delegation is evidence of the fact that our government and investor and trade establishment feel that China is of prime importance as a trading partner for the UK."

One of May's priorities will be to lay the groundwork for a free trade agreement between the UK and China after Brexit, although because the UK is still an EU member, no specific terms can be discussed.

"The UK can't do any bilateral agreements now because it is still a member of the European Union, but they can talk in general about how things can work and indicate a desire to go forward when the time is right," adds Judge.

During Xi's trip to the UK, around ￡30 billion ($42.82 billion; 34.46 billion euros) in trade agreements were reached between the two countries, including a ￡6 billion investment in the new Hinkley Point C nuclear power plant in Somerset and investment in the UK's new HS2 high-speed rail network.

The UK had a trade deficit with China of ￡25.4 billion in 2016, but this is expected to be reduced, with China expected to have a huge appetite for the country's services in the future.

The UK's services exports to China in 2016 were ￡3.3 billion, 35 percent of which were travel services, with the UK being a major destination for Chinese tourists, according to official UK data. Overall it had a trade surplus in services of ￡1.7 billion.

Road vehicles were the UK's largest single export, making up ￡3.7 billion of the ￡16.8 billion total exports.

China was the UK's eighth-largest export market and fourth-largest source of imports in 2016.

Judge says it is important not to regard future UK-China trade as all about services.

Economist and commentator Liam Halligan believes leaving the European Union will create an opportunity for the UK to sell more of its services to China.

"We can only cut trade deals at the moment as part of the EU, and the EU is not going to emphasize services because it is only interested in emphasizing other stuff," he says.

"The UK is the world's biggest exporter of financial services and none of the other EU countries are anywhere near us on financial services."

Halligan, who is also co-author with Gerard Lyons of the new book, Clean Brexit, says the UK has unparalleled links with China as a result of its historical connections with Hong Kong.

"We obviously have generations of British professionals in finance and the law, in insurance and shipping living in that part of the world and also comfortable in that part of the world," he says.

"Services is something we are world-class at. So there is tremendous scope for the City of London and financial and professional services across the UK to do more of it in China."

Judge, however, says it is important not to see services as the whole picture of the future China-UK trade relationship.

"Services are definitely prime, but the Chinese have also been actively investing in UK infrastructure, and that investment has been very welcome. I think there are also many manufacturing opportunities back and forth between the two countries," adds Judge.

Kerry Brown, director of the Lau Institute at King's College London, says May's visit to China will be an opportunity to explain what Brexit means to the Chinese.

"I don't think they have a very clear idea. It seems to me talking to Chinese officials, they are as confused as anyone else, and so I think that needs to be explained," he says.

"After two years (since the UK's EU referendum in June 2016), there has to be an obligation on the UK government to provide some form of explanation."

Douglas McWilliams, deputy chairman of the London-based Centre for Economics and Business Research, believes Brexit will force UK businesses to think beyond Europe and more globally, which will only serve to enhance the UK-China relationship.

"There is a psychological aspect to all of this. At the moment, it is very much the attitude in the UK that we trade primarily with people nearby. Part of the effect of Brexit will be to force people to look beyond," he says.

"We will be paying much more attention to markets around the world. As a result, the degree of UK interest in China will grow dramatically."

Whether China will view the UK as a more advantageous trading partner after Brexit is open to discussion.

Adam Williams, a former chairman of the British Chamber of Commerce in China and a former group chief representative of the Jardine Matheson Group in China, believes Brexit could make the UK less attractive as a destination for Chinese investment and trade.

"The accessibility and openness the UK has to Chinese investment compared to other European countries, combined with also being a member of the European Union, was quite a winner for Britain," he says.

"Chinese companies could invest in Britain which would then give them a leg into the bigger European market. I think some of the appeal of Britain must drain away now."

Williams, who is also deputy chairman of International Hospitals Group in China and vice-chairman in China of Care Visions, a residential care provider, believes that China may also have concerns that Brexit will undermine the European Union.

"I have always thought the Chinese rather liked a strong EU as a counter against the US and other blocs."

Jonathan Haskel, professor of economics at Imperial College Business School and co-author of Capitalism Without Capital: The Rise of the Intangible Economy, fears that the UK won't get a trade boost from countries like China and leaving the EU will be detrimental to trade.

"Like most other economists, I'm very down on Brexit because I simply think it is going to have very adverse effects on our trade. I also think it reflects badly on us as a nation for being nationalistic, none of which I very much like," he says.

He says those who argue that the UK getting out of the EU is right because it will become increasingly focused on the euro, of which the UK is not a member, miss the point.

"We're ruined whether we're in or whether we're out. If there is a huge collapse in Europe whether we're in or out, we're in terrible trouble, so we may as well be in and have the advantages of the single market."

London is expected to play a major role in the international convertibility of the Chinese yuan.

It is second only to Hong Kong as a clearing center outside the Chinese mainland, taking over from Singapore in 2016

London is by far the world's largest foreign exchange trading center, a position it has occupied since 1995.

The total foreign currency traded in London in April 2016 was $2.42 billion, nearly double that of New York's $1.27 billion, according to the Bank of International Settlements.

Halligan says that because of this, the idea that China is going to move all of its yuan clearing to mainland Europe is a non-starter.

"Frankfurt is like the number 29 financial capital of the world, Paris is number 34, according to the data in our book. We are not competing with Frankfurt and Paris but Hong Kong and New York, and maybe eventually it might be Shanghai, I don't know," he says.

"The City (of London) is a globally preeminent financial hub, and that is not going to change after Brexit. Even though the UK is not in the euro, London is the eurozone's banking capital. When eurozone members want to raise finance, they come to the City."

Brown at the Lau Institute, who also is author of China's World: What Does China Want?, which looks at China's new role in the world, says that whether Brexit is going to be good or bad for China depends on whether the UK remains open to its investment, London remains a strong financial center and it can forge an intellectual partnership with UK universities.

"It could be a good thing. It could be that it makes Britain think in a very different way about its trading and investment relationship with China. It could lead to things that weren't done before or it could be a very negative thing. I don't think we really know."

Judge, who first came to China in 1979, says China is at a stage of its development when it has a need for what the UK produces.

"The more successful China becomes, the more the appetite it has for British goods. I believe China has a real respect for British cultural heritage and also its legal, corporate governance and trading heritage. The British also have a great deal of admiration for the major transformation of China that we have witnessed."

She adds that British business on the eve of May's visit regards China as one of the key trading partners it will have in the future.

"We, as leaders in business, are excited by the possibility of an ever closer relationship and the development of a real mutual respect."