Be practical on the 'golden decade'

President Xi Jinping shakes hands with visiting British Prime Minister David Cameron in Beijing, Dec 2, 2013. [Photo/Xinhua]

With Chinese President Xi Jinping about to embark on a state visit to the United Kingdom, British and Chinese officials are talking of a "golden decade" in bilateral relations. Ties have improved in recent years and economic interests have converged. However, the advancement is fragile, with uncertainty still surrounding whether the promised economic benefits of closer relations will materialize.

The recovery in UK-China ties has been impressive, given the nadir they dipped to in 2012 after Prime Minister David Cameron and the then deputy prime Minister Nick Clegg met privately with the Dalai Lama. China condemned the decision as a "serious interference" in its internal affairs.

Britain has since redeemed itself in China's eyes by focusing on commerce. This effort has been led, not by the Foreign and Commonwealth Office, but by the Treasury under George Osborne. The UK chancellor made a five-day visit to China in September, when he marketed the UK as China's "best partner in the West". In March, he also overrode concerns voiced within the FCO and by the UK's closest ally, the United States, to ensure Britain was the first European country to announce it planned to join the China-led Asian Investment Infrastructure Bank.

The political environment in the UK is certainly more conducive for fostering closer ties with China, and Xi's trip will help to cement the upturn in bilateral relations.

Economic ties between the UK and China are also growing in importance. China's transition to a services and consumption-led economy promises opportunities for UK companies in the areas in which they are most competitive, such as luxury goods, pharmaceuticals, business and financial services.

Chinese investment in the UK, which ranges from renewable energy to property, has been the highest among European countries in recent years. The City of London has emerged as a hub for renminbi trading, and an estimated 150,000 or so Chinese students study in the UK, making it the European nation with the largest number of Chinese students. With the economic benefits more apparent, politicians such as Osborne are happier than in the past to make the case for closer engagement with China.

However, although relations are on an upward footing, it might not take much for them to unravel. A lot will hinge on whether closer UK-China ties deliver the sizeable economic dividends that have been promised. Without this ballast, bilateral relations could weaken and familiar political differences reemerge.

It will be of some concern, then, that after several years of reasonable growth, British exports to China have fallen by nearly 20 percent this year amid faltering Chinese consumer demand. This threatens Osborne's goal of making China the UK's second-largest trading partner by 2025. And weaker than expected economic growth in China would likely dash the hopes of those seeking to improve the relationship.

While China's services sector holds rich pickings for British firms, regulatory obstacles mean they struggle to access them. Globally competitive UK banks and insurers barely have a footprint in China. A failure on China's behalf to open its markets to more competition would make the rhetoric of friendlier relations seem hollow, and the UK government might come under pressure to take reciprocal action.

For China, the UK's promise to act as its "best partner" would quickly be undermined if the country voted to leave the European Union in the referendum scheduled for 2017. Without a gateway to Europe, Chinese firms would hesitate about investing in the UK and renminbi trading in London could also suffer.

Chinese companies have additional concerns. Gripes with the onerous British visa system remain commonplace. Some of the major infrastructure projects in which they are being asked to invest in the UK, such as nuclear power and high-speed railways, are also surrounded in political controversy. The returns on such investments may not warrant the efforts likely involved in securing them.

Both the UK and China are justified in stressing positive developments in bilateral ties. There is clearly potential for a stronger relationship. However, until the economic foundations are more firmly in place, it is too early to talk of a "golden decade".

The author is a Beijing-based analyst for The Economist Intelligence Unit