The Government has declared that success in emerging markets, particularly China, is central to the aim of reviving and rebalancing the UK economy. In a measure of the importance attached to relations with China, the Autumn Statement has been delayed by a day this week to accommodate the Prime Minister’s 120-strong trade delegation there.

In Tweets during his visit, the PM has invoked the familiar but ambiguous trope of the ‘global race’. In fact, the UK appears to be simultaneously embroiled in three competitions: a race against China for global export markets; a battle with other countries to do business in and export to China; and a beauty contest to attract Chinese inward investment. It is the battle and the beauty contest that are at the heart of the PM’s visit.

Those who see the UK in competition with other countries in this way, and measure success in terms of ‘market share’, may be concerned that the UK is currently losing out. In trade terms, the UK has gone from being China’s 14th most important source of goods imports in 1995 to its 25th most important in 2012, with its share of total exports declining over this period from 1.5% to 0.9%. Germany currently exports four times as much (by value of goods and services) to China than the UK. A recent FCO study bemoaned that the UK was not ‘keeping pace with the market’.

Economists might offer solace by pointing out that conceiving of trade with emerging economies in terms of a race with winners and losers is not particularly meaningful, primarily because their demand for imports is not fixed; on the contrary, it has grown rapidly as a consequence of economic expansion and trade liberalisation. Thus, despite losing ‘market share’, the UK’s exports to emerging economies have trebled over the past ten years, and to China in particular they have risen sixfold.


In terms of UK investment in China, things are more complicated. Though the stock of UK investment there has risen, to $9bn at the end of 2012, this still represents just 0.5% of total UK foreign investment. This is partly because the environment in China is a challenging one. Many areas of its economy are dominated by state-owned enterprises (SOEs), and remain either shut off to foreign competition through licensing requirements, or unassailable through the preferential government treatment SOEs receive. The World Bank’s 2014 Doing Business report ranked China 96th for ease of doing business, down from 79th in 2011, while in international rankings of the quality of intellectual property protection China ranks above India, but below Brazil and Russia.

By contrast, UK capital markets are highly liberalised, and there are relatively few ‘hard’ barriers to foreign investment. On the face of it, the UK looks like a strong contender in the beauty contest to attract inward Chinese investment; and the Government is particularly keen to tap into the $1tn held by China’s sovereign wealth funds to finance its infrastructure pledges.

Yet the stock of Chinese direct investment in the UK was worth just $3.2bn in 2012, less than 0.3% of total foreign investment in the UK. One obstacle may be that the type of investment the UK is seeking is in regulated areas such as financial services, telecoms, energy and utilities. The Government has already shown a willingness to relax the regulatory environment: during a visit to China in October, the Chancellor declared that Chinese banks will be allowed to operate branches in London (rather than subsidiaries, which must maintain their own capital buffers), much to the dismay of other non-EU banks, which are generally required to establish subsidiaries. During the same trip, it was agreed that Chinese companies would be permitted to take majority stakes in new UK nuclear power plants.

There are also softer barriers to Chinese investment: one frequently cited by Chinese officials is ‘negative media coverage’. They presumably have in mind the sensitivity attached to Chinese involvement in ‘critical’ UK infrastructure, highlighted in the recent Intelligence and Security Committee’s report into a contract between BT and the Chinese telecoms company Huawei. A recent report by the US Congress raised similar concerns about the potential for conflict between commercial imperative and national security.

Finally, it is worth noting that most of China’s infrastructure finance to date has taken place in eastern Europe and Africa, and has involved Chinese firms winning equipment, construction and engineering contracts at the same time; or, as KPMG’s head of infrastructure recently put it “the provision of finance is just a mechanism to get the real prize, which is a bigger export market for their manufacturing”. Which raises the question: could winning the beauty contest lose us the race?

Author: Gavin Thompson