China and the World

London calling

Chinese trade delegation arrives in the UK to celebrate new stock link

Philip-Hammond-w

How do you do: Philip Hammond with Chinese Vice-Premier Hu Chunhua

“The UK attitude is one of increasing weakness,” the US Secretary of State wrote to the President. “Britain seems to feel that we’re disposed to accept present risks of a Chinese war and this… has badly frightened them.”

The exchange might sound current, but it actually happened 65 years ago between John Foster Dulles and Dwight Eisenhower.

Back in 1954 the US was unhappy, as it is now, with what it viewed as British pusillanimity towards Chinese aggression. At that point, the matter at hand was French Indochina.

Later that summer, an uneasy truce was forged at a conference in Geneva, dividing Vietnam along the 17th parallel. At one of the side meetings between Britain’s Foreign Secretary Anthony Eden and Chinese Premier Zhou Enlai, the British took the opportunity to revive diplomatic relations with the five year-old People’s Republic of China. The Times correspondent was at pains to report the next day that this was not “the result of a bargain involving any change in British policy”. He told his readers “there has been no concession on the British side”, explaining that installing a charge d’affaires in Shanghai represented a “useful, practical and sensible step”.

The article was published on June 18, 1954. This week China’s vice premier, Hu Chunhua, was in London to mark the occasion, and the British Embassy also held a party in Beijing.

The backdrop to Hu’s UK visit shows that, in some ways, little has changed over the past six-and-a-half decades. The US is still berating the UK for failing to honour the “special relationship” and taking its side more actively against China in a new tech cold war. It is particularly unhappy that the UK government has not ruled out contracting Huawei to build the country’s 5G network.

As before, a Conservative government is at the helm. And its main objective seems to be furthering Britain’s commercial interests with China, just as it was the case under Prime Minister Winston Churchill in 1954, when a group of 48 British companies made a historic trade mission to ‘red’ China.

On Monday, the two countries announced £500 million worth of new trade deals as part of the 10th UK China Economic and Financial Dialogue. “Britain is a very open trading economy. It’s vital we forge a relationship with China that works for both trade and investment,” the Chancellor of the Exchequer, Philip Hammond, told reporters.

Hammond’s comments were not particularly well received by the wider public, despite an addendum in which he admitted that the UK was “aware of the risks” of doing business with China.

The most-liked comment on a Financial Times article on the topic argued that the UK was “on the wrong side of history”, while another widely ‘liked’ comment asked why Hammond didn’t make a strong statement about protests in Hong Kong against a contentious extradition bill, given that the UK is supposed to guarantee its former territory’s ‘freedoms’ under the Sino-British Joint Declaration.

Other commentators lashed out at Britain for adopting a supine attitude: “Here, put on these kneepads, you’ll be more comfortable,” one sneered, referencing the kowtow position.

Some of the newspapers in other countries took a more pragmatic view, like the Australian Financial Review, which said that the UK was reluctant to clash with the Chinese on political issues “given Beijing’s willingness to retaliate on the commercial front at a time when Brexit-bound Britain feels economically vulnerable”. Hammond also acknowledged that Britain was “very vulnerable” to the US-China trade dispute because of its status as an open trading economy.

Relations between London and Beijing took an awkward turn earlier this year when an invitation to a trade delegation was withdrawn. Former Defence Secretary Gavin Williamson angered the Chinese when he said that the UK was sending an aircraft carrier to a disputed part of the South China Sea as part of a strategy to show “lethality”.

That was out of step with the general direction in Sino-British ties, where China is becoming a more significant trading partner for the UK, although not quite as important as Hammond’s predecessor, George Osborne, once hoped it would be.

As we wrote in WiC300 four years ago, Osborne was keen to promote the UK as China’s ‘best friend in the West’. He also wanted China to become Britain’s second largest trading partner by the end of the decade. This seems highly unlikely: China stands in sixth place in trade terms (in 2018, bilateral trade amounted to £68.5 billion).

Osborne’s wooing marked the highwater point of recent relations, culminating in a state visit by President Xi Jinping to the UK in October 2015. The British government under Theresa May then took a more circumspect approach, although figures show the UK is still the favoured destination in Europe for Chinese investment.

The Mercator Institute for Chinese Studies calculates cumulative investment of $81 billion, only slightly less than the total for France, Germany and Italy combined.

One of the UK’s key objectives in its policy towards China has been to bolster ties in the financial services sector, something that China’s Ministry of Finance acknowledged in its communiqué on this week’s talks, describing the City of London as “the world’s leading global financial centre”.

One of the pitstops for Hu was the London Stock Exchange (LSE), where he and Hammond inaugurated the Shanghai-London Stock Connect Scheme. The trading link gives LSE investors access to 260 Chinese A-shares and last week Chinese brokerage Huatai Securities was the first company to issue Global Depository Receipts (GDRs) under the new programme.

Investors in London can trade the depository receipts, which represent ownership of company shares that are held by a custodian bank. That’s different to the stock links between Hong Kong and Shanghai, and between Hong Kong and Shenzhen, which allow investors to trade shares directly through local brokerages.

Analysts wonder whether London-listed companies such as HSBC or Burberry could now follow suit and issue the first Chinese Depository Receipts (CDRs) in Shanghai. This option is slightly more complex as potential issuers can only sell existing stock, rather than raise new money. A minimum requirement is a $20 billion market capitalisation.

It has taken four years to get the Shanghai-London Stock Connect scheme up and running, but most observers think that the early trading volumes will pale in comparison to the Shanghai/Shenzhen-Hong Kong Stock and Bond Connect Schemes. Analysts said that that regulators in Shanghai will be cautious about approving too much new issuance, because they won’t want to divert too much capital from Chinese companies.

Other deals forged on the trade trip to London this week included a £1 billion fund run by Charterhouse Capital, China Investment Corp and HSBC that will invest in British SMEs with growth plans linked to China; likewise an MOU was inked between MultiPass International and UnionPay to develop a digital platform to increase acceptance of UnionPay outside of mainland China.

And there was good news for Britain’s farmers too. The trade talks also resulted in the lifting of a 20-year ban on British beef following the 1990s BSE (or ‘mad cow’) outbreak. The British government estimates that this could generate £230 million in exports over five years.

Negotiations to restart sales had been expected to continue for two more years. However, British farmers may have proven beneficiaries of the Sino-US trade war, as China has historically been a major importer of American beef.

On Wednesday, Hu left London for a two-day visit to Wales to meet representatives from the agricultural industry. Yet overall his UK visit didn’t generate too many headlines – overshadowed perhaps by the Conservative Party’s leadership campaign and the fact that Hu isn’t one of the seven powerful figures that sit on the Politburo’s Standing Committee.


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