News & Events

The UKs deals worth billions with China-what do they really mean

TRADE LINKS

China now represents the UK’s sixth-biggest export market, taking 3.6% of its goods and services. But some analysts characterise Xi’s visit as all one-way traffic, with a grateful Britain buying almost anything China had to offer, from nuclear technology to investment funds for the HS2 rail line, with only a handful of Chinese purchases of UK goods and services going the other way.

Critics have also characterised many of the deals as largely symbolic and spread over many years, diminishing their value in the context of overall investment in the UK.

But for Xi the willingness of the UK to embrace China is a much-needed fillip as he struggles with an economy suffering from massive overcapacity, especially in the steel, coal and building sectors, where official data suggests factories have the ability to produce up to 30% more than current demand.

A huge drop in exports and efforts to shift the away from heavy industries to consumer services has also slowed growth to a pace dubbed by Xi as the “new normal”.

And even these lower estimates from the government statistics department could be generous with independent efforts to measure the economy downgrading growth in the last quarter from 6.9% to nearer 4% and an unemployment rate that hovers just above 4% to the dangerously high 10%.

Launched in 2013, “One Belt, One Road” is Xi’s route out of the malaise. Beijing estimates it will add £1.7tn to China’s trade in the next decade, as it seeks overseas destinations for products that have no home in a saturated domestic market. Britain is one of many such destinations.

NUCLEAR

The flagship industrial project for the “golden era” of cooperation is the £6bn investment by China in the planned new Hinkley Point C nuclear plant in Somerset. The British government is relieved that state-owned China General Nuclear Power Corporation has bailed out the cash-strapped main developer, EDF of France, and promised to take a 33.5% equity stake in the controversial project.

The quid pro quo for the Chinese participating, and for providing cash for new reactors at Sizewell in Suffolk, is to be allowed to build and operate their own facility at Bradwell in Essex.

Bradwell will allow the Chinese to trial its Hualong reactor designs in the west and act as a showcase to the rest of the world for its nuclear prowess.

New investment money coming into Britain’s creaking energy infrastructure is considered the main UK benefit at a time when over £100bn is needed to update old power stations and introduce new low-carbon power.

EDF has promised that 60% of the contracts at Hinkley will go to the UK although the plant will use a French reactor design, the EPR, and engineering via another French company Areva.

British companies such as Laing O’Rourke, Balfour Beatty, and Cavendish Nuclear are in line for significant contracts, with G4S a bidder for security contracts and Somerset Larder for the catering.

The biggest boost should be 25,000 new jobs, but the Royal Institution of Chartered Surveyors warned last week the UK “lacks the necessary construction skills to deliver critical programme such as Hinkley Point.”

VISAS AND CULTURAL EXCHANGE

Xi made much of the demands from China’s new middle-class consumers for foreign goods and travel. He said that over the next five years, China would import the equivalent of £6.5tn of goods and that 500 million Chinese tourists would travel abroad. To make sure Britain stays on the map, Cameron said that, from January, new visitor visas for Chinese tourists would be valid for two years – four times the usual six-month limit. He also pledged to match the US government’s latest 10-year multi-entry visa for Chinese tourists at no extra cost.

Why single out Chinese tourists for special attention? They contribute £500m a year to the UK economy, according to the latest figures from VisitBritain and the numbers are increasing rapidly. There was a 35% jump in visitors from China in the year to June on 2014.

With every Chinese holidaymaker and business traveller spending on average £2,688 every time they visit, “the extension of the visitor visa will enable them to maximise their spending power even further,” said Downing Street, adding that every 22 additional Chinese visitors create an additional job in the tourism sector.

INDUSTRY

Low-carbon technology was at the heart of deals struck with China across the automotive sector during Xi’s visit. Aston Martin signed a deal worth £50m with private equity firm China Equity to develop an electric sports car, the Rapide S. The Chinese carmaker Geely, which makes London’s distinctive black cabs, promised to pump in an extra £50m to research and development at an expanded Coventry factory, including the launch of a new fleet of hybrid black cabs capable of zero emissions. And bus manufacturer Alexander Dennis agreed a £660m deal to build single-decker buses that China’s BYD will equip with batteries to run as electric vehicles.

Ian Fletcher at IHS Automotive says even the smaller deals now represent significant investment: “Unfortunately our homegrown industry isn’t as big as it once was, so it’s a feather in the cap. The investment in R&D for a new London taxi does suggest that we still have strengths in engineering in that field: had you said that London Taxi would get a total £300m investment from abroad five years ago, they’d have said you were mad. Geely do see something in that brand, they are probably eyeing more exports.”

Meanwhile, Fletcher says, the injection of funding will be important for Aston Martin. “Electric vehicles are a growing market, but there hasn’t been that much movement at the top end. It’s an opportunity for Aston Martin to become a super-Tesla – and, with the Chinese government very focused on trying to reduce emissions in their cities, to sell into that market.”

CREATIVE INDUSTRIES

The UK’s creative and TV production industry struck deals worth more than £225m with Chinese partners in a flurry of announcements. The deals included BBC Worldwide’s co-production deal with Shanghai Media Group to make the sequel to 2007 hit Earth, the feature-length version of the Planet Earth series, due for release in 2017.

It is the first deal completed under the Sino-UK Film co-production treaty ratified earlier this year. Other deals include co-production agreements to make a Chinese version of the BBC series Coast. And Chinese online video company LeTV picked up the broadcast rights to Poldark, while this year’s Sherlock Christmas special will transfer to cinemas across China.

Other initiatives include the University of York striking a £200m TV training programme deal with a Chinese investment group that will involve 300 foreign students a year. While the list of glossy announcements is impressive, China remains a difficult market for UK TV producers to crack. According to indie trade body Pact, sales of British TV shows to China were just £16m last year, with growth of just 1%, down on a 40% surge in 2013. “China still seems to be mostly a case of a long walk for a short drink,” says one senior executive.

PROPERTY

Even before last week’s visit, China had been busy investing in the UK. The country has amassed a huge fortune in foreign reserves from exports, and until the financial crash parked much of it in US Treasury bonds. These days property is the asset of choice, sometimes to the point of investing in apartment blocks that remain empty simply because it is too much hassle to rent them out. Investments in the UK are mainly in London and will soon grab the attention with a development on the river Thames at Nine Elms by the Shanghai-based developer Greenland. The massive towers planned for the area upriver from the Houses of Parliament have already been branded a super-rich playground with flats starting at £1.3m.

Cameron was only able to lay claim to a small investment by the Chinese developer Advanced Business Park (ABP) in the £1.7bn Royal Albert Docks scheme as part of Xi’s visit. But the scheme – also involving fellow Chinese group Citic, which already owns 40% of that site – is billed as developing a new financial district in east London that will create up to 30,000 jobs.

As a signal of intent, it is clear. Beijing wants to take over from the oil-rich Middle Eastern states as the main investor in London’s trophy assets.

FINANCE

In a deal timed to coincide with Xi’s visit, China’s central bank made its first sale of debt on London’s markets last week, drawing orders of more than 30bn yuan (£3bn). The move is mutually beneficial: it aids China’s drive to make the yuan an international currency, while consolidating London’s position as a global financial centre.

The City treasures its reputation as the most international financial centre in the world. It plays host to many more foreign banks than either New York or Tokyo and in recent years added Middle Eastern banks wanting to sell products under sharia law to a list that includes banks from every continent.

Last week’s debt sale was not the only example of Sino-British cooperation in finance. In 2014 the China Construction Bank won approval from Beijing to open Europe’s first clearing bank for yuan in London. Later it also started trading in Paris and Frankfurt, but made London its European headquarters. CCB UK, which spent around £110m on a new headquarters in the Square Mile, processed around 6bn yuan of transactions per day last year.

Last week the Chicago Mercantile Exchange announced that its London trading centre would offer offshore yuan futures, allowing financiers to trade and hedge on movements in China’s currency. The move will bring to London a practice that was previously conducted through Hong Kong.