China - UK Relations and Business Sentiments

The UK’s relationship with China has come to the forefront of the national debate this year, thanks to the confluence of several major news stories:

• The COVID-19 pandemic, which originated in Wuhan, and has since severely disrupted the UK and global economy;
• Beijing’s introduction of a controversial new National Security Law for Hong Kong. which led the UK to offer a path to citizenship for Hong Kongers who hold British Nationals Overseas passports;
• The UK government’s U-turn on its earlier decision to allow Chinese telecoms giant Huawei to participate in the rollout of 5G infrastructure.

These stories have all emerged against the backdrop of rapidly deteriorating political relations between the US and China.

Prominent politicians from both major UK parties have voiced growing scepticism about the country’s relationship with China: Several now reject the approach of David Cameron’s government, which had proclaimed a ‘golden era’ of Sino-British relations, and have called for a reset of the UK’s China policy. A group of Conservative MPs -- led by Tom Tugendhat, who is also chairman of parliament’s Foreign Affairs Select Committee -- has set up a ‘China Research Group’ which has so far taken a notably hostile approach towards China.

Doubts have surfaced about the wisdom of relying on Chinese manufacturers for key supplies, such as protective clothing for health workers, or the extent to which Chinese tech-related firms should be allowed to operate freely in the UK. A growing number of MPs have expressed concern about alleged Chinese human rights abuses, particularly in Xinjiang. 

Implications for business and outlook

The foregoing suggests there is potential for a rupture in Sino-British relations that could, in turn, severely harm the interests of British businesses operating in and exporting to China, as well as future Chinese investment in the UK. 

Such a scenario is a higher risk now than in previous years, while external factors -- chief among them the result and implications of the forthcoming US presidential election -- could make the outlook even trickier. Yet there are good reasons to suggest both countries will not want to let matters get out of hand. On the UK side, for example, Prime Minister Boris Johnson has even gone on record calling himself a ‘Sinophile’. 

There is still plenty of interest among multinationals in doing business with China. According to Santander’s latest ‘Trade Barometer’, over one-third (37%) of international businesses based in the UK already do business in China, with one-fifth seeing growth opportunities in the country. Among companies surveyed by Santander, a net 35% believe that since Brexit it has become easier for British companies to win business outside the EU, compared with a net 21% who believe it has become easier to do so inside the EU. 

Moreover, the UK’s economic ties with China have become ever more important. China was the UK’s third-largest destination for goods exports in 20191; the UK also runs a widening surplus in services trade with China. Around one-quarter of all foreign students at British universities hail from China, while around 880,000 Chinese tourists2 visited the UK last year. In all, the UK’s ties with China support nearly 130,000 jobs spread across the country, according to recent research by Cambridge Econometrics, commissioned by the China-Britain Business Council3. 

Meanwhile, although Chinese officials have expressed disappointment about the UK government’s turn against Huawei and strong opposition to its involvement in Hong Kong, there has been little open action taken against UK companies to date. More broadly, Beijing has so far stayed the course in terms of opening up its economy, offering greater access to overseas financial services companies and reducing the number of sectors where foreign investment is restricted. 

Given the current domestic political environment, it appears unlikely that the UK government will look to secure a comprehensive trade agreement with China in the near to medium-term. Its post-Brexit priorities remain to agree the UK’s own FTAs with countries with whom the EU has an agreement, such as the recent one with Japan; and to push ahead on deals with Anglophone countries such as the US and Australia.

However, given the health of the underlying economic relationship and China’s likely leading role in the post-pandemic global recovery, a full turn towards anti-China protectionism appears unlikely too. 

A potential UK strategy in the near-term could involve a push for improved market access in sectors such as financial services, technology, food and drink, retail and wholesale, life sciences, automotive and manufacturing; alongside efforts to persuade Beijing to address perennial business concerns. Around 40% of UK companies operating in China say bureaucracy remains a major challenge, according to Santander’s Trade Barometer, while 36% cite regulatory issues as an issue.

Santander has successfully opened the doors for many UK SMEs and large corporates to trade and invest in China. We have strong local presence and partners in both countries and understand the breadth of practical help that is needed to connect businesses to the right opportunities. This covers a variety of support from knowledge of the local culture, language and regulatory environment to operational support such as legal or HR resources. Above all it means helping businesses move with confidence by putting them in touch with people they know they can trust. 

To find more on how Santander can support you in the China market, contact Dennis Lin on dennis.lin@santander.co.uk