The Debate | Opinion

The British Treasury Is Still Hopelessly Optimistic About China

Under Boris Johnson’s successor, will the Treasury get its way on deepening economic ties between the U.K. and China?

The British Treasury Is Still Hopelessly Optimistic About China
Credit: Depositphotos

A leaked draft agreement of the recent economic and trade talks between the U.K. Treasury and the Chinese Ministry of Finance confirms what many have long suspected: When it comes to China policy the Treasury remains stuck in the “Golden Era” and stands firmly apart from those who are increasingly concerned about Chinese authoritarianism.

Often considered the most powerful department in Whitehall, first under George Osborne (from 2010-2016), then under his successors, the Treasury has long held the central seat in driving forward the deepening of economic and financial ties between China and the U.K. through regular dialogues.

The Chinese government’s Sovereign Wealth Fund, Chinese state-owned enterprises and banks, and Chinese state backed technology companies like Huawei, Hisense, TikTok, and Hikvision, have historically done very well out of these financial and economic dialogues. These dialogues have not only paved the way for Chinese investment in strategic industries in the U.K. economy, including energy, water, telecommunications, and transport, but have positioned Chinese companies to benefit from lucrative public procurement contracts and raise capital by listing on the London Stock Exchange.

A brief analysis of the leaked draft agreement shows that this round of China-U.K. economic and trade talks was no different. The planned outcomes included the Treasury inviting the Chinese government’s Sovereign Wealth Fund to open a representative office in the U.K., allowing more Chinese companies to list on the London Stock Exchange, helping Chinese companies operating in the U.K. to issue renminbi debt, and a new scheme of Chevening scholarships to allow Chinese businessmen to study in the U.K.

Of course, for assisting Chinese companies in increasing their takeovers of U.K. strategic infrastructure and businesses, allowing them to list on the London Stock Exchange, and helping with the internationalization of the renminbi, the U.K. government under the draft agreement would be fairly compensated with the resumption of direct flights between the London and Beijing, the relaxation of restrictions on U.K. beef exports, and greater access for HSBC and Standard Chartered to China’s markets.

Aside from the Treasury’s ability to negotiate an imbalanced agreement, it is notable how many of these planned concessions ignore geopolitical realities, cut across the approach of the U.K.’s key partners, or the growing concern among the U.K. public over economic dependency on China.

Take the question of expanding the number of Chinese companies that are able to list on the London Stock Exchange. Such a policy would indirectly import Chinese domestic political risks to the U.K. financial markets. Many Chinese companies are already facing tough, and unpredictable, regulatory crackdowns by the Chinese government for their activities overseas (e.g. Didi Chuxing’s IPO in New York). The Chinese economy is facing an unprecedented slowdown not seen in two decades. Serious human rights violations in Xinjiang and Hong Kong continue to pose increasing reputational risks for firms that signed up to the ESG pledge.

Ministers have made a great deal of the new powers to block foreign takeovers under the National Security and Investment Act. Yet allowing the China Investment Corporation to establish a representative office in the U.K. would have signaled a green light for the sovereign wealth fund to increase its substantial holdings in the U.K., which already includes a stake in Heathrow Airport, Neptune Energy, Thames Water, and logistics firm Logicor.

Similarly, the planned suggestion of helping Chinese companies to issue renminbi debt in the UK ignores the Chinese government’s growing interest in using the internationalization of the renminbi to bypass the SWIFT banking system in the future and even investor sentiment, with investors dumping a record $35 billion worth of renminbi-denominated bonds in the first four months of 2022.

Even the so-called benefits of this draft dialogue, if adopted, appear minimal under investigation. According to the Agriculture and Horticulture Development Board, U.K. beef exports accounted for just 364.1 million British pounds in 2021 out of a total of 312.4 billion pounds worth of exports of goods. HSBC’s recent adoption of a Chinese Communist Party cell in its China offices make it clear that Beijing is increasing the price British-based banks must pay to access its markets. These cells are part of the United Front network used to control and influence.

Former Chancellor Rishi Sunak, now a Conservative Party leadership candidate, has already disowned the draft agreement as the work of Treasury officials and argued that he turned against it because of national security concerns. However, the agreement reflects an established Treasury orthodoxy that has favored deepening economic ties over very present economic, security, and ethical risks. This business-first outlook has dictated the mechanics of China-U.K. relations under the last three prime ministers.

What remains to be seen is whether Boris Johnson’s successor is willing to challenge this established orthodoxy, or whether we will see some of the proposals in this draft agreement resurface in a future economic dialogue between the U.K. and China.

Guest Author

Dennis Kwok

Dennis Kwok is a senior fellow at Harvard Kennedy School. He previously served as a Hong Kong Lawmaker (2012-2020).

Guest Author

Sam Goodman

Sam Goodman is executive director of the China Risks Institute and director of Policy and Advocacy at Hong Kong Watch.