Since the result of the UK's Brexit referendum came out in June, the plunge of the pound has reflected financial market volatility, and a stream of black swan events has heightened uncertainty in the world economy. As the UK launches Brexit negotiations, what is the future direction of China–UK economic relations? And what new prospects are there for bilateral economic, trade and cooperation?
Two days after Donald Trump was elected the new U.S. president, the eighth UK–China Economic and Financial Dialogue (EFD)—the first formal intergovernmental dialogue between the two countries against the backdrop of Brexit—was held in London on November 10, covering trade, financial services, infrastructure and energy.
On December 9, David McFarlane, Minister-Counsellor at the British Embassy in China, was interviewed by the Economic Observer. McFarlane, who came to China to study as early as 2000 and has worked for the embassy, officially became the UK's Minister-Counsellor in China more than a year ago, responsible for economic and trade policy. "UK–China bilateral relations are entering a golden era," McFarlane said, noting that economic ties between China and the UK have been strengthening over the past decade.
New challenges also mean more opportunities for cooperation. McFarlane believes that China is the world's second-largest economy, and the strategic cooperation between the two major economies demonstrates the ambition and confidence of both countries' development; the two governments will conduct more exchanges to seek bilateral cooperation opportunities in investment, trade and finance.
Economic Observer: At the recently concluded eighth UK–China Economic and Financial Dialogue, 63 policy outcomes were reached on the UK–China global comprehensive strategic partnership for the 21st century, trade and investment, financial services, infrastructure and energy, and industrial strategy. Compared with last year, what are this year's new areas of focus at the EFD?
McFarlane: This year we built a series of new outcomes around the state visits between China and the UK. The backdrop of this year's EFD is that the Brexit referendum changed part of the UK's environment and the U.S. election had just concluded; as the first formal intergovernmental dialogue between the two countries against the backdrop of Brexit, the eighth EFD is very important. During the dialogue, China and the UK had a great many outlooks for the future—not only for this year but continuing into the next four to five years.
Both China and the UK are seeking potential development opportunities, and the EFD provides a pathway. A series of new areas are being explored. In insurance, for example, on further advancing market access, we agreed that more cooperation is needed at the regulatory level to make investment easier for both sides. The dialogue also covered more issues in commercial trade. The UK–China Financial Services Summit, led by the chairmen of China Construction Bank (5.730, 0.16, 2.87%) and HSBC, standardized thinking for leading banks and financial services companies. Summit members will provide advice to the annual UK–China Economic and Financial Dialogue to support the implementation of long-term strategic planning for financial services cooperation between the two countries. On trade policy, China and the UK are also strengthening trade dialogue and rethinking and envisioning new opportunities.
Economic Observer: Last year's EFD focused on deepening cooperation in health, cooperation in intellectual property, and jointly developing China's bond market. What progress has been made so far this year?
McFarlane: We also had a very positive economic and financial dialogue last year. In fact, the UK Treasury and China's Ministry of Finance have been monitoring progress to ensure that what was agreed moves forward smoothly. In fact, we have made great progress in all areas.
For example, in healthcare, under the G20 framework we have a series of cooperative exchanges, such as on antimicrobial resistance (AMR).
In finance, green finance is a highlight. China and the UK co-chaired the Green Finance Study Group during the G20, discussing rule-making and pursuing higher goals; this has now also become one of the EFD outcomes. The two sides agreed to develop channels and products for cross-border green bond investment, including potential new channels and platforms consistent with the overall strategy of opening China's financial markets. The two sides will support Chinese financial institutions and enterprises in issuing green bonds and other green financial products in the UK, and encourage UK and international institutions to issue green bonds and carry out green investment in China.
Economic Observer: Since the Brexit referendum in June, the market has changed a lot. With the UK no longer an EU member in the future, will the UK consider opening its market more freely? What does this mean for the City of London?
McFarlane: I have always been very clear that the UK wants to and will become one of the most open trading nations in the world. Our new Prime Minister Theresa May responded to this shortly after taking office, making clear that this is what she wants to see.
As for the future of the City of London, I would say that the City is one of the most international and strongest financial markets in the world. In 2016, London replaced Singapore as the world's largest offshore RMB center outside Hong Kong. I would say the role played by the City of London and its stock exchange is increasingly important and its scale is constantly expanding; I see no reason why the City would be affected by Brexit.
Economic Observer: After the Brexit referendum, what impact has there been on UK–China economic relations?
McFarlane: Brexit has not changed the complementarity and partnership between the Chinese and British economies. If you ask me whether UK–China relations have become more important after Brexit, my answer would be: more important. This is a positive challenge. Brexit will not change the good foundation of cooperation and the economic foundation between China and the UK; what may change is the UK's flexibility in direct trade relations.
On the economic relations between China and the UK, for example, the new government reviewed and then approved the Hinkley Point nuclear power station project after taking office. Personally, I think this is a practical and clear signal that the UK will remain open to overseas investment and welcomes more cooperation opportunities.
Economic Observer: In the past, the UK's trade relied on the EU, with half of its total imports and exports coming from within the EU. After Brexit, does the UK intend to further increase import and export trade with China, and which industries might be involved?
McFarlane: Our blueprint for trade relations is to trade with all countries and regions in the world, and we already had very large trade volumes before Brexit. A mature, established market like the UK pays close attention to neighboring trade markets, but to seek more growth opportunities we must also focus on emerging and developing markets, especially the Chinese market. Looking back at data from the past 10 years, bilateral trade has grown substantially. We hope to maintain this momentum, and a UK–China working group will be established in the future to study bilateral trade matters.
Economic Observer: In October 2015, Chinese President Xi Jinping and then UK Prime Minister Cameron jointly issued a statement advocating the establishment of the UK–China Infrastructure Alliance. How is the alliance developing now? What progress has been made in infrastructure cooperation between China and the UK?
McFarlane: One of the outcomes of last year's EFD was the establishment of the UK–China Infrastructure Alliance, an outcome that also received strong support during President Xi Jinping's visit to the UK—this is a good idea of complementary advantages. The alliance mainly involves three aspects: first, a center will be established in Beijing to study cooperation plans for the two countries' construction in third countries, while working with enterprises to provide the highest-quality, sustainable infrastructure investment in third countries; these are closely related to the Belt and Road Initiative, focusing on regions in urgent need of infrastructure construction. Second, a UK–China Infrastructure Academy will be established in the UK to provide training and guidance in relevant fields for Chinese enterprises investing in the UK, especially guidance on rules that some Chinese companies are not familiar with. Third, it involves public-private partnership (PPP) between China and the UK. The Infrastructure and Projects Authority, an independent body under HM Treasury, is providing a comprehensive training program on PPP in China. The consensus reached by China and the UK in the EFD is that the UK–China Infrastructure Alliance will be led by the chairman of China's National Development and Reform Commission and the UK Chancellor of the Exchequer, with a dedicated management body to be established.
Economic Observer: The global economic environment still faces challenges and downside risks remain. In this context, what is your view of China's economic development in 2017? How do British investors view the Chinese market?
McFarlane: At present, global economic growth is limited and global trade also appears to be declining. According to IMF data, the global economy grew 3.1% in 2016 and is expected to grow 3.4% in 2017; the global economic environment is somewhat subdued. From my experience, I believe China, as one of the biggest beneficiaries of global trade over the past 15 years, should play a key role in continuing to promote global trade.
If I were to make some predictions for next year, given the pressures and challenges we face in globalization, we hope that, out of the desire for development, China will maintain continuous momentum in market opening; not only does the UK hope to enhance investment and trade with China, but other regions will too—I think this is what both the UK and Chinese governments want to see.
In the eyes of British investors, China is constantly maturing and full of opportunities, different from the Chinese economy of two or three, or even five, years ago. What investors worry about is whether there are barriers to market access and restrictions on investment—issues that may not be encountered with other economies. I think the challenge for the Chinese government is how to send a signal to the world of its commitment to free trade and openness.
Economic Observer: For Chinese investors, what comparative advantages does the UK have in its investment environment compared with other countries? What advice do you have for Chinese investors in terms of investment fields and models?
McFarlane: My advice is not to look only at traditional fields but to develop more new opportunities. Personally, I think the EFD shows that both sides are giving each other more opportunities for openness and cooperation. Although there is currently uncertainty about the pace of capital market opening, we have made great progress in stock exchange connectivity. The "Shanghai–London Stock Connect" between the Shanghai Stock Exchange and the London Stock Exchange is moving to the next stage, which has the strong support of both the Chinese and UK governments; the specific timing and details of cooperation will depend on the two exchanges.
At the same time, the UK government has always stressed that the UK is not just London. Beyond the southeast, we have many different, vibrant and growing city centers and regions. For example, in the Northern Powerhouse, we focus on investment in the Manchester area. This involves a great deal of infrastructure construction, such as the construction of Airport City Manchester; Beijing Construction Engineering Group from China is one of the main members of this large project—a good early example of Chinese investment in the UK. The Northern Powerhouse also has many infrastructure projects. During the EFD, we provided investors with a series of investment opportunities covering 13 investment projects, each worth more than £100 million, spanning airports, housing, commercial real estate, docks, industrial infrastructure, potash mines, high-end manufacturing and other fields.
Economic Observer: How do you view the current relationship between the pound, the euro and the dollar?
McFarlane: Over the past few months, the pound has been under obvious pressure. The volatility brought by Brexit is normal. I think this pressure will remain for months or even years to come, not only for the UK but also for other EU member states. This means currencies will have to face numerous obstacles. But I think it is very important that the other EU member states—the UK is still a member of the EU—remain successful and have strong currencies, which is what the UK hopes to see. We want to have a very broad, deep and close trade relationship with the EU, so we want a strong euro, and we also want a strong pound.
During the Brexit process, UK Chancellor of the Exchequer Philip Hammond made it very clear to Chinese officials that there will be short-term volatility from now until the end of the Brexit process because there is much uncertainty. But the fundamentals of the UK economy are strong, and the medium-term opportunities in trade, investment and partnership are very positive and powerful.
Economic Observer: One of the EFD's policy outcomes is that the two sides are willing to promote deeper cooperation between old industrial bases such as the Northeast and the UK. What forms do you think the cooperation will take? Does this cooperation mean addressing overcapacity?
McFarlane: The UK has some experience similar to the problems now facing the Northeast, such as how to manage the provision of social services and education. Obviously, this is also related to overcapacity and economic transformation. In this important process, the UK wants to cooperate with China in this regard.
Economic Observer: According to item 21 of the policy outcomes of the eighth EFD, the UK supports the EU in complying with its WTO obligations in implementing anti-dumping measures, including fulfilling its obligations under Article 15 of the Protocol on China's Accession to the WTO. Do you think the UK supports China obtaining market economy status? Will it communicate with the United States and other EU countries on this issue?
McFarlane: At present, the UK is still a member of the EU, and we will still deal with this matter as an EU member.
Source: Economic Observer 2016-12-11