Does the recent anti-China rhetoric by British PM candidates represent an irreversible trend within the British political establishment? Or is it just temporary election hype without teeth? And what are the short and long-term business impacts of this political process on the UK-China relationship?

Ting Zhang, our Founder & CEO, shares her views. 

Since the resignation of Boris Johnson on 7th July and in the final contest for the Conservative Leader / Prime Minister, China has suddenly emerged to be a prominent topic during heated political debate. Some hasty promises were made to reduce the perceived “China threat,” and they’ve managed to grab headlines. Beijing has taken notice and hit back with stern responses.

While some China watchers and experts dismiss these as just “noise” associated with the PM selection and “football playing” in the political process to secure the seat, others are not quite so sanguine on the “risk of real damage” being done within an already fractious relationship between the two countries.  The contest between the candidates will intensify in the next few weeks but it remains to be seen whether the China topic will continue to stay at the top of their agenda.

I personally think this is a case of political tricks being adopted by the PM candidates to defend themselves or to attack their opponents, but provided it stops with the debate and does not enjoy more attention, the short-term damage would be limited.  However, some of the promises made may have policy implications post-appointment of the PM which, if not thought out carefully, will leave undesired consequences for the UK-China relationship in the medium to long term.

Scope for optimism

Despite all the noise and continuously challenging geopolitical circumstances, I believe there is still some scope for cautious optimism as far as UK-China business is concerned.

To start with, both economies are still growing, although with different latitudes.  Despite high inflation pressure caused by the energy price spikes, the UK economy should narrowly avoid recession in 2022, with GDP forecast to grow 3.7% in 2022, says the latest EY ITEM Club report. UK business leaders have proven resilient in the face of constant change, and according to Accenture, British businesses lead their European counterparts in terms of confidence about the future, even after an index of optimism plunged by half to a record low.

In China, after months of disruptions, the economy looks to be back on the path to normalisation. The recent announcement of the decision to shorten the isolation period from 21 days to 10 days and adjust the frequency of Covid tests was largely welcomed by the international business community.  To help restore the economy as well as confidence from both consumers and businesses, the Chinese government has rolled out a raft of tax cuts and subsidies in recent weeks and may be announcing more support soon.

The Chinese economy has managed to transform and diversify in the past decade into a combination of big consumer market and capital-intensive manufacturing activities. As consumer demand returns, it is expected that retail sales will turn from negative year-on-year growth in 2Q22 to positive growth in 2H22. This should benefit domestic producers as well as foreign exporters who are looking to grow their sales into China.

With a more robust external demand and Chinese port congestion now eased, we see a better international trade environment going forward, compared to 1H 2022. China’s foreign trade saw positive changes in the second quarter, according to a recent survey conducted by the China Council for the Promotion of International Trade (CCPIT). During the period, more than a quarter of surveyed firms saw quarter-on-quarter growth in trade volume, and about 20 percent reported expansion in profits and new orders. Relief policies by Beijing to stabilize foreign trade have proven effective, and the acceleration of export tax rebates played the biggest role in easing cash strains.

Aerial photo taken on May 6, 2022 shows a view of the Longtan Container Terminal of Nanjing Port in Nanjing, Jiangsu Province. (Source: Xinhua/Li Bo)

A favourable outlook

On a daily basis, the team at Crayfish.io has been talking to fast-growing UK and European businesses across a range of sectors, including manufacturing and engineering, automotive and EV, education, life science and renewable energy, as well as those in B2B services and FMCG sectors. Most of them are interested in understanding more about the Chinese market and they are keen to identify and work with local partners.

With the possible gradual easing of travel restrictions to China in the second half of the year, I would advise British and European businesses to re-evaluate the Chinese market and consider investing to build more local capacity and resources. This will enable them to capitalise new opportunities that come with the recovery of the economy. Some of them may look at expanding into different sectors and geographic areas.  For example, if your business is looking to set up new manufacturing facilities in China to streamline your supply chain for Asian markets, you would be in a good position to explore the favourable policies in terms of tax and land use prices available in many economic development and free trade zones across the country.

Despite the geopolitical challenges, I believe now is also the right time for Chinese companies and business support organisations to plan for new initiatives aimed at reconnecting with UK and European markets in 2023. This is because the UK offers many advantages for any international business that is entering into Western European markets.

For example, the UK ranks first in Europe in advanced digital technologies such as blockchain, artificial intelligence, virtual and augmented reality, 5G and the Internet of Things. Globally it is behind only the USA and China.

Source: Digital Catapult

Time to build bridges

The UK’s innovative culture and established technology commercialisation system (like we see from our base in Cambridge) continues to provide fertile ground for ambitious start-ups that may become tomorrow’s unicorns. These can obviously benefit from the vast Chinese market.

In other sectors such as health care & life sciences and financial services, we also see continuous interest from both sides to work together.  Finally, climate change and sustainability remain high on the collaboration agenda and receive political and policy support from both sides of government.

The UK continues to attract Chinese investors across a wide range of sectors, from TMT, advanced manufacturing and mobility to health care & life sciences, and financial services.   According to EY China, the momentum of Chinese overseas M&As might slow down in the rest of the year due to geopolitical uncertainty. Global supply chains might be further reshaped as well; therefore more Chinese enterprises might consider greenfield investment overseas to keep up with the growing trend of getting closer to the consumer market in this part of the world. The UK can indeed position itself as a perfect partner for forward-thinking Chinese companies that want to build or increase their foothold in the UK and the rest of Europe.

UK leadership campaign politics will settle in early September and let’s hope that the main policies revert to the status quo before this contest. And in China, preparation is already underway for the 20th Party Congress in November.  No matter what happens at the political levels,  if the businesses in both countries can just “keep calm and carry on”, by creating more collaborations, big or small,  then together we can still hope that the positive energy from the bottom up will prevail in the end.

More than ever, we need to maintain people-to-people dialogue and build business links, language learning and cultural savvy between the UK and China.  More bridges need to be built and maintained rather than burnt.

(Views expressed in this article are purely personal and not from Crayfish.io.)

Sources

https://www.theguardian.com/politics/2022/jul/25/sunak-ruse-aims-to-outmanoeuvre-truss-over-china
https://www.bloomberg.com/news/articles/2022-07-17/uk-leads-eu-in-business-confidence-despite-drop-to-record-low 
http://english.scio.gov.cn/chinavoices/2022-06/30/content_78297742.htm 
https://www.digicatapult.org.uk/news-and-insights/press-releases/post/new-global-index-ranks-uk-first-in-europe-for-advanced-digital-technology/
https://www.ey.com/en_cn/news/2022/05/ey-releases-the-overview-of-china-outbound-investment-of-q1-2022