Why Rachel Reeves will not find much growth in China
An economist looks at the specifics of the Reeves trade deal with the PRC
This Thinker is by George Magnus, member of the Advisory Council of the China Observatory at the Council on Geostrategy, and former chief economist at UBS.
The Thinker | No. 02/2025
Rachel Reeves, Chancellor of the Exchequer, may have had good reasons to re-start a formal economic and financial dialogue with her Chinese counterparts after an almost six-year hiatus. Dialogue, after all, is a virtue in and of itself, and can contribute to understanding, if not agreement and alignment. Yet, His Majesty’s (HM) Government’s oft-quoted mantra that better ties with Beijing will boost economic growth in the United Kingdom (UK) constitutes a poor excuse and exaggeration.
For starters, trade with the People’s Republic of China (PRC) is only about 5% of total UK trade in goods and services, and is far overshadowed by trade with the United States (US) and the European Union (EU). It is half the country’s trade with the Commonwealth. Only about 0.5% of the UK’s stock of inward and outward foreign investment involves the PRC. Moreover, Beijing’s economy is hardly in the best of health, propped up by the persistent rolling out of unsustainable borrowing by local governments. The more restrained outlook for Beijing’s economy, along with a much more repressive and controlled business environment certainly was not mentioned in HM Government’s official statement.
HM Treasury’s motivations
The Treasury claims that the outcomes of the meeting will boost the UK economy by £600 million over five years, possibly up to £1 billion, but there is little in the text that adds up to this. Even if it did, it would still fall short of even a rounding error in the UK’s £2.6 trillion economy. Writing in The Times as she left for Beijing, Reeves wrote that she was eager to promote financial services, ‘which are the engine powering prosperity and growth…and a core source of Britain’s competitive advantage on the world stage’. Britain’s financial services sector is indeed an important economic player with global status, and a key source of jobs and tax revenues at home. Yet, its contribution to Gross Value Added (GDA), or the contribution made to total output, is a bit smaller than manufacturing and on a par with a few other sectors, none of which rely on pitching to Beijing.
On the 16th January, HM Government announced that Sir Keir Starmer, Prime Minister, secured £600 million in investment from Polish companies over the next four years. It is interesting to note that he secured an identical amount to Reeves, without feeling the need to preface it in a desperately eulogistic justification in a leading national publication. It is also worth pointing out that the £600 million secured in Warsaw occurred on the sidelines of a more significant bilateral event – the signing of a new defence and security treaty.
It is possible that the Treasury and British banks see closer relations with Beijing as a way to offset several problems that have ruffled the financial services sector. Major firms have been delisting or transferring their primary listings from London – 88 in 2024 – with many going to the US. The number of initial public offerings, or share issues when firms go public, on the London Stock Exchange has fallen for several years. Financial transactions denominated in euros continue to migrate to countries within the eurozone. The stock market itself has been a relatively weak performer, with UK pension funds investing less than 5% of their assets at home.
Details of the deal
The terms of the dialogue agreement are revealed in the 69 paragraphs of the Treasury’s 2025 UK-China Economic and Financial Dialogue policy outcomes.
Both sides agreed to regular dialogue on financial supervision and data sharing. This is standard fayre, but the latter is not something that foreign firms feel optimistic about in today’s People’s Republic of China, bearing in mind the national security status of data and the clampdown on data transfer, usage and publication.
Feasibility studies are proposed which might establish closer capital market links and allow UK firms better access to the asset management, insurance and pension markets in the PRC, and to bolster the hitherto lacklustre initiatives since 2019 to increase mutual stock exchange listings and equity investment transactions in different time zones. Shein, the Chinese online fast-fashion firm, submitted plans for a London listing in 2024, after being turned down in the US, sparking hopes in the City that others might follow. The company has run into problems including in the UK over allegations of the use of forced labour in its cotton supply from Xinjiang Province. A Financial Conduct Authority (FCA) decision is awaited.
Even though the PRC welcomes the know-how that foreign financial firms bring, the reality is that over the years, including when business and political conditions were far more propitious, foreign financial firms have never really managed to build market share or make their presence felt against local competitors.
The UK sought from Beijing better market access for a small number of products in the agri-food sector (pork, pet-food and poultry), and asked that consideration be given to the healthcare and auto sectors. It also requested co-operation for improved access for law, architecture and accounting firms, and a level playing field in things like government procurement, state enterprise reform, competition standards, and intellectual property. There may be some minor business possibilities here, but market access is a familiar shortcoming that the UK, US and other countries have long campaigned for the PRC to address. Beijing’s idea of a level playing field is one where local firms prevail, and dominate market share.
For its part, Beijing offered to consider licensing and quota allocations for UK financial firms to do more business in. For example, the PRC’s bond, derivatives, and wealth management markets. While individual UK firms may conceivably benefit, this is most unlikely to apply generally. The UK agreed to the PRC being the first to issue a first sovereign renminbi green bond in London, while other renminbi-related financing opportunities would also be opened up.
Future implications
If this all sounds rather esoteric and calculated to benefit the financial firms that accompanied Reeves to Beijing, it is because that is precisely the case. Yet, the speed with which HM Government has changed course in its dealings with the PRC, reportedly also having expressed support for Beijing’s plans for a new London ‘mega embassy’ after usurping the decision from the local council, suggest it has already decided to ‘engage’ full-on with Beijing, ahead of the return of Donald Trump, President of the US, and without waiting for its own policy review on the PRC, the so-called ‘China audit’.
Time, and events, will tell if future dialogue, which is desirable to have, will open the door to a more convincing growth narrative that is beneficial to the UK. For the moment, though, financial interests and political calculus are running this show.
George Magnus is a member of the Advisory Council of the China Observatory at the Council on Geostrategy.
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