Loong on China: China trade deals – UK at the back of the queue

Summary: Britain is now a partner of doubtful value to China. Not only has it lost its status as gateway to the huge EU market, its government is now hampered by a loss of mandate. On any free trade deals going with China, Britain will find itself at the back of the queue.

• Britain will be at the back of the queue in any trade deals with China
• The EU is a crucial dimension of China’s interest in Britain.
• A lame-duck government cannot really drive hard bargains … be it with China or the EU

UK AT THE BACK OF THE QUEUE

The so-called golden era in relations between China and Britain launched with much fanfare two years ago is fast losing its shine.

Crucial to the supposed “special” relationship offered by China is a London that is firmly rooted in the European Union.

And Britain’ value in that role is shrinking. Not only has it lost its status as gateway to the huge EU market, its government is now hampered in negotiations over its future EU relationship by a loss of mandate.

In addition, on any free trade deals going with China, Britain will find itself at the back of the queue.

Brexit was bad enough. The British referendum last June that resulted in the decision to leave the EU means that in two years’ time, London will be offering access to a market of 65 million instead of 500 million.

And in last week’s British general election shocker, the Tory government lost its majority in Parliament. The lack of mandate and political uncertainty means the chances of a speedy Brexit deal that might preserve trade and other access to the vast EU market are now much slimmer.
Beijing will no doubt seek to make the best of the new realities.

But Britain is now a partner of doubtful value with little negotiating leverage. What has a market of 65 million people to offer China with its market of 1.3 billion in terms of trade or investment? And it is fanciful to imagine that Britain can negotiate a deal that will lift China’s effective barriers to entry to its domestic market when decades of intense pressure from the US and the EU has failed to accomplish such a feat.

In fact, Beijing may decide to recalibrate its strategy of giving London a head start in the scramble for pole position for China’s offshore renminbi business.

The Chinese had invested heavily (literally and metaphorically) in its strategy to partner with Britain – from the US$9 billion investment in the Hinckley Nuclear Plant to other investments which the Cameron government said added up to US$60 million.

And they chose London’s fledgling renminbi market to debut its first ever offshore Chinese currency sovereign bond – arguably giving London a head start in the scramble for the potentially lucrative offshore renminbi business.

Britain was seen at the time as a friend with benefits. – EU benefits. Access to the EU is the foundation of the new relationship Chinese president Xi Jinping said so in as many words during his high-profile visit to Britain two years ago – that he “hopes Britain, as an important member of the EU, can play an even more positive and constructive role in promoting the deepening development of China-EU ties.”

Britain was a leading promoter of renminbi internationalization and a cheerleader for China ranging from support for its Asia Infrastructure Investment Bank to a leading voice for granting it market economy status.

Britain may still be willing to play that role but its ability to deliver has been greatly reduced. And still up in the air is the longer term impact on the City’s position as a major financial centre in terms of effectiveness in promoting the renminbi.

Much depends on the final Brexit agreement. Unless a favourable deal is reached with the EU, London could end up losing its current quasi-monopoly role as the financial centre through which EU forex transactions are generally routed. British banks, brokerages and financial markets will become foreign financial institutions in the EU market and treated as such under EU laws and regulations.
Last week’s election might force British Prime Minister Theresa May to soften her stance on Brexit and retain more access to the EU market than would otherwise be possible.

But with a government looking for support in Parliament on an issue-by-issue basis, the outlook for a dream deal for Britain – and hence its role as gateway to the EU for China – is not rosy. Beijing has little reason not to play hardball in negotiations given Britain’s lack of leverage.

As for the good news. A member of the British Parliament pointed out recently that Brexit would provide an opportunity for British farmers to increase sales of chicken feet to China, because they are considered a delicacy in that country. Good luck with chicken feet.

BACKGROUNDER: WHY THE EU IS KEY

Let’s start with trade. If Britain remained in the EU, its support in Beijing’s push for market economy status in the single market would be invaluable.

Classification as a market economy is important to China. It affects how Chinese firms are penalized in anti-dumping cases. China has the most anti-dumping complaints brought against it by the United States, the European Union and, collectively, worldwide. Market economy status would make it more cumbersome to bring anti-dumping complaints, effectively lowering barriers to China’s EU exports.

The mood in the EU has been to maintain the status quo. Last year, the European parliament passed by an overwhelming majority a non-binding vote against recognizing China as a market economy. China has since launched a legal challenge against the EU (and the US) over their reluctance to treat it as a “market economy” under World Trade Organisation rules. An uneasy truce exists.

BEIJING’S GLOBAL PUSH

Then there is China’s globalization strategy. Britain has again proved itself an enthusiastic and successful supporter.

Britain took the lead in 2014 in being the first foreign sovereign issuer of debt denominated in the Chinese currency. Last year, it helped deliver a diplomatic coup for Beijing by breaking ranks with its EU allies to join the China-led Asian Infrastructure Investment Bank. That move arguably started a scramble by other once-reluctant European nations to follow suit.

And the British have been highly vocal in supporting China’s bid for reserve currency status for the renminbi in the IMF, which ended well.

Last year, China reciprocated by choosing London for the launch of its first offshore renminbi-denominated sovereign bond outside of Hong Kong. (Hong Kong operates under the One-Country-Two-Systems arrangement which allows its markets and financial institutions to claim offshore status.)

But quitting the EU will make Britain a much less of a “global” partner in future and thus less attractive to China’s in its external trade and investment strategies.