UK-China relations: from ‘golden era’ to the deep freeze

In the autumn of 2015, on a mission to Beijing that would pave the way for President Xi Jinping’s triumphal state visit to the UK that October, George Osborne employed a phrase that has come to haunt Sino-British relations. Looking to the future, the then chancellor hailed what he predicted would be a “golden decade”.

It was a time when Britain basked in Beijing’s favour. Six months previously, and despite strong US misgivings, the UK had become the first G7 member to sign up to China’s new competitor to the World Bank, the Asian Infrastructure Investment Bank.

That summer, as trans-Pacific tensions flared over such issues as China’s military build-up in the South China Sea, cyber-hacking and devaluation of the renminbi, officials said David Cameron’s Conservative government remained stubbornly “chillaxed”. In Washington there were rumblings about Britain’s “constant accommodation” of China.

Now Mr Osborne, surrounded by delegates from some of Britain’s most powerful companies, was in China to collect the pay-off in the form of inward investment.

Britain’s offer of a ‘path to citizenship’ for some Hong Kong citizens was seen as a ‘gross interference in China’s internal affairs © Anthony Wallace/AFP/Getty

On his shopping list was support for his pet project, the Northern Powerhouse, an investment programme designed to regenerate some of the depressed ex-industrial areas of the north of England. But there were plums too for China, such as the opportunity to participate in the UK’s new nuclear programme, ultimately by building a Chinese-designed reactor at Bradwell in Essex.

“No economy in the west,” Mr Osborne declared, “is as open to Chinese investment as the UK.”

Five years later, little remains of Mr Osborne’s glittering vision. Despite its straitened finances, the political shock of Brexit and a consequent need for global trade and investment every bit as urgent as Mr Osborne’s, Boris Johnson’s government is taking a much harder look at China.

After months of speculation, and not a little pressure from allies, led by the US, ministers are expected on Tuesday to ban the Chinese tech champion Huawei from participating in Britain’s 5G mobile networks on security grounds. Public opinion is supportive: according to a recent opinion poll, 83 per of those asked said they distrusted China. Many opponents now believe the proposed flagship nuclear investment will also be blocked.

UK prime minister Boris Johnson’s government is taking a much harder look at China under Xi Jinping © Getty

Bilateral relations, meanwhile, have descended into the freezer. Liu Xiaoming, China’s ambassador to Britain, warned last week that the UK would “have to bear the consequences” if it treated China “as an enemy”. Trade would suffer if Huawei were excluded from selling its equipment.

This came in addition to disputes over Hong Kong, and China’s introduction of a new security law in the former UK colony, seen by Britain as breaching the “one country, two systems” arrangement applied to the territory since the 1997 handover. Britain’s riposte, offering a “path to citizenship” for up to 3m Hong Kong citizens holding British National Overseas passports, was described by Mr Liu as “a gross interference in China’s internal affairs”.

Britain is not alone in seeking to recalibrate its relationship with Mr Xi’s China. Beijing’s more assertive approach to international affairs has startled governments around the world, impelling them to reappraise their ties with the country — from Australia and Japan to Germany.

But the switch is particularly uncomfortable for the UK. Not only did the government raise higher hopes than most about the potential benefits of closer ties with China, but as it sets out to build its post-Brexit future, many think it is in a weaker position to spurn the fastest growing major economy in the world.

Line chart of Rolling 12-month sum of trade (£bn) showing Growth in the UK's trade with China trade favours Beijing

Trashing policy

The widening row with Beijing alarms those once-influential voices that continue to champion engagement. According to Jim O’Neill, a former Treasury minister under Mr Cameron and one of the architects of the Northern Powerhouse strategy, the “impetus to cut ourselves off from China seems to me a bit like the weird self-imposed dilemmas that drove Brexit”.

He sees it as trashing a policy that has delivered significant economic gains, tripling Britain’s exports to China in the decade to 2018, and securing twice as much Chinese investment as the next European recipient. “If you think about Britain’s economic future, you have to think which parts of the world are going to be relevant. If we are too influenced by the US — especially given American competition with China — it doesn’t make sense,” Lord O’Neill says.

Critics argue that not only were many of these gains illusory, but they came at a cost in terms of dismaying Britain’s allies and weakening its security. Indeed, the entire Cameron-era policy betrayed a wholesale misunderstanding of China’s assertive direction under the leadership of Mr Xi. “It’s been called the golden era, but I prefer to call it the ‘golden error’,” says Charles Parton, a former diplomat and China expert.

Chinese nuclear operator CGN has backed the Hinkley Point project in Somerset, south England © PA

His views are shared by Nigel Inkster, director of transnational threats and political risk at the International Institute of Strategic Studies and former deputy chief of Britain’s MI6. “There was a misapprehension and a lot of wishful thinking about what China really was,” he says.

A Foreign Office strategy paper from 2009 talked about the idea of Britain using its status as a partner to push messages on human rights and internal reforms. The then foreign secretary, Labour’s David Miliband, said these were “integral” to the approach.

Soon after, Downing Street officials decided that ethics would muddy the sales pitch. The message was rammed home firmly when UK ministers met the Dalai Lama in 2011. An irate Beijing put London into diplomatic limbo for a year.

China, however, has not been so reticent about aggressively pushing its interests. One example is in higher education, where Beijing has exploited the UK sector’s growing dependence on Chinese students for revenue. According to research from Onward, a think-tank, at least 16 universities — including Imperial College and University College London, as well as Manchester — receive more than a fifth of their student income from Chinese sources.

Chart showing that Chinese investment in the UK has plummeted. Foreign direct investment $ billion, 2011-2019.

China also tries to use its influence in education to protect itself from criticism. Testimony to a UK parliamentary select committee in January 2019 describes how the Chinese embassy threatened to cut off the flow of Chinese students — and cash — to Oxford university unless the vice-chancellor, Louise Richardson, stopped Chris Patten, the chancellor and a former Hong Kong governor, from visiting the ex-British colony. She refused.

Collaboration in education has also become more sensitive since Chinese companies and state bodies reportedly began commissioning academics to do research which may have security implications. Three international academics specialising in military technology and AI academics looked at 17 research papers funded by Huawei. Of these 15 were deemed to have possible military applications, according to a report in the Daily Telegraph. Huawei disputes the analysis, claiming these were “common areas of research for telecoms suppliers”.

Mr Parton, now an adviser to the UK parliament’s foreign affairs committee, is not surprised that Beijing is taking a more confrontational tone. Under the chairmanship of Conservative MP Tom Tugendhat, the committee has been highly critical of the UK’s China policy. Along with the newly created China Research Group, which has 20 Tory MPs on its steering committee, it has led the charge in putting pressure on Mr Johnson to change tack.

Liu Xiaoming, China’s ambassador to Britain, has warned the UK will ‘have to bear the consequences’ if it treated China ‘as an enemy’ © Simon Dawson/Reuters

“The problem is not that Britain has the wrong policy,” he says. “We don’t really have one at all.”

The British approach has rested in part on the hope that Beijing would open itself progressively to western goods and influences. However, over the past decade, the government has been faced with growing evidence that China was actually moving in the opposite direction.

On the political front, the limited space that once existed for legal activists and non-governmental groups has eroded, especially since Mr Xi took power in 2013, while the media has become even more tightly-controlled.

The direction of industrial policy has also reduced the space for foreign companies in the Chinese economy. There was dismay in western capitals when in 2015 Beijing launched its “Made in China 2025” strategy, which aims to secure Chinese dominance in 10 high-tech sectors.

A recent study by the Henry Jackson Society, a think-tank, found that the UK was “strategically dependent” on China for 229 out of 831 categories of traded goods. This is defined as a situation where the country both imports more than 50 per cent of its supplies from China and Beijing controls more than 30 per cent of the global market for that good.

Chart showing where China invests in the UK. Value of foreign direct investment by sector, 2010-19 $ billion.

Dawning of a new era

For the Cameron administration, the pay-off was supposed to come in the form of Chinese investment. Beijing would also open its financial doors, offering the City of London access to a huge new market. But those hopes have dwindled. While China has snapped up UK assets, investing almost $80bn since 2010, around two-thirds of these acquisitions have been in finance and low tech sectors such as property and logistics. Meanwhile, high profile ventures such as the Sino-British stock connect system, a mechanism that allows UK-based investors access to trade in large Chinese stocks, has fizzled. Only two companies have listed on it since it launched last year.

A recent paper from Beijing-based US economist Michael Pettis raised doubts about the value of Chinese direct investment. Unlike Japan, which brought with it sophisticated manufacturing knowhow when it invested in British car plants in the 1980s, China has little but cash to offer.

“Chinese businesses are unlikely to bring technological or managerial advances that can improve the productivity of British economic activity or that can change the orientation of British industry,” Mr Pettis wrote.

Five years after Xi Jinping’s triumphal state visit to the UK, left, with David Cameron, bilateral ties have deteriorated over Hong Kong and cyber security © Kirsty Wigglesworth/Pool/Getty

The reality is that most of the technology flows are in the opposite direction. China’s thirst for high-tech UK companies, such as when it backed the acquisition of chipmaker Imagination Technologies in 2017, has prompted demands for a tougher process for vetting not only foreign investments but Chinese involvement in scientific research.

Sceptics claim this is not simply a question of security: Beijing’s reluctance to give western technology companies free access to its own markets gives Chinese companies an unfair advantage in bidding for western assets. More recently, concerns have been sharpened by the Covid-19 downturn and the possibility of Chinese enterprises snapping up distressed UK businesses.

“In a downturn, the difference between state-backed credit and the buying power of normal commercial investors will become starker, further strengthening the hand of state-owned enterprises,” says Mr Tugendhat.

Jim O’Neill, former Treasury minister: the ‘impetus to cut ourselves off from China seems to me a bit like the weird self-imposed dilemmas that drove Brexit’ © Simon Dawson/Bloomberg

Diplomatic doghouse

Some sceptics say there will be little cost in taking a tougher line with China. “Beijing still needs western knowhow, and access to financial markets,” says one China watcher. “And are they really going to take on the Chinese middle classes who want to send their children to study in English-speaking universities abroad?”

Mr Parton points to past spats between China and countries such as Norway, which incurred Beijing’s wrath by giving a Nobel Prize to dissident Liu Xiaobo, or South Korea, which was punished for installing a sophisticated air defence system. “Overall exports to China rose in every year in which these countries were in the diplomatic doghouse, although individual companies and sectors did suffer,” he adds.

This ignores the legacy of Britain’s involvement in Hong Kong, which has left the UK with considerable commercial and financial interests. HSBC and Standard Chartered are dependent on the former colony for a large part of their profits. Both have been quick to say they support the new national security law.

Chart showing which UK universities are the most reliant on fees from Chinese students. Estimated share of tuition fees from China-domiciled students, 2018-19, percentage figure.

Having welcomed Chinese businesses into strategic sectors of its economy, Britain faces awkward decisions over how and where to “decouple”. The Huawei case has exposed the government’s lack of a clear strategy in pulling back.

One problem for Mr Johnson with telecoms was the absence of a ready alternative to the Chinese group’s technology, and the fact that UK operators had already installed 3G and 4G Huawei kit. An ad hoc attempt to restrict the Chinese firm to “non-core” parts of the network with a maximum of 35 per cent participation is expected to be replaced by an outright ban.

Other legacies of the “golden era” may prove no less strewn with potholes. Take nuclear power, where Mr Cameron signed an official communique with Beijing in 2014 affirming a policy of so-called “progressive entry”. That meant that if the Chinese nuclear operator CGN helped back the Hinkley Point project, acquired consented sites and developed technology that passed muster with UK regulators, it would be free to build a plant.

CGN is well on the way to meeting these criteria. “The [UK] can always pull the plug if it really wants to,” says a consultant with knowledge of the process. “But having laid out a path for the Chinese to follow, Beijing would justifiably see it as an act of bad faith.”

All of which has raised worries among pro-engagement voices that Britain is being dragged needlessly into a conflict with Beijing. “We’re drifting into a trade war, while dressing it up as a security issue,” says Lord O’Neill.

At least 16 UK universities receive more than a fifth of their student income from Chinese sources © Alamy

In Mr Cameron’s time, he and Mr Osborne took security concerns with a pinch of salt. But the pendulum has now swung in the opposite direction. “We have moved on from saying ‘we can all make lots of money so off we go to the bank’,” says one diplomatic official.

But businessmen point to Britain’s struggling economy, weakened by the prolonged coronavirus lockdown and the uncertainties of Brexit, and ask whether the country can afford its newly-rediscovered principles.

“If we are going to cut ourselves off from our privileged access to the European market and if we recognise that the US economy operates in quite a protectionist way, are we going also to isolate ourselves from China, the biggest source of growth in the world?” asks Peter Mandelson, a former cabinet minister who now heads the Great Britain-China Centre. “Where are we going to make a living?”