(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves will become the most senior British official to visit Beijing in 7 years this weekend as she embarks on a mission to deepen economic ties with China against the backdrop of UK market turmoil that threatens to undermine her plans to spur growth domestically.
In a meeting in the Chinese capital with her counterpart He Lifeng, Reeves aims to revive high-level talks between the two countries that have been on hold since before the pandemic, to consider areas of potential cooperation — including on financial services. To reflect that priority, she’ll be joined by Bank of England Governor Andrew Bailey, UK Financial Conduct Authority Chief Executive Nikhil Rathi and senior figures from banks including HSBC Holdings Plc and Standard Chartered Plc.
Labour Prime Minister Keir Starmer is seeking to mend relations with the world’s second biggest economy after years of tensions under successive Conservative governments fueled by the pandemic, China’s crackdown on pro-democracy activists in Hong Kong and a series of cyberattacks and spying operations in Britain that UK officials have blamed on the Chinese. The British premier wants to promote growth domestically by encouraging foreign investment and boosting trade, and has described the relationship he’s seeking with China as based on “three Cs”: Cooperate, challenge and compete.
Proposals that British officials have been drawing up for closer links with China include a bilateral dialog on capital markets and cooperation on financial regulation.
“With Labour in charge, they are more pragmatic,” said Henry Wang Huiyao, founder of the Center for China and Globalization research group in Beijing, describing the UK’s position and predicting an improvement in the relationship. “They are looking for more economic interests.”
The two biggest opposition parties in the House of Commons — the Tories and Liberal Democrats — both called on Reeves to cancel her visit in order to focus on market turmoil that hit the UK. A selloff has seen the pound drop to its lowest in more than a year and long-dated gilt yields climb to the highest since 1998 — a rise in borrowing costs that may force Reeves into further tax rises or spending cuts in order to meet her self-imposed fiscal rules.
That market backdrop and the UK’s fragile public finances reinforce the need for Reeves and Starmer to deliver on their promise to spur growth in the UK economy. At her budget in October, the chancellor gave herself just £9.9 billion ($12.2 billion) of headroom to meet her key fiscal rule requiring day-to-day government spending to be covered by tax receipts, and economists predict that margin has all but evaporated amid the recent rise in borrowing costs.
The push for warmer economic relations with China also carries political risk for Starmer, who’s simultaneously trying to succor favor with US President-elect Donald Trump’s incoming administration, which has vowed to slap tariffs as high as 60% on Chinese imports as part of a wider hawkish stance toward the Asian nation. Moreover, a recent spying scandal involving a Chinese businessman with close links to Prince Andrew, King Charles III’s brother, highlighted the threat to Britain posed by Chinese state-backed actors.
For China, the meeting with Reeves comes as it is working to better relations with US partners ahead of Trump’s return to the White House. President Xi Jinping’s government has made diplomatic overtures to steady ties with Japan, India and Australia in recent months, as Beijing braces for a possible tariff war with the US that could leave it seeking shelter in other markets.
Reeves is the most senior UK minister to visit China since former Prime Minister Theresa May in 2018. The formal economic talks between the UK and China are the first since 2019, when then chancellor Philip Hammond met former Chinese vice premier Hu Chunhua in London. The two sides haven’t held such talks since, amid the pandemic, the fallout over Hong Kong, and a more hostile China stance adopted by the Tories.
Starmer met with Chinese President Xi Jinping at the Group of 20 summit in Brazil last year and Foreign Secretary David Lammy traveled to Beijing in October. Lammy’s Foreign Office is encouraging Reeves to meet her Chinese counterpart twice a year in order to strengthen ties, similar to the regularity at which US Treasury Secretary Janet Yellen met with the Beijing administration, according to people familiar with the matter who asked not to be identified detailing private advice.
The UK approach differs from that of the US and European Union, which are both unleashing trade curbs on China amid complaints that a glut of Chinese exports stoked by unfair state subsidies are flooding their markets. Starmer’s ministers have so far steered clear of publicly upbraiding China on the thorny topic so-called overcapacity.
“When it comes to China, progressive realism means consistency, not oscillation,” Lammy said on Thursday in a speech in London. That is “pragmatic engagement to cooperate with China where we can, such as on trade, climate, global health or AI regulation, but also very robust dialog and challenge where there are clear threats: sanctioning Chinese firms who supply technologies to support Putin’s war, working for the release of Jimmy Lai, calling for an end to human rights abuses in Xinjiang, an end to cyber attacks on the UK and an end to sanctions on our parliamentarians.”
The China trip follows Reeves’ recent participation in a Eurogroup meeting of EU finance ministers in Brussels, the first attended by a British chancellor since the UK left the bloc, another case of the Starmer administration seeking to reset relations with a key economic partner. After her trip to China, Reeves is expected to give a speech in the coming weeks setting out her vision for growth and seeking to reassure bond markets about her financial plans.
--With assistance from Ellen Milligan, Colum Murphy and Jenni Marsh.
