Unpicking the trade-offs: eight key takeaways from the UK-China Financial Dialogue

Background: The UK Chancellor Rachel Reeves recently travelled to Beijing and restarted the UK-China Financial Dialogue. The UK-China Financial Dialogue was established in 2008 by the Brown Government and continued by the subsequent governments of David Cameron and Theresa May. The UK-China Financial Dialogue was suspended in 2019 as a result of the ongoing crackdown on human rights in Hong Kong.

This note has been put together by CSRI and is based on an analysis of the outcomes document of the UK-China Financial Dialogue published by HM Treasury. For a deeper understanding of the context leading up to the event, we encourage readers to read our previous analysis prior to the UK-China Financial Dialogue trip on 10 January 2025.  

1.

Pre-empting the UK-China audit. Rachel Reeves’s visit to Beijing and the resumption of the UK-China Financial Dialogue has pre-empted the China audit currently being undertaken by the Foreign, Commonwealth, and Development Office with both sides effectively readopting the 2010 Osborne/Cameron “Golden Era” framework for engagement. The floodgates for other government departments have opened up for their own pending bilateral dialogues:

•  China-UK Energy Dialogue (Department for Energy and Climate Change).

• 14th UK-China Joint Economic and Trade Commission (Department for Business and International Trade). 

• 2nd UK-China Industrial Cooperation dialogue (Department for Business and International Trade).

This does lead to the question of why the current government believes it will be more successful in its engagement with China, gaining Chinese investment, and spurring UK economic growth than the previous governments of Brown, Cameron, May, and Johnson.

2.

The PRC narrative of these talks. The Chinese Ambassador to the UK has touted the UK Government’s engagement as a model for other European countries to emulate. Chinese commentators, think tanks and academics close have also sought to portray these talks as linked to the election of Donald Trump and part of a wider shift of key US partners seeking to deepen relations with China ahead of his return to the Oval Office.

Of course, this narrative is slightly misleading as the UK-China Financial Dialogue and Reeve’s trip was planned well before the US elections. At a time when Donald Trump’s return to the presidency seemed unlikely.

3. 

The bankers strike back. These talks have delivered heavily for the UK banking community including signed agreements for HSBC and Standard Chartered to increase their access to China’s financial markets and the creation of a pension symposium designed to give UK banks access to China’s growing private pensions markets. The Chancellor’s willingness to lobby the Chinese government on behalf of these banks comes despite HSBC and Standard Chartered taking policies directly at odds with the UK government’s position on the crackdown in Hong Kong. Both banks have publicly supported the National Security Law, which the UK government has labelled as an ongoing breach of the Sino-British Joint Declaration, while HSBC has complied with Hong Kong government requests to freeze the assets of pro-democracy activists fleeing abroad.

The Chinese Embassy in the UK spends a significant amount of its time on outreach to interlocutors in the Square Mile working on the theory that by influencing bankers who in turn influence the Treasury they can foster a UK-China policy more to their liking. So far this strategy appears to be working with both sides giving their blessing to the continuation of the UK-China Green Finance Taskforce, delivered by the City of London Corporation. Banks that have supported closer engagement with China fund some of the most prominent foreign policy discussions on China in Westminster, including the government’s own flagship civil servant training scheme. Meanwhile, the China Britain Business Council, a lobbying group which has worked closely with the Chinese Communist Party’s All-China Federation of Industry and Commerce, was entrusted with hosting the Foreign Secretary on his visit to Shanghai last year.   

Given the resumption of these investment talks this campaign appears to have been successful. Not least, because of the need for the UK Chancellor to continue to keep the banking community on the side to maintain the economic credibility of the government at a time when the UK economy is facing increasing turbulence.

4.

UK-China pension symposium as Hong Kongers have billions of pounds of pension funds still frozen. One outcome of the financial talks has been the agreement to establish a UK-China pension symposium, which for the reasons stated above are primarily at the request of the UK banking community. However, the fact that this has been agreed at a time when the Chinese authorities have frozen around £3bn worth of Mandatory Provident Fund pension savings from Hong Kongers who have moved to the UK under the British National Overseas Visa scheme is concerning.

At the very least, the UK Government should use this symposium as a forum to encourage the Chinese Government to unfreeze and return these pension funds to Hong Kongers living in the UK. The alternative is that these developments could leave UK banks more exposed to requests for the freezing of pension funds in Hong Kong from China.

5.

The revival of the UK-China Stock Connect and joint listings. A key takeaway from these investment talks was the reannouncement of the UK-China Stock Connect and the promotion of Chinese companies jointly listing on the London Stock Exchange. Since the UK-China Stock Connect was announced in the UK-China Financial Dialogue in 2019 only six Chinese companies have listed under the connect.

From both sides, the rationale behind this reannouncement is the hope that companies in China or with Chinese leadership based outside of China (SHEIN and Tik Tok for example) who are unable to list in the USA might elect to list in London instead, which has a weaker regulatory regime and a government keen to support new IPOs.

The idea of connecting the City of London to Shanghai through a stock connect was built on the basis that China and the UK’s financial markets were converging in terms of transparency, rules, and regulations. That is no longer the case. The Chinese authorities are continuing to reduce market transparency by cracking down on foreign due diligence companies and removing public data regarding China’s economy. At the direction of the authorities, Chinese companies continue to remove the China risk section from IPO prospectuses and hide their governance structures (which generally include influential roles for CCP branches). It is increasingly difficult for companies to audit their supply chains in China, as VW has recently found out, and there remains little transparency regarding high valuations and potentially high levels of fraud within Chinese companies. Take the case of Luckin Coffee which was adjudged by US regulators to have been given a high valuation with fraudulent accounts and continues to have a high valuation in China.

At the same time, China’s stock markets are facing numerous challenges, with Shenzhen, Shanghai, and even Hong Kong’s Stock Exchange experiencing significant lows. It is unclear what benefit there is for the City of London to deepen its links with China’s financial markets when they increasingly sit within an information black box.

There is no guarantee that companies are being truthful regarding their earnings and for investors there is little recourse to hold Chinese companies accountable or to gain financial compensation with their headquarters and assets physically in China.

6. 

The implications of a working group on financial crime for transnational repression. The creation of a working group on financial crime is a victory for the Chinese side, which has a legitimate need for support from the UK to repatriate and recover funds from Chinese nationals who have committed financial crimes and absconded from justice. This includes the recent case of the UK police seizing over £3bn in bitcoin from a fraudster who moved from China to the UK.

Given China’s interest in the repatriation of Chinese nationals involved in financial crime and stolen funds this is an area where the UK has significant leverage when it comes to offering its cooperation. Sadly, that appears to have been largely given up in this round of financial talks.

Furthermore, there is a likelihood that this working group on financial crime will be used by the Chinese Government to demand access and the freezing of bank accounts of preeminent Chinese dissidents under the pretext of combatting money laundering.

The Chinese authorities already have a track record of accusing dissidents of financial crime as a justification for freezing their assets in China and Hong Kong and more broadly targeting its own nationals in anti-corruption initiatives which have raised fears of political persecution.

7.

The total figure of £600m over five years shows the limited appetite for new investment. The total value of the new agreements under the UK-China Financial Dialogue is just £600m over five years, which breaks down to just £120m a year. This figure pales compared to the USA which accounts for nearly £1 in every £3 of foreign direct investment into the UK. Similarly, in the same week that Rachel Reeves returned from Beijing one Polish company InPost announced that it was investing £600m in the UK to scale up its operations by 2029.

The small areas of agreement include increasing Chinese market access for UK pet, fertiliser, wool, whiskey, cars, and pork exports. While positive, this reflects the reality that the opportunity that China presents to UK exporters is largely limited to a few sectors.

It should also be noted that promises of reciprocity and market access for UK goods and service providers have not materialised either, with the UK's market share in China stagnant at 1.6% in 2022, barely unchanged since 2014 when it was 1.5%. 

8.

Establishing London as an RMB internationalisation centre and China’s Cross-Border Interbank Payment System. Both sides agreed to continue to develop London as the largest centre for the internationalisation of the RMB outside of China. This approach makes sense given that London is an international currency trading hub. As it stands the only restrictions on the trading of RMB are the capital controls set by the Chinese Government.

Where things may get trickier is the continued collaboration between China Development Bank and Standard Chartered to offer cross-border RMB cooperation in third countries. Both HSBC and Standard Chartered recently joined China’s Cross-border Interbank Payment System to clear RMB cross-border payments.  Given allegations that China has used RMB cross-border trading and its Cross-Border Interbank Payment System to help Russia bypass international sanctions, there may be broader concerns that countries will use these arrangements to evade sanctions and undermine the dominance of the US dollar as the world’s global reserve currency. 

RMB clearing in the City of London is primarily routed through the branches of the China Construction Bank and the Bank of China. The Bank of China has been caught up in the recent crackdown on corruption in financial services in China with its ex-Chairman jailed for life. It is worth noting that rather than set up separate subsidiaries in the UK, these China state banks elected to openbranches which remain part of the parent entity back in China. This means that the branch is in effect regulated in China and subject to lower levels of oversight and transparency.

Written by Sam Goodman, with support from CSRI’s economic advisors.