Expectations and Political Landmines: What outcomes to look for as the UK-China Financial Dialogues resume?

Background: The UK Chancellor Rachel Reeves will travel to Beijing from 10-12 January 2025 to restart 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 of previous rounds of the UK-China Financial Dialogue.

Green investment, energy, and national security. Given that it has been briefed heavily by the UK Government that the financial dialogue will include commitments to bolster Chinese investment into green energy projects as part of its plans to make the UK a “clean energy superpower, it will be important to see whether this investment is in sensitive sectors of the UK economy, how it interacts with the National Security and Investment Act, and how the Government will include safeguards to protect national security. 

For reference, the National Security and Investment Act covers 17 economic sectors which includes energy, civil nuclear, and transport. Chinese investment in the UK’s critical energy infrastructure could lead to increased dependency on the PRC and could be weaponised to force the Government to soften its stance on human rights, Taiwan, and other areas of core interest to the PRC. It would also offer the PRC a treasure trove of data which could potentially allow the PRC to sabotage or immobilise the UK’s energy grid in the future (in the event of a deterioration of relations).

It is worth noting that there is a distinction between a small Chinese stake in a green energy project run by a UK or trusted provider and an agreement which would entrust Chinese companies with running critical energy infrastructure. As is the background of the Chinese entity investing in the UK energy sector, including whether it is a sovereign wealth fund, a state-owned enterprise, or a ‘private’ company.  

The previous government spent £700m buying out China Nuclear General from the Sizewell C nuclear energy project. Therefore, it is important that clear redlines are set out to avoid significant amounts of taxpayer money being spent in the future to remove Chinese involvement from critical national infrastructure.

Chinese investment in HS2 and rail. Similar questions will be raised about any agreement that might see Chinese investment in the UK’s transport sector which is another sector covered by the National Security and Investment Act. 

The Government may revive previous plans floated to encourage Chinese investment in HS2. As with the UK’s energy grid, this investment could create a dependency that could be weaponised, would provide a treasure trove of data that could be used for intelligence, and might potentially allow the PRC in the future to sabotage the UK’s transport network. 

Space collaboration. Previous financial dialogues included commitments for the UK and China to collaborate on deep space exploration, satellites, and a joint space science and technology laboratory. France currently has a cooperation agreement with China on space cooperation and last year they launched a joint satellite. It will therefore be interesting to see if the UK follows France particularly at a time when concerns are being raised about China’s space military capabilities and is creating an alternative Global Positioning System.

UN principles and China’s support for Russia’s war in Ukraine. Given growing concern in Europe regarding evidence that China is providing not just financial but military aid to Russia’s war in Ukraine, it is an open question whether these talks will see a commitment to the UN Charter which Russia’s war in Ukraine violates. 

Support for the WTO and excess manufacturing output. Similarly, it will be worth looking out for any statements regarding support for the WTO trading system at a time when the USA, Canada, and the European Union have introduced tariffs on Chinese exports in response to claims of excess manufacturing.

The expansion of the AIIB to London. A rumoured outcome of the financial talks will be the establishment of an Asian Infrastructure Investment Bank (AIIB) regional hub in the City of London. Given the recent controversy regarding the alleged influence of the Chinese Communist Party within the bank and criticism including from UN Special Rapporteurs that some of the projects funded by the development bank have undermined human rights, this may raise fresh questions about the UK’s membership of the Chinese multilateral bank.

Resurrecting joint London-Shanghai Stock Exchange listings. Despite China’s economy becoming an information black box for foreign investors with the removal of open-source financial data, the ending of auditing contracts for the Big Four, the crackdown on the financial services sector in China, and the raiding of foreign due-diligence companies, it is likely these talks will resurrect the idea of joint London-Shanghai Stock Exchange listings. The hope is that London can become an attractive alternative listing centre for Chinese companies shut out of the New York Stock Exchange for failing to meet their listing requirements.

RMB Internalization and China’s alternative payments system. A long-term outcome of the UK-China Financial Dialogue has been the development of London as a hub for RMB internationalisation. It is very likely that this round of talks will see further commitments to expand RMB trading in the City and to cement this status. In past dialogues, the UK government has supported China’s development of an alternative to the SWIFT payments system. Given allegations that this has been used by Russia to bypass Western sanctions it will be interesting to see if any language about China’s alternative payments system (Cross-Border Interbank Payment System) will be included in the outcome of these talks.

Pension and tax information exchange and transnational repression. A likely outcome of these talks briefed to the press from the UK side is a commitment for both sides to exchange pension and tax information to tackle financial fraud and money laundering. In the past, concerns have been raised about the sharing of tax information of dissidents and Hong Kongers in the UK with the Chinese authorities.  The Chinese Government also continues to block billions of pounds of pension money from leaving Hong Kong. It therefore will be important to see how an agreement on this would be balanced against the Government’s commitment to tackle transnational repression and resolve the freezing of Hong Kongers Mandatory Provident Fund savings.

The Belt and Road Elephant in the Room. Previous financial dialogues saw the UK Government not only publicly support China’s One Belt and One Road Initiative but commit to using the City of London to marshal private investment for Belt and Road projects. Given previous G7 statements criticising the Belt and Road, financial commitments to create an alternative, and China pivoting the Belt and Road to “smaller greener projects”, it is worth watching to see if the UK Government changes its position once again on China’s flagship development program. 

ODA and development cooperation with China. Outside of the UK’s membership of the AIIB, the UK has cut its funding of Overseas Development Aid (ODA) projects in China to just £8m in 2023. Despite the political push to end UK aid to China, these talks could lead to a development aid partnership with China in third countries. This would be in line with previous financial dialogues where both sides pledged to work together on development aid.

Technology partnerships in AI, quantum computing, and semiconductor chips. At a time when the USA has introduced new restrictions on outbound investments into Chinese companies working in areas of emerging technology and the EU is still considering its own outbound investment screening regime it is worth looking to see if the dialogue includes a commitment to partner in the development of technology or the financing of technology in these sensitive areas.

Health cooperation. Previous financial dialogues have seen a commitment to collaboration in sharing information on respective social care systems, support for the World Health Organization, and mutual regulation of traditional Chinese medicine. At a time when China is still refusing to provide data on the origins of COVID-19 to the WHO, it will be interesting to see whether language on health cooperation references pandemics and the WHO.

UK business groups involved in any financial dialogue working groups. Previous financial dialogues had working groups which included organisations in the UK business community. Given reports of some of these groups, like the 48 Group Club being allegedly infiltrated by the United Front Working Group and groups like the CityUK having reportedly lobbied against a foreign agents' register, it will be worth scrutinising the membership of these working groups.

References

Article on launching of first UK-China Economic and Financial Dialogue (2009): 

https://www.chinadaily.com.cn/china/2008-04/16/content_6620017.htm 

Press release from 3rd UK-China Economic and Financial Dialogue (2010) https://www.gov.uk/government/news/chancellors-visit-to-asia (Policy outcomes document taken down from of Treasury website)

Press release from 4th UK-China Economic and Financial Dialogue (2011) https://www.gov.uk/government/news/chancellor-hosts-fourth-uk-china-economic-and-financial-dialogue--2 (Policy outcomes document taken off of Treasury website)

Policy outcomes from 5th UK-China Economic and Financial Dialogue (2013): https://assets.publishing.service.gov.uk/media/5a75856340f0b6360e474c0b/UK_Chinese_EFD_outcomes_paper.pdf 

Policy outcomes from 6th UK-China Economic and Financial Dialogue (2014): https://assets.publishing.service.gov.uk/media/5a75bc66ed915d6faf2b54b4/UK-China_policy_outcomes.pdf 

Policy outcomes from 7th UK-China Economic and Financial Dialogue (2015): https://assets.publishing.service.gov.uk/media/5a8180a240f0b62302697a83/EFD_combined_POP__21_Sept_web.pdf 

Policy outcomes from 8th UK-China Economic and Financial Dialogue (2016): https://assets.publishing.service.gov.uk/media/5a7f59a2e5274a2e8ab4ba53/UK-China_8th_EFD_policy_outcomes_paper.pdf 

Policy outcomes from 9th UK-China Economic and Financial Dialogue (2017): https://www.gov.uk/government/publications/uk-china-9th-economic-and-financial-dialogue-policy-outcomes 

Policy outcomes from 10th UK-China Economic and Financial Dialogue (2019): https://www.gov.uk/government/publications/uk-china-10th-economic-and-financial-dialogue-policy-outcomes/uk-china-10th-economic-and-financial-dialogue-policy-outcomes