China: improving trade links will take time

China: improving trade links will take time

China’s changing economic landscape

  • Population: 1.35 billion
  • GDP (nominal): .2 trillion (just under three and a half times the UK’s GDP of .4 trillion)
  • GDP (PPP): .4 trillion (more than 5 times larger than UK GDP of .3 trillion)
  • GDP per capita (PPP): ,200 (¼ of UK’s ,900)
  • GDP growth over 2012-18: 8.4% p.a.[20]
  • UK exports to China 2012:  £13.7 billion (2.8% of UK total exports) [21]

China has witnessed spectacular economic growth in recent years. By 2018, China’s share of global GDP in purchasing power parity terms is expected to reach 28% – which is larger than the US economy and up from 5% in 1990.[22]

  • Urbanisation is driving a huge increase in demand: 50% of China’s population live in urban areas and the rate of urbanisation is increasing at nearly 3% per year.[23]
  • 125 Chinese cities are already ranked among the 600 largest urban economies in the world. By 2028, another 100 are expected to join this list, replacing cities in Europe and North America, and these 225 cities alone will contribute 29% of global growth over the next 15 years.[24]
  • China is expected to provide half of the global growth in middle-class consumption with a potential market worth over ,457 billion by 2022.[25]

The UK is starting from a low base, but it is well positioned to improve trading links as China changes

The UK’s share of the Chinese market has fallen to around 1% over the past decade and has continued to lag behind France, Italy and Germany. UK exports to China in 2011 were less than a third of France’s and only around 15% of the comparable figure for Germany.

This, in part, is because the UK’s export mix is not particularly well aligned with China’s fastest-growing sectors today. In 2011, 32% of China’s imports were fuels, metals and other raw materials,; with a further 28% related to machinery and electrical goods; only 12% were services.[26] But the UK was supplying mainly the latter: over a quarter of UK exports to China were services in 2011, with machinery and electrical goods accounting for only 19% of UK exports and raw materials only 16%.

Despite this, the UK’s economy is well positioned to increase its participation in the Chinese market in future years. As China becomes wealthier, its economy will become more like that of other developed countries, replacing imports of industrial goods with imports of higher-value goods and services of which the UK is a leading exporter.

UK-China trade links are already strengthening. As of the end of 2012, the U.K. was estimated to be the second-largest EU investor in China, after Germany, with a cumulative direct investment value of US.76 billion.[27] Furthermore, the UK is making encouraging progress in attracting Chinese investment to Britain: in 2012, the UK was the 4th most popular destination for Chinese outward investment - behind Hong Kong, the US, and Kazakhstan - up from 8th place in 2011 and 21st place in 2010. The overall stock of Chinese investment in the U.K. is estimated to be around US.9 billion.[28]

For many British firms, China is already a major market

Pinewood Shepperton has entered into a 50/50 joint venture agreement with Seven Stars Media, one of the largest and fastest-growing media conglomerates in China.

BP has been investing in China since the early 1970s, investing around US billion to date. BP currently operates 17 joint ventures and wholly-owned businesses in China with activities including exploration, petrochemicals manufacturing and marketing, aviation fuel supply, and oil product and lubricant retailing.

The University of Nottingham was the first Sino-UK University to operate independently in China, with over 5,000 international students now studying British degrees at its campus in Ningbo.

BT is emerging as a key player in IT consultancy services in the Chinese health sector, showing strong revenue growth in the past year and positioning itself well for future new business.

Airbus has seen demand from China rise from 6% of their planes in 1995 to 48% of the market today.

WPP: the London-based group is the world’s largest advertising and marketing services company, employing 170,000 people (including associates) in 110 countries. The group has a strong strategic focus on the BRICs and other fast-growing economies. Its companies have been active in China for many years, and WPP first held a board meeting in the country in 1989. China is now WPP's third largest market after the US and the UK, with revenues of .4 billion and 14,000 people.

But significant barriers to entry remain

For companies looking to operate in China, there remain significant barriers:

  • The increasing competitiveness of Chinese companies – in attracting global talent and investment, as well as fostering innovation – is making it harder for UK firms to break into the Chinese market. The global aspirations of Chinese companies and their ability to compete in international markets is increasingly apparent.
  • Issues around the security of intellectual property remain a major concern for foreign companies operating in China. The threat of cybercrime and cyber espionage has been regularly highlighted by companies as a significant challenge.
  • Preferential treatment afforded to domestic firms – through a variety of means including state-owned enterprises, market access barriers, FDI restrictions and licensing procedures – serve to restrict UK business opportunities for trade and investment in key sectors and in public procurement.

Progress in tackling some of these issues is slowly being made, but international pressure will be a vital driver of further improvements to highlight the business and societal benefits of a more transparent business climate.


References

[20] IMF World Economic Outlook, April 2013

[21] ONS Pink Book 2013

[22] IMF World Economic Outlook, April 2013

[23] CIA World Factbook

[24] MGI Cityscope 1.1

[25] OECD Development Centre

[26] FCO Econmics Union, UK Exports to China: Now and in the future, January 2013

[27] Foreign and Commonwealth Office, British Embassy in Beijing, China in Numbers, October 2013

[28] Foreign and Commonwealth Office, British Embassy in Beijing, China in Numbers, October 2013