UK-China relations are set for a pragmatic restart

What’s happened?

On January 11th-13th the UK chancellor of the exchequer, Rachel Reeves, made a three-day visit to China. She and China’s vice-premier, He Lifeng, co-hosted the UK-China Economic and Financial Dialogue, which was revived after a five-year hiatus.

Why does it matter?

The increasing re-engagement between the UK and China serves the interests of both countries. The Labour Party, which took office in July 2024, aims to improve the UK’s ties with China, which have deteriorated in recent years as a result of bilateral disputes over the latter’s human-rights record and covid-19. The UK is one of the few European countries not to have been granted unilateral visa-free entry by China, joining the likes of Sweden, the Czech Republic and Lithuania. Meanwhile, China has continued to extend overtures to a number of Western countries, given the expected complication of US-China relations by the return of Donald Trump as US president.

However, lingering strains will prevent a substantial upgrade in UK-China relations. Human rights will remain a major stumbling block, as was evident when the UK prime minister, Keir Starmer, and the Chinese president, Xi Jinping, met in Brazil last November, in the first meeting between the UK and Chinese leaders in six years.

During her visit, Ms Reeves faced pressure at home from Labour members of parliament to demand the release of Jimmy Lai, a jailed pro-independence media mogul in Hong Kong. The deterioration of civil and political rights in Hong Kong will challenge efforts to rehabilitate UK-China ties. In particular, the UK is doubtful over China’s commitment to the Sino-British Joint Declaration (the agreement meant to safeguard Hong Kong’s autonomy until 2047, which China has downplayed in recent years). The Ukraine war will be another lasting source of disagreement, even as China adopts a more cautious relationship with Russia in the coming years. Mr Trump may also exert pressure on Western allies to take a tougher stance on China, so the outlook for the UK’s reset with China remains uncertain.

We expect bilateral co-operation to expand gradually in a pragmatic way, with an initial emphasis on easy opportunities. Financial services will be a focus area, for example, characterised by China’s plan to issue a sovereign green bond in London, the potential facilitation of listings in London by Chinese companies and the offer of expanded market access in China for UK financial institutions. We also believe that UK banks will be well positioned to serve a rising number of Chinese businesses investing overseas. Food and agriculture may also be among the major beneficiaries, following arrangements to facilitate bilateral trade in sectors such as pet food, pork and poultry.

Nevertheless, the overall economic benefits to the UK from deeper bilateral engagement will be small. Ms Reeves claimed that these initiatives would amount to £600m (US$732m) over five years, delivering up to £1bn in the UK economy, but this represents a small fraction of both the UK economy and UK-China trade. China’s efforts to woo British businesses—including financial firms—are also unlikely to mitigate perceptions of its challenging business environment or facilitate a significant recovery in foreign direct investment. Based on past experience, future market access pledges will remain restricted by the persistence of quiet barriers, including restrictions on the free flow of capital and information, as well as difficulties in navigating licensing and bureaucratic regimes that disproportionately favour domestic enterprises.

What next?

The re-engagement will still create room for some growth in UK-China trade and investment. This will be most evident in the UK’s relative independence in its trade approach: it has not, for example, followed the US, the EU and Canada in imposing tariffs against Chinese electric vehicles. This should give it an advantageous position for attracting Chinese investment. However, we do not expect China to grant unilateral visa-free treatment to UK citizens until late 2025 at the earliest, unless bilateral ties improve more significantly than we currently expect, and upcoming negotiations with Mr Trump over US import tariffs raise the risk of further strains in the UK-China relationship.

The analysis and forecasts presented in this article are drawn from EIU’s Country Analysis service. This comprehensive solution offers essential insights into the political and economic outlook of nearly 200 countries, empowering businesses to manage risks and develop effective strategies.