China and the UK

There has been much attention given over to China in recent weeks, following the visit of President XI and the signing of many deals between China and the UK, not least in the energy sector where China (and France) will be financing and largely building a generation of nuclear power plants in the UK. The Times commented that it will not be long before a Midlands UK businessman or woman could breakfast on Chinese cereal (Weetabix), travel to London on a partly Chinese-financed railway (HS2) for a meeting in a Chinese office development (China has invested heavily in UK property), then make a call home on a Chinese mobile phone and arrange to take the family out to a Chinese owned pizza chain (PizzaExpress) to discuss the possible purchase of a Sunseeker Yacht, a company acquired by China in June 2013. It is also worth noting that Chinese tourists to the UK have doubled between 2009 and 2014 to 185,000 and there were 10,468 Chinese pupils and 87,895 students at UK  independent schools and  universities respectively in 2014. By 2030 the World Bank estimates that 30% of global investment will come from China, the year it is estimated that it will become the world’s largest economy.

Currently China provides 9% of our imports of goods but we are only their 7th biggest source of their imports and our 22nd largest export market for goods so there is considerable potential for growth there. Given the UK Government’s intention to move to a budget surplus and not to borrow even to invest, China provides a valuable source of finance for infrastructure investment.

However all is not well at home with recent Chinese growth figures falling to 6.9% in the third quarter, slightly below the target rate of 7%. There has been some doubt expressed about the validity of this figure and some economists suggest that a true figure would be significantly lower, not least because nominal growth was only 6.2% implying a 0.7% deflation in China over the period which some commentators suggest is inaccurate. An alternative measure looks at statistics for electricity, bank lending and rail cargo which suggests growth of between 3% – 4%. Such discrepancies put the UK’s recent fall in GDP growth to 0.5% into perspective.

Macroeconomic Musings 27th September – the UK’s international trade

We should not be surprised at George Osborne’s visit to China. The current state of the UK’s external finances is not great with a current account deficit record last year of £106bn. This has to be financed and inward direct investment has been important in doing this in recent years. The Chancellor is hoping to attract some of the spare Chinese cash into major investment projects such as HS2 which will offset part of the current account deficit. (Such transactions will be recorded on the financial account).. This is an interesting reflection of the rise of the Chinese economy because, until recently, the net flow of funds was from the UK to China but it switched in 2012.

China is currently the sixth largest market for UK exports but there is considerable room for improvement – a second reason for the Chancellor’s visit. At present we provide 1.3% of their import of goods so even maintaining this percentage as China grows, will boost the UK economy. Another area of UK exports to China which should grow is ‘financial services’ as Chinese companies need to borrow and seek access to world capital markets and the rest of the world seeks to acquire yuan.

One company which shows the strength of the UK economy today is Brompton Bicycle – the up-market folding bicycle, with prices up to £1,700. The UK mass bicycle industry has largely disappeared as companies such as Raleigh have moved production to Asia. Brompton currently manufactures 50,000 machines pa and has a turnover of £30m on which it makes a 10% profit. Its major export markets are Germany, South Korea, Holland and Belgium and, both at home and abroad, it focusses on quality, stressing the hand-made element in its production process, and the way consumers can design their own model. However because of high demand, particularly from overseas, it is expanding its capacity this year to produce 100,000 machines.

To investigate them further, try their website:

Old Brentwood Sir Charlie Bean, has been in the news  since he is undertaking a review into government statistics. A major issue for him is how the ONS should take account of recent changes in the way we purchase goods and services.For example in the past one booked a holiday at a travel agent whose commission was counted in the GDP. Now we often  do it ourselves on-line so it appears that GDP has gone down because the commission has been lost.