21st Century Sino-UK Relations Look Promising Despite Unsettled History.

A Brief History

For nearly a century, China’s relationship with Britain and its empire was politically its most important, setting the agenda for its relations with other powers; for better or for worse. Major British trading firms and financial institutions which emerged in the nineteenth century still play key roles in East Asia today. It is safe to say that, historically, the relationship between the two great states has been brittle and in some periods hostile. However, the current relations appear to be favorable and as China increases its interests across the world, its relationship with Britain again may play a crucial role in shaping its future.

The Opium Wars

The first major events in the relationship between the UK and China emerged in the early nineteenth century with the British using parts of China as centres for the drug trade. This was the prelude to what was known as the First Opium War (1839-42) in which the British revolted against opium controls and seizures by the Chinese government. This led to the treaty of Nanking in 1842 which gave the British the rights to open coastal ports and take charge of Hong Kong Island. The British demands included opening all of China to British merchants, legalising the opium trade, exempting foreign imports from internal transit duties, suppression of piracy, regulation of the coolie trade, permission for a British ambassador to reside in Beijing, and for the English-language version of all treaties to take precedence over the Chinese. The failure of this treaty led to the Second Opium War (1856-60) which saw the British and the French fight full on against the Qing dynasty of China. British forces also fought against the Chinese in the Korean War in the 1950’s.

Despite the dark periods in the history of the two nations, they have not always been enemies. During the Second World War China and Britain fought side-by-side against the Japanese. Also, more recently, Sino-UK relations have been very positive based on mutual benefits in terms of trade and commerce. In 1984 the Sino-British Declaration was signed and in 1997 Britain relinquished its control over Hong Kong. Since these events China and the UK have formed a strategic partnership and relations have entered a phase of ‘maturity’.

London as an ‘Off-Shore Hub’ for Yuan trading?

This relationship seems to have taken a very positive turn in recent weeks with the joint announcement that China and the UK will be developing London as an ‘offshore trading hub’ for the Chinese Yuan also known as the Renminbi. This will involve the development of Yuan dominated financial products and services in London as trading in the Chinese currency becomes more liberalized and slowly more flexible. Currently Hong Kong holds exclusivity over deposits in Yuan, however, this move seems to recognize London’s position as the premier foreign exchange trading hub and the leading trading centre for commodities. London, in this way, presents an attractive investment opportunity for the Chinese, not only because it already possesses the necessary infrastructure, but because it can operate as a gateway for further Chinese investment in the European market. The bi-lateral dialogue that will emerge as a consequence of these talks will help to support future market developments. In addition to these talks, there have been further positive discussions concerning Chinese investment in the UK regarding many legacy projects after the Olympic Games which are being held in London in 2012. This is proof that relations between China and the UK are improving and becoming strong as both nations have both committed to doubling trade figures by 2015. The recent agreements are a boost to both economic and political relations and there is now a good atmosphere between officials which has helped soothe some of the tension caused by British Prime minister David Cameron’s criticism of China’s human rights record in 2010 which greatly offended Chinese Premier Wen Jaibao upon a visit to the UK.

London Must be Realistic

One must however consider the realistic facts surrounding Yuan trading before they assume London will become a power-house for Yuan deposits. The progress that is planned out will be slow as the currency is still not fully convertible and its liberalization, though it is at last occurring, is occurring slowly. Many political commentators have stressed the need for Sino-UK relations to improve in such areas as investment, science, technology, tourism and energy before the development of London’s Yuan deposits can take-off. Furthermore, London is very unlikely to overtake Hong Kong as the dominant Yuan-trading hub any time soon. Other cities such as Singapore and Taipei are also fighting for a larger share of off-shore Yuan trading. However, in reality they (along with London) will play second fiddle to Hong Kong for the foreseeable future as the currency is internationalized. Hong Kong has an inherit advantage as many Chinese firms that settle exports and imports denominated in Yuan have offices there thus providing an existing infrastructure and liquidity for trade in Yuan.

However, this is still an exciting prospect for Sino-UK relations and the city of London. That said, the success of London will rest in private demand and the support of regulators.

• Neil Rylander- CPG Marketing Intern