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China-UK visit: Are the great expectations justified?

China-UK trade should hit $100B: Premier Li
China-UK trade should hit $100B: Premier Li
Key Points

The red carpet was rolled out from Windsor to Downing Street for China on Tuesday, as a high-profile trade delegation arrived in the U.K.

Hopes were high: Li Keqiang, who took over as Premier last year, so far appears to be both business-focused and cautiously friendly towards the West. However, during his tenure, China has had to sort out its slowing economic growth—which may have dented its appetite for more extensive external investments.

The visit, which started at Downing Street on Tuesday, is already more successful than last year's U.K. expedition to China, from which the most headline-grabbing deal involved the supply of pig semen.

There were concerns that the U.K. was not quite striking the right tone, after last year's visit. The Chinese delegation were understood to have warmed to Chancellor George Osborne more than the Prime Minister. Li insisted on a meeting with the Queen on his first official trip to the country, and did so on Tuesday.

Li also met with Prime Minister David Cameron. In a joint news conference afterwards, Cameron said the two nations had signed deals worth £14 billion ($24 billion).

"China and the U.K. should view each other's development as an opportunity," said Li at the conference. "The U.K.'s advanced technology can be married with China's vast market."

Bob Dudley, chief executive of BP, confirmed to CNBC on Tuesday morning in Moscow at the World Petroleum Council that the oil major would sign a 20-year natural gas contract with China, which became the biggest net oil importer in the world, overtaking the U.S., in 2013.

"It's a good deal. It's a good bridge between the UK and China in terms of trade," Dudley said.

Meanwhile, Shell is also expected to announce an expansion of its ties with Cnooc, China's state energy company.

The U.K.'s focus on financial services rather than manufacturing also means that it has less to sell to the Chinese than other countries—which may be part of the reason its exports to China were worth just $10.1 billion last year, a fraction of Germany's $73.4 billion and much less than France's $19 billion.

"For a very long time, the UK has mostly exported to the slowest growing nations. We are now learning how to change that," Danny Quah, professor of economics at the London School of Economics, told CNBC.

One of the FTSE 100 chief executives brought over with Cameron's delegation last year was Andrew Witty of GlaxoSmithKline, the U.K.'s biggest pharmaceutical company. The pharma giant has since been dogged by corruption allegations in China.

The relationship is also dogged by criticism in the U.K. Cameron's deputy Nick Clegg spoke of the "very large-scale abuse of human rights" in China on Monday, and there are other concerns that the U.K. is making great concessions to an undemocratic state.

In Tuesday's conference, Li said the two nations should "increase mutual political trust" and "accommodate each other's core interest and major concerns".

China-UK visit: Are great expectations justified?
China-UK visit: Are great expectations justified?

The relaxation of visa laws for Chinese visitors to the U.K., announced on Monday, follows protests about the backlog of passport applications for ordinary U.K. residents. Chinese tourists are viewed as potentially huge consumers for the U.K. luxury goods sector in particular.

"There may be an element of jealousy of the rise of China," said Stephen Perry, chairman of The 48 Club, which focuses on improving U.K.-China trade.

He forecast that China will soon start being more active with its investments abroad, as its executives gain more experience of management.

Infrastructure, agriculture and banking are likely to be the focus in the short-term. The Chinese have experience of both high-speed railways and nuclear power stations, and the U.K. is about to embark on large, long-term projects in both areas. And China is understood to be open to allowing imports of U.K. beef and lamb again, as its burgeoning middle class's appetite for meat expands. There has been a ban in place since the BSE crisis of the 1980s.

One big question mark is over how the Industrial and Commercial Bank of China (ICBC)'s purchase of a London banking operation from Standard Bank will proceed. The Chinese bank is sending seven delegates, with another seven from its affiliated aircraft leasing company ICBC Financial Leasing—close to a tenth of the delegates from Chinese business in total. It is understood that this may be a way of gaining China Construction Bank a foothold in the London market, to boost renminbi trade through London.

Why Li Keqiang's UK visit is important
Why Li Keqiang's UK visit is important

Further down the line, there may be investment in the commercialization of graphene, which was discovered in 2004 in Manchester by two Russian-born scientists.

Ultimately, the U.K. has plenty that China wants.

"China remains a developing country. It needs expertise in financial services, technology, education and research and development," Quah said.

By CNBC's Catherine Boyle with Katy Barnato