World Economy

UK pushes to be ‘China’s best partner’ despite fears

The U.K. announced a series of steps to boost its economic ties with China on Monday, as the West competes for the world's second-biggest economy's favor despite fears of a slowing economy and stock market volatility.

Chinese 100 yuan (RMB) bank notes being counted at a bank in Huaibei, in eastern China's Anhui province.
STR | AFP | Getty Images

During a five-day tour to China, the U.K. Chancellor of the Exchequer, George Osborne, announced measures to boost both bilateral trade and London's role as a major center for renminbi business.

"UK can be China's best partner in the West," Osborne proclaimed on Twitter, in one of a host of tweets with the hash tag #UKChina from the visit.

Announcements on Monday included a move to extend the renminbi/sterling swap line—an agreement to exchange one currency for another at a set rate at a certain time in the future.

The U.K. was the first group-of-seven (G-7) country to establish a currency swap line with China, in 2013, and in another first on Monday, the Treasury said that London would be the first foreign city from which China will issue a renminbi-denominated note. In addition, the U.K. and China will carry out a feasibility study on a stock connect between London and Shanghai equity markets, following the launch of a similar scheme in Hong Kong.

The moves to ease U.K. investors' access to Chinese equity markets comes amid a period of intense instability in China's stock markets: There has been a slump of around 40 percent in Shanghai stocks since a peak in June. This has raised concerns about the U.K. banking system's exposure to China—which is among the world's highest in both absolute terms and relative to the size of its total foreign claims according to a recent note by JPMorgan. Plus, investors and politicians alike remain fearful of an economic "hard landing" for China and the potential ramifications for the rest of the world.

The U.K. Treasury acknowledged such concerns in a statement ahead of the trip on Friday, in which it said that China remained hugely important to the global economy, despite the slowing growth that could see it fail to expand by the targeted 7 percent this year.

The Treasury noted that the slower-expanding China would still represent one-quarter of global growth and that it contributed almost 15 percent of world gross domestic product (GDP) in 2014.

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"Starting this weekend, he (Osborne) will embark on a week-long tour that is set to encompass thousands of miles across China and comes after a period of turbulence in Asian stock markets," said the Treasury statement.

"The Chancellor will argue that far from backing away from China after the events of the summer, Britain aims to increase cooperation and understanding between the two countries and open up billions of pounds of potential opportunities between what remains the world's fastest growing major economy and the U.K."

With that in mind, the U.K. also announced a number of trade deals with China on Monday, including a £2 billion nuclear project. This will see China invest in the U.K.'s first government-guaranteed nuclear power station to be built in 20 years. The countries also agreed to two joint space programs, including one worth £24 million on remote sensing for agri-technology.

The U.K. has been among the keenest in the West to woo China and attracted nearly $12 billion of Chinese foreign investment in 2013—more than France and Germany combined—according to the Treasury. It was the U.K.'s sixth largest goods export market in 2014, up from 14th in 2003.

However, Britain faces tough competition from other Western countries eager for stronger ties with China. In particular, China may be eager to improve its somewhat fractious relationship with the U.S., with President Xi Jingping set to make his first state visit the U.S. later this week.

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Other rivals include Switzerland, whose nimbleness in making overtures to China may be boosted by its absence from both the European Union and the euro zone.

Switzerland signed a free trade agreement with China around a year ago and followed close behind the U.K. in applying to join the China-backed $50 billion Asian Infrastructure Investment Bank earlier this year, despite opposition from the U.S.

Switzerland also benefits from its reputation as a well-regulated financial hub, particularly for private wealth banking—although Zurich's banking sector remains smaller than that of London.

In terms of trade, Swiss luxury watches and jewelry are popular in Hong Kong, while mainland China is a major importer of pharmaceuticals from Swiss giants like Novartis and Actelion.

One of Switzerland's biggest banks, Credit Suisse, announced only last week that the country was "well on its way to becoming a hub for the Chinese currency"—a stated aim of the U.K.

"China and Switzerland have close trade relationships. Further export stimuli can be expected as a result of a free trade agreement signed last summer. This positions Switzerland and its entire financial sector well toward China," Credit Suisse said in a blog post on its website.

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—By CNBC's Katy Barnato. Follower her on Twitter @KatyBarnato.