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UK Chancellor Rachel Reeves has urged the UK to engage “confidently” with China, despite rising economic turbulence at home. Reeves arrived in Beijing to meet China’s vice premier He Lifeng, with her trip coinciding with heightened concerns over UK borrowing costs and market volatility.
In a column for The Times, Reeves asserted that choosing not to engage with China was “no choice at all,” highlighting the economic significance of China as the second-largest economy in the world and the UK’s fourth-largest trading partner. She emphasized that UK exports to China support nearly half a million jobs, underscoring the importance of maintaining strong economic ties.
Trade with China and National Interest
Reeves made it clear that the UK must be proactive in fostering trade with China, focusing on areas that serve the UK’s national interest. However, she also stressed the need for the UK to be forthright in raising economic concerns with China, particularly issues like market access and practices that may distort global trade.
“Choosing not to engage with China is therefore no choice at all,” she wrote, adding that the UK should be equally confident in addressing challenges while maintaining constructive engagement in areas such as trade. Reeves also noted that the UK should be candid in its dealings with China on issues beyond economics, including human rights, Hong Kong, and China’s stance on Russia’s invasion of Ukraine.
Her comments came amid growing market concerns about the UK’s fiscal position, with yields on UK government bonds surging to their highest levels since 2008, reflecting investor concerns about the sustainability of UK government debt.
Rising Government Borrowing Costs and Economic Uncertainty
The Chancellor’s visit to China has been overshadowed by rising yields on UK gilts, which reached their highest levels since 2008. On Thursday, the yield on 10-year UK government bonds hit 4.89%, a sharp increase that remained elevated through Friday. The rise in borrowing costs has led to concerns about the sustainability of UK government debt and its potential impact on Labour’s fiscal strategy.
Reeves, who has already ruled out tax hikes and further borrowing increases following the October Budget, may now be facing pressure to consider further spending cuts in order to navigate the increased cost of servicing government debt.
This market volatility is particularly concerning as it could reduce the financial flexibility of the government, potentially straining the UK’s fiscal outlook as it tries to recover from the economic challenges caused by inflation and the fallout from the COVID-19 pandemic.
Support for Reeves’ Visit from Labour Colleagues
Despite opposition calls for her to cancel the trip due to growing economic uncertainty, Labour’s Culture Secretary Lisa Nandy defended Reeves’ decision to engage with China. Nandy emphasized the importance of maintaining strong economic ties with China, stating that what happens in China has a direct impact on the UK economy, from the job markets in regions like Stockton to Sunderland.
“China is the second-largest economy, and what China does has the biggest impact on people from Stockton to Sunderland, right across the UK,” Nandy said. “We need to make sure that the UK economy remains competitive, we need to challenge where we must, including in the area of human rights, but we also need to make sure that we are working with China on those areas of shared interest.”
Volatility for the Pound Amid Growing Market Concerns
The UK’s economic outlook has been further complicated by the volatility of the pound, which fell to a fresh 13-month low against the US dollar. The pound was down by 0.7% on Friday, as US economic data showing continued growth in the job market helped strengthen the dollar.
This currency volatility, combined with rising borrowing costs, could have significant implications for the UK’s ability to manage its debt, with investors signaling concern about fiscal sustainability.
As a result, Reeves may face additional pressure to make tough fiscal decisions, including exploring further cuts to government spending. The UK’s economic challenges, coupled with global factors such as the ongoing impact of the war in Ukraine, highlight the difficult balancing act the government faces in maintaining fiscal discipline while pursuing long-term economic growth.
