Britain has “absolutely no choice” but to engage with China, Rachel Reeves has argued, as it seeks to boost the economy in the face of rising borrowing costs and tight financial markets.
The chancellor arrived in Beijing to finalize new trade and investment deals worth £600 million over five years, the first visit by a UK chancellor to China in more than half a decade.
His visit comes as the UK faces stubbornly high inflation and renewed doubts about how quickly the Bank of England can cut interest rates. The yield on 30-year government debt remains at a 27-year high, and the pound has lost ground against the dollar – both of which have been unpopular with markets over the past year.
Reeves reaffirmed his “non-negotiable” fiscal rules, stressing that economic stability is essential to restoring confidence. The Treasury’s forthcoming spending review is already expected to demand effective savings of at least 5 per cent across Whitehall, and increased debt servicing costs could increase that figure. Reeves vowed not to repeat last fall’s tax hikes, though his options have narrowed as inflationary pressures remain persistent.
Paul Johnson, director of the Institute for Fiscal Studies, warned that any breach of the limits imposed by the council on borrowing would disrupt the markets and cause even higher yields. That situation looks even bigger as the cost of servicing the government debt rises and slows economic growth that undermines tax receipts.
To help combat these pressures, the chancellor aims to increase trade and inward investment ties with China. He argues that the UK’s earlier, more isolationist position put the country at a disadvantage while France and Germany expanded their trade ties with Beijing. China is the world’s second largest economy and the UK’s fourth largest trader, supporting nearly half a million British jobs through exports.
The agreements reached with Deputy Prime Minister He Lifeng include other cooperation in areas such as financial services, foreign investment, climate programs and agriculture. “So choosing not to engage with China is not a choice at all,” Reeves said, stressing that the relationship must remain “respectful and consistent” despite major differences of opinion.
Investors have remained cautious about UK assets in recent weeks, as inflation continues to stubbornly stay above the Bank of England’s 2 percent target. Markets had been expecting a cut of two basis points per quarter this year, cutting the Bank’s key interest rate from 4.75 percent down to 4.25 percent. Analysts are now questioning whether the second cut will come to fruition, which is the disruption to 1.8 million households in fixed-rate mortgages due to expire in 2025.
That uncertainty spells trouble for borrowers hoping that two-year mortgage rates will drop below 4 percent. Economists at Pantheon Macroeconomics predict that high inflation is likely to continue, pushing up prices and reducing the Bank’s appetite for monetary easing. But others, including Nomura’s George Buckley, believe the rise in yields will act as a brake on inflation, allowing for further cuts next year.
Beyond the UK, uncertainty hangs over the global economy as Donald Trump’s White House reshuffle adds volatility to financial markets. The dollar benefited from his promises of corporate tax reform and deregulation, underpinning the strong greenback at the expense of the pound. Mortgage brokers say any softening of expectations for a British rate cut will increase mortgage costs, weighing on the housing market and consumer spending.
For the Chancellor, the challenge now is to implement new trade deals abroad without jeopardizing his hard line on fiscal policy at home. With the Treasury admitting that further public spending cuts may be inevitable if debt servicing costs continue to rise, Reeves’ policy in Beijing underlines his broader economic strategy: stabilizing markets, promoting growth, and building alliances – even in politically sensitive areas – to keep Britain afloat. continuous method.
