“The way you are treating Huawei will be followed very closely by other Chinese businesses,” China’s ambassador to the UK, Liu Xiaoming, said during a press conference. “The mutual trust was undermined. It will be very difficult for businesses to have the confidence to have more investment.”
The ban is “the reversal of a very long standing policy of successive British governments of trying to attract Chinese companies to invest in the UK and in particular of wooing Huawei,” said Tim Summers, a senior consulting fellow on the Asia Pacific program at Chatham House, a UK think tank.
The action against Huawei may prompt other Chinese companies to think twice about investing in Britain if they are concerned that politics could get in the way, he added.
Britain needs all the friends it can get as it scrambles to replace the trade deals it enjoyed as an EU member and find the new opportunities Prime Minister Boris Johnson has promised will flow from Brexit.
China was the United Kingdom’s third largest export market in 2019 after the United States and the European Union, accounting for 4% of all UK goods and services exports at a record value of £30.7 billion ($38.7 billion), according to the Office for National Statistics.
London has also been a major beneficiary of moves by Beijing to relax control of its currency. The city is the leading hub for trading in the Chinese yuan, or renminbi, with daily volumes averaging £82 billion ($103 billion) in the third quarter of 2019, according to the City of London Corporation. There are more than 30 Chinese institutions in London’s financial district, and more were planning to open representative offices, the corporation said in February.
These links may now be at risk. China could hold up regulatory approvals for new share listings or freeze market access for UK firms, Paul Triolo, Eurasia Group’s head of geo-technology said in a research note. It could also suspend investments in nuclear power or pause talks on a trade agreement, he added.
Many UK companies rely on Chinese suppliers, importing nearly £47 billion ($59 billion) of goods last year.
Britain is already on thin ice. The UK government has angered Beijing by condemning its imposition of a controversial national security law in Hong Kong and offering millions of Hong Kong citizens a path to British citizenship.
The ambassador, Liu, warned last week that Britain will have to “bear the consequences” should it treat China as a “hostile country.” Chinese state-run tabloid The Global Times said in an editorial on Wednesday that retaliation should be “public and painful” for the United Kingdom.
Beijing did not hesitate to slap tariffs on barley and beef imports from Australia after its government led calls for investigations into the origins of the coronavirus.
But China may be reluctant to take a similarly hard line with Britain, given that it remains a valuable market for Chinese goods and any reaction will be closely watched by countries such as Germany and the Netherlands, which are even more important to Chinese businesses.
Taking a “harsh retaliatory stance” could close doors to future investments elsewhere in Europe, said Veerle Nouwens, a research fellow at the Royal United Services Institute, a British defense and security think tank.
“Irrespective of Chinese grandstanding, we can’t forget that China is also still recovering economically from the pandemic. It may therefore feel that the costs of reacting very strongly against the UK may outweigh the benefits of doing so,” Nouwens added.
Retaliation likely to be moderate
There are other factors that could make it more difficult for Beijing to meaningfully hurt UK-China trade.
For example, Chinese consumers and companies will still want to buy British brands and visit the United Kingdom, said Summers of Chatham House. “Those sorts of things are not going to be completely turned around overnight,” he added.
UK luxury stores, restaurants and universities desperately need Chinese travelers to return. Travel and tourism spending have been decimated by the pandemic. Members of Walpole, Britain’s luxury goods association, say they are only seeing between 5% and 10% of their normal sales volume, according to CEO Helen Brocklebank.
China sent more students to the United Kingdom than any other country in 2018-2019, a 34% increase from four years earlier, according to the UK’s Higher Education Statistics Agency. Those 120,000 students spent an estimated £1.9 billion ($2.4 billion), according to the Cambridge Econometrics report. And over one million Chinese tourists visited the United Kingdom last year, five times more than in 2009.
“We are going to see some form of punishment, but I don’t think we should exaggerate how bad it is going to be,” Parton told CNN Business. Parton pointed to spats between China and other countries, such as South Korea, which still posted overall growth in exports to China during the years that economic sanctions were in place.
While there may be some “foregone opportunities,” the threat is “greatly exaggerated,” he said.
— Sharon Braithwaite, Shawn Deng, Isaac Yee and Sherisse Pham contributed to this report.