Schools, banks, and property: The UK’s real value to China, charted

Obsession
China's Transition
Obsession
China's Transition

Relations between China and Britain have rarely been this cordial. China’s president Xi Jinping will be treated to a 103-gun salute, a stay at Buckingham Palace, several banquets, and plenty of personal time with Queen Elizabeth II and British prime minister David Cameron during a five-day trip that starts today (Oct. 19).

All this pomp appears to be Britain’s way of making amends for souring its relationship with China in 2012, when Cameron met with the Dalai Lama in London. In return for giving China so much face, the British government is expected to be rewarded with billions of dollars to help pay for infrastructure projects across the country.

Currently, trade between China and the UK is substantial, but arguably not the most important part of their relationship. China is the world’s second-largest economy, but it is only Britain’s seventh-largest export market, according to International Trade Centre data. China’s importance to the UK, as an export market, is growing but still tiny:

China is the UK’s second-largest source of imports though, behind Germany but ahead of the United States.

Trade aside, Chinese individuals and businesses rely heavily on the UK for a few things.

Wealthy Chinese citizens are increasingly sending their children, even at a young age, to Britain for private school education. Among the UK’s private primary and secondary schools, 6,344 students are from China, or 14% of the total foreign student population. That makes Chinese students the largest single group of foreign students at the UK’s prestigious private schools:

University-age Chinese are also flocking to the UK; in the academic year ending 2014 there were almost 88,000 Chinese students at British universities—a 5% rise from the year earlier—making China the biggest source of foreign students here too.

China’s companies are also heavily dependent on Britain’s banks. UK bank loans to China are so vast that British banks are now more exposed to mainland China than banks in any other country in the world.

The territory of Hong Kong is more exposed, but it is worth noting that about one-quarter of Hong Kong’s exposure—almost $209 billion—is held by HSBC and Standard Chartered’s Hong Kong subsidiaries. In July Fitch Ratings counted the liabilities against Hong Kong, not Britain. But HSBC and Standard Chartered are still British banks and, should a major economic downturn in China result in huge loan losses, Britain would be responsible for bailing them out, not Hong Kong. So UK bank’s exposure to China loans actually looks more like this:

British businesses have also been attractive acquisitions for their Chinese counterparts, sometimes for trophy reasons but also because of high levels of transparency and the UK’s strong legal system. Since 2000, almost 40% of Chinese money spent buying or merging with European businesses has gone to UK firms.

This year so far (up to Oct. 16), Chinese companies (including those in Hong Kong) spent $60 billion snapping up their counterparts in the EU; of that sum, $21.8 billion was spent buying British companies like Specialist Machine Developments, which makes equipment for submarine mining and was bought by a subsidiary of a state-owned Chinese rail firm for £130 million ($200 million).

And let’s not forget real estate; Chinese are now the biggest group (paywall) of foreign buyers of London homes worth £1 million ($1.5 million) or more. In 2014, Chinese buyers bought 11% of these properties, up from just 4% a year earlier. The next largest group, Russian buyers, bought 5%.

London’s commercial real estate market might be the next to find itself dominated by Chinese buyers. According to Savills, an international real estate company, 70% of the $21 billion spent on commercial property in the capital last year came from foreign buyers. Chinese buyers spent a collective $2.2 billion of that sum, second only to the $3.6 billion spent by US buyers.

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