The parliamentary debate in the week preceding Christmas led to an interesting exchange of views between the Gibraltar Government and the opposition as regards the maintenance of Gibraltar’s Hong Kong office. Gibraltar opened an office in Hong Kong two years ago in an attempt to generate business from that region, the annual cost of so doing being around £400,000 per year. A sum very well spent, it seems, in the opinion of the Government. The Chief Minister described China as being “one of the biggest opportunities” for Gibraltar, and Mr. Albert Isola, the Minister of Commerce (whose department is responsible for the Hong Kong office) described China as “the biggest power house probably over 10 to 15 years”.
Clearly, China is a place few trading countries can afford to ignore, and Gibraltar has an obvious interest in it. How to transform that interest into profitable business is of course something of a challenge. In 2016, China was the world’s largest trading nation, and the world’s second largest economy. Although at differing ends of the scale, Gibraltar is also a trading nation, and one whose economy is growing at a similar rate. In 2016, numerous Chinese related investors visited Gibraltar in respect of a number of potential projects, and representatives of Gibraltar Government likewise visited China. Since 2014, the Gibraltar Government has maintained a Hong Kong office with the aim of showcasing Gibraltar and serving as a stepping stone into China as well as a means to promote Gibraltar to potential Hong Kong and Chinese investors.
This is a first in a new series of articles on China, from the perspective of Gibraltar, with emphasis on its economy and potential business opportunities for us. It provides a summary of the state of the Chinese economy in 2016, and concludes with some thoughts on potential opportunities arising from Brexit. China’s economy can be summarised as follows:
China’s economy continues to grow but at a slower pace than preceding years. China refers to this as the “New Normal” situation, whereby it plans to experience lower but steadier annual growth of around 6.5%-7% a year.
Structural economic reform
This largely comprises the expansion of the private sector in the economy, and market-orientated reform of the state owned sector.
China continues its proactive fiscal approach, with expenditure growing faster than revenue. In 2015, the official fiscal deficit was 2.4% of GDP, although unofficially, estimates put the deficit as high as 10%.
China’s monetary policy now reflects the “New Normal” situation. Interest rates have been liberalised somewhat with banks being more free to set lending rates.
Foreign exchange policy
China continues to operate a managed-floating exchange rate regime. The floating range of the renminbi exchange rate has, however, gradually increased allowing a greater fluctuation in the value of the renminbi to reflect market value.
In 2015, both exports and imports declined, with exports totalling US$2.3 trillion and imports US$1.7 trillion. The position has not changed materially in 2016.
China is one of the largest recipients of foreign direct investment in the world. In 2014, it amounted to nearly US$120 billion. Making headlines in the news in 2016, however, were investment agreements made by Chinese companies overseas, Hinkley Point being a prime example.
International trade agreements
China had signed 15 preferential trade agreements, including with Australia, New Zealand, Switzerland, Singapore and Korea. China continues its integration with Hong Kong, in particular with the implementation of the Closer Economic Partnership Arrangements (CEPA).
China and Brexit Opportunities
As members of the European Union, the UK (and Gibraltar) have been unable to negotiate their own international trade agreements, including with China, as such agreements are conducted at EU level. Depending on the UK/EU agreement on Brexit, and in particular whether the UK stays within the customs union, it is possible that upon exit, the UK could negotiate its own trade agreement with China. China already has 15 trade agreements in place, including with countries with similarities to the UK and Gibraltar, such as Australia and Switzerland. Bearing in mind the recent experience with CETA, it is unlikely that a EU/China trade agreement will be possible perhaps for decades. However, it is no secret that the UK, and indeed Gibraltar, sees opportunities for a trade agreement with China, and that possibility has already been discussed at the highest UK-China political level.
The UK is ultimately responsible for Gibraltar’s foreign relations, and so its position will be closely tied to the UK. However, when Gibraltar leaves the EU, it will lose the benefit of the numerous trade agreements to which the EU is a party. The UK has clearly recognised the impact of that situation on Gibraltar, as well as the fact that Gibraltar wished overwhelmingly to remain within the EU.
In fact, it is fair to say the UK recognises it is more or less obligated to ensure that any new trading relationships put in place to replace those lost as a consequence of EU exit, should include Gibraltar. Of all the British overseas territories, Gibraltar is in a unique relationship with the UK as a consequence of its EU membership that allows, for example, the passporting of financial services between Gibraltar and the EU (which of course includes the UK) in a way that is not available to any other British overseas territory. It is only right that these rights be maintained so far as within the powers of the UK. It is also becoming evident that the UK at least recognises the view that it is morally obligated to consider whether new international agreements it may negotiate post-Brexit that go beyond the current EU arrangements should also include Gibraltar, bearing in mind that international relations are never static and that there should be consistency in the approach taken. In the opinion of many, a UK-China trade agreement of the future can, and indeed should, include Gibraltar.
words | Alicia Bowry, Benady Cohen & Co Chartered Accountants