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The New Special Relationship? China Cozies Up with the United Kingdom

November 4, 2015

The recent visit of Chinese President Xi Jinping to the United Kingdom was greeted by familiar pomp and circumstance.  A visit with the royal family, a trip to the Imperial College London, and several, well-documented strolls with British Prime Minister David Cameron were among the highlights of Xi’s tour. 

While the external markers of Xi’s state visit were familiar, the achievements and response of his UK tour mark a shift in UK-China relations.  UK promotion of the internationalization of the yuan signals an increased British enthusiasm to cooperate with China’s vision of economic statecraft. British alignment with Chinese efforts to increase its regional and global significance is a direct challenge to existing UK foreign policy relationships, particularly its longstanding “special relationship” with the United States.

            A key outcome from Xi’s visit is increased cooperation to make the yuan a globally used currency. British support of yuan internationalization stands to directly challenge the dominance of the dollar and strain UK-US relations. As a component of supporting use of the yuan within the British market, Cameron and Xi announced a continuation of current bilateral local currency swap measures. A currency swap exchanges the principal and interest in one currency for another between two institutions, which thus serves to hedge against risks from exchange rate fluctuations. Under new agreements, the current model will be renewed for another three years.  Additionally, the swap line will be increased from 200 billion yuan to 350 billion yuan (£35.72 billion).

The results of Xi’s visit are a continuation of previous moves by the UK to support yuan use. Since 2011, the UK designatedLondon as a business center for the yuan, since then use of yuan has expanded precipitously. Furthermore, British officials expressedwillingness in recent months to support inclusion of the yuan in International Monetary Fund’s special drawing rights (SDR) basket, a key component of the Chinese push for international financial influence.  Inclusion in the SDR basket means that the yuan would be one of the institution’s reserve currencies, thus increasing the integration of the yuan into the global economy.

Internationalization of the yuan is key component of China’s increasing active efforts of economic statecraft. As has gained considerable coverage in recent months, Chinese initiatives such as the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Infrastructure Fund aim to increase and expand China’s financing reach and influence. UK membership in the AIIB has already served as a source of tension for US-UK ties.  The UK announced last spring its intentions to join the international financing institution, in sharp contrast to US opposition. In frank wariness of this decision, an unnamed US official reported that the US “wary about a trend toward constant accommodation of China.”

Division over AIIB membership and recent results of Xi’s London visit communicate a disturbing trend for US-UK relationships. As China emerges as a global superpower, it is increasingly important for the US-UK special relationship to maintain a coordinated approach to Chinese foreign policy or risk a permanent fissure in a long-held relationship.  If the US and the UK do not work in partnership, foreign policy approaches to China could create competition and friction between both nations that may be irreparable.  Moving forward, Prime Minister Cameron must chose how and when to pursue increased ties with China in light of the potential costs to other British bilateral relationships

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