EY ITEM Club Spring Forecast 2014

Guest viewpoint

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China: a mirror image of the UK’s economic rebalancing…

In recent years, the People’s Republic of China’s (PRC’s) rapid expansion and thirst for commodities have seen it play a pivotal role in the global economy. Its impacts have ranged from fueling growth in world trade to driving up commodity prices. Now policy changes within China are bringing new and more complex implications for other economies worldwide – not least the UK.

This is partly because the UK and Chinese economies are virtual mirror images of one another. Even as the UK seeks to rebalance away from consumer spending and towards business investment and exports, China is looking to rebalance in the opposite direction.

As a first step, the PRC has already replaced export growth with investment. Now it is entering the next stage, weaning its economy off investment and secondary bank finance towards consumption through actions including allowing its exchange rate to rise and encouraging domestic demand.

…brings opportunities for UK plc

Achieving such a transformation in an economy as big, dynamic and influential as China’s is not without its risks.

However, assuming China stays on track, its rebalancing also brings big opportunities for the UK and its companies. The most obvious is that Chinese consumers’ burgeoning spending opens up major sales potential for the UK’s world-class branded consumers goods, not just in luxury segments like handbags but also general consumer products and pharmaceuticals.

At the same time, the flattening of Chinese demand for raw materials is reducing the upwards pressure on global commodity prices ranging from copper to oil. This is helping to bring down UK industrial import prices, in turn easing wider inflationary pressures in the UK. Meanwhile, the rise in China’s currency and labour costs promises to dampen UK imports from China and support the trend towards ‘reshoring’ production activities in the UK.

 China may seem a long way off. But its economic impacts are very close to home.

Bridget Walsh, EY Head of UK&I Greater China Business Services