Optimism falters over China's ability to boost UK economy

The Beijing slowdown and tighter state controls hit British companies' hopes of expansion

British investors and banks could have to overhaul their Chinese expansion plans as the country's economy feels the pain of the global economic crisis.

The 7.6 per cent expansion of the economy, between April and June, was the weakest quarter of growth in three years. This is due largely to the delayed effect of policy restrictions in 2010/11 which were intended to curb inflation worries subsequent to the 2008 stimulus programme.

Also, Chinese exports grew just 1 per cent in July on the same month last year, a result of a slowdown in new export orders in the manufacturing sector, as well as waning demand from the EU and US.

Experts warned that a slowdown in China, perhaps the country that European companies have most pinned their hopes on for growth as domestic markets slump, could hurt UK companies.

Vicky Redwood, the chief UK economist at Capital Economics, said that there would be a "weakening" of investor confidence. She added: "Many thought China would be a powerhouse that would keep the global economy going as developing nations were slowing down, but this has proved not to be the case.

"Businesses in the UK may become more reluctant to invest in the country, and consumers may also lose confidence due to a fall in overall financial wealth."

Shaun Breslin, a politics professor at Warwick University and author of China and the Global Political Economy, argued that some of the liberalisation of China's economy since joining the World Trade Organisation in 2001 risks being undone. Over those 11 years, the financial markets have opened up, offering significant opportunities to British banks.

Mr Breslin said: "In this time of crisis, China is exercising greater state control over its finance system to gain more financial leverage. Although this may be good for China, it makes it harder for Western banks to get footholds into the Chinese economy, footholds that were initially expected to become easier."

Despite measures to stabilise the economy such as lowering interest rates, investors are still waiting for the Chinese economy to rebound.

State media reports have suggested that a 1.2 trillion yuan (£119bn) stimulus for bank lending and fast-tracked state-funded infrastructure projects will be able to compensate for reduced exports and real-estate construction.

Chris Cummings, the chief executive of the international financial services lobby group City UK, said these plans offered British companies opportunities in China. "Given the large infrastructure projects that China wants to undertake – it is trying to entice capital from the UK and EU – those banks with a healthy balance sheet can still take advantage of this opportunity," he said.

"HSBC and Standard Chartered are both big players in this sense. China remains a sound long-term investment opportunity."