Chancellor heads to China in search of growth amid surging borrowing costs

Rachel Reeves said that Britain has “absolutely no choice” but to deal with China, as it seeks to support economic growth against the backdrop of high borrowing costs and unstable financial markets.

The advisor arrived in Beijing to finalize new trade and investment commitments worth £600 million over five years, the first trip by a British advisor to China in more than half a decade.

Her visit comes as the UK struggles with stubbornly high inflation and renewed doubts about how quickly the Bank of England will cut interest rates. The yield on 30-year government debt remains at a 27-year high, while sterling has lost strength against the dollar – both unwelcome echoes of last year’s market turmoil.

Reeves reiterated his “non-negotiable” fiscal rules, stressing that economic stability was vital to restoring confidence. The Treasury’s upcoming spending review is already expected to require efficiency savings of at least 5 per cent in Whitehall, and a spike in debt servicing costs could push that figure even higher. Reeves has pledged not to repeat last fall’s tax hikes, although his options have narrowed as inflationary pressures persist.

Paul Johnson, director of the Institute for Fiscal Studies, warned that any breach of the Chancellor’s self-imposed borrowing limits would rattle markets and push yields higher. This scenario looms as rising government debt servicing costs and weak economic growth undermine tax revenues.

To help counter these pressures, the Chancellor aims to increase internal trade and investment relations with China. It argues that the UK’s previous, more isolationist stance put the country at a disadvantage when France and Germany were expanding their trade ties with Beijing. China is the world’s second-largest economy and the UK’s fourth-largest trading partner, supporting nearly half a million British jobs through exports.

The agreements reached with Vice Premier He Feng include further cooperation in areas such as financial services, cross-border investment, climate initiatives, and agriculture. “Choosing not to engage with China is not a choice at all,” Reeves said, stressing that relations must remain “respectful and consistent” despite sharp ideological differences.

Investors have become more cautious about UK assets in recent weeks, fearing inflation has remained stubbornly above the Bank of England’s 2 per cent target. Markets expected an interest rate cut of a quarter of a percentage point this year, which led to the bank’s key interest rate being reduced from 4.75 percent to 4.25 percent. Analysts are now wondering whether the second cut will materialize, a setback for 1.8 million households on fixed-rate mortgages that are set to expire in 2025.

This uncertainty is causing problems for borrowers hoping that interest rates on two-year fixed mortgages will fall below 4 percent. Economists at Pantheon Macroeconomics expect high inflation to persist, raising price expectations and reducing the bank’s appetite for monetary easing. But others, including Nomura’s George Buckley, believe rising government bond yields will act as a brake on inflation, allowing for further cuts over the next year.

Outside the United Kingdom, uncertainty hangs over the global economy, as Donald Trump’s move to the White House adds volatility to currency markets. The dollar benefited from its pledges on corporate tax reform and deregulation, which strengthened the US currency at the expense of the pound. Mortgage brokers say any decline in expectations for interest rate cuts in Britain will prolong high mortgage costs, affecting the housing market and consumer spending.

For the chancellor, the challenge now is to take advantage of new trade deals abroad without jeopardizing her tough stance on fiscal discipline at home. With the Treasury admitting that further cuts in public spending may be inevitable if debt servicing costs continue to rise, Reeves’ mission in Beijing underscores her broader economic strategy: stabilize markets, boost growth, and forge alliances – even in sensitive terrain. Politically – to keep Britain alive. Sustainable path.