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Rachel Reeves vowed to stand by her “non-negotiable” fiscal rules as she arrived in China for a trip overshadowed by market turbulence at home.
The chancellor said the trip was a “significant milestone” in UK-China relations, adding agreements had been reached worth £600m to the UK economy over the next five years.
She declined to comment extensively on the financial markets in the UK during a visit to bicycle-maker Brompton’s flagship Beijing store on Saturday, but said the rules she had set for herself in October were essential for economic stability.
She said: “The fiscal rules laid out in the budget are non-negotiable. Economic stability is the bedrock for economic growth and prosperity.”
This week, the pound briefly fell to a 14-month low against the US dollar after a sell-off in the bond market fuelled investors’ anxiety about UK assets. Gilt yields rose to their highest level since 2008, in effect increasing the cost of government borrowing, which fuelled concern that the chancellor would be unable to meet her rules on debt and spending without imposing deeper cuts than she had already planned.
The spending review, due later this year, is already expected to require departments to make efficiency savings worth 5% of their budgets.
But with more money being spent on servicing government debt, that figure could end up being even higher, given Reeves has previously ruled out further tax rises. The Guardian reported this week that steeper cuts to public services were being considered while the Telegraph reported that disability benefits faced billion-pound cuts.
The alternative would be breaching her fiscal rules, a prospect that Paul Johnson of the Institute for Fiscal Studies described as “pretty scary for the markets”, which were already “concerned about the UK position”.
The turmoil in the gilt markets has overshadowed Reeves’s trip to Beijing. The Conservatives and Liberal Democrats had demanded the chancellor call off her trip, but ministers argued that improved relations with the world’s second-largest economy would help boost growth, and that under the Conservatives the UK had lagged behind the US and EU when it came to high-level engagement with Beijing.
Accompanied by a delegation including the Bank of England governor, Andrew Bailey, and the Financial Conduct Authority’s chief executive, Nikhil Rathi, Reeves met the Chinese vice-premier, He Lifeng, on Saturday for the first UK-China economic and financial dialogue since 2019.
The chancellor called for more trade and investment between the two countries against a “more complex and more challenging” geopolitical background.
She said: “We must seize this opportunity to set a course for a stable and mutually beneficial relationship with one another.”
After the meeting, the chancellor announced a £600m agreement had been reached , while “re-engagement” with China “sets us on course to deliver up to £1bn of value for the UK economy”.
This includes agreements on financial services, agri-food and cultural exports, along with other areas.
But she also emphasised that economic ties must not weaken national security, and said the two countries had “an obligation to be frank with each other where we disagree”.
As well as resetting relations with Beijing, the government has promised to “challenge” China where necessary, amid long-standing human rights concerns about the treatment of Uyghur Muslims, constraints on freedoms in Hong Kong andChina’s support for Russia’s war in Ukraine.
Reeves is expected to travel to Shanghai next.
