Silk originated in China and the Silk Road is the collective name given to a number of ancient trade routes linking China and Central Asia. Modern China wants to recreate the Silk Road with road and rail links from Beijing via Urumqi in the north to western Europe. It sees the potential of boosting trade by US$2.6tn in the next decade, more than the value of its exports in 2013. The UK is the biggest European recipient of Chinese investment and the UK has the ambition to be China's top partner in Europe. Can Ireland gain from these developments?

 

A June 2015 Bloomberg briefing says "It took Italian merchant Marco Polo 24 years to get from 13th century Italy to China and back. The payback: he returned a wealthy man. In China’s 21st century vision, the modern version of this trade route is about to get a little smoother. But will returns on the new Silk Road be so high?"

"As the name suggests, China’s One Belt, One Road plan has two components. One Road is a maritime Silk Road stretching from Fujian on China’s coast, through the Malacca Straits — a 805 km stretch of water west of the Malaysian Peninsula and east of the Indonesian island of Sumatra  — around the horn of Africa, and ending in Venice. One Belt is an overland route stretching across central Asia, through the Middle East before ending in the heart of Europe."

Last March, George Osborne, UK chancellor, pleased the Chinese when Britain became a founding member of the China-sponsored Asia Infrastructure Investment Bank. Other European countries such as Germany followed. 

Xi Jinping, Chinese president, will fly to Manchester Thursday evening, on the third day of his state visit to the UK, and the Financial Times reports that Osborne is seeking Chinese finance for half the cost of his £50bn Northern Powerhouse plan, which includes a railway line under the Pennines.

In 2014 Ireland was the UK's fifth biggest goods export market at £18bn ahead of China's £14bn while China was the UK's biggest import market after the US.

Among Britain's top trading partners, Ireland and the US are outliers as surplus trading countries for the UK.

The Office for National Statistics says that following a growth of imports from £11.4bn to £37.6bn in 2014, China has become the UK’s second largest import partner behind America, accounting for 7.0% of UK imports in 2014 compared with 3.3% in 2004. Compared with the rise in imports, exports to China have risen at a more subdued rate over the same period, from £4.0bn to £16.7bn (including services) in 2014 and now accounting for 3.2% of goods UK exports. Trade in goods dominates UK trade with China, which has accounted for over 80% of all UK trade with China per year since 2004. Due to imports growing at faster rate than exports, the UK’s goods trade deficit with China has also grown, standing at £22.1bn in 2014, the second highest behind the UK's deficit with Germany. This is 6.9% larger than in 2013 and more than 6 times larger than in 2000. This compares with a surplus in services of £2.7bn.

China's overseas investments are set to triple by 2020 while Ireland received only €99m from €46bn in direct investments in European Union (EU) countries in the period 2000-2014, according to research published this year — see here.

Chinese FDI (foreign direct investment) investors tend to buy or invest in existing businesses in Europe. This is wise as human resource management is an art that requires some evolution in China.

The UK was in the lead for FDI in 2000-2014 receiving investment of €12.2bn followed by Germany €6.8bn; France €5.9bn; Portugal €5.1bn; Italy €4.2bn; Netherlands €3bn; Hungary €1.9bn; Sweden €1.5bn; Spain €1.1bn; Belgium €938m; Romania €733m; Poland €453m; Austria €436m; Luxembourg €432m; Greece €405m; Bulgaria €207m; Czech Republic €138m; Denmark €134m; Finland €103m; Ireland €99m; Malta €69m and the rest: the 3 Baltic republics, Cyprus, Slovenia and Croatia at €4m have smaller amounts.

This year Chinese firms have agreed a number of aviation leasing deals including the purchase of Avolon Holdings, but these are not significant for the Irish economy.

Last week an FT report made a reference to the Feb 2012 visit to Ireland by Xi Jinping, then the Chinese vice president. "A framed photograph of him playing Gaelic football on a visit to Dublin in 2012 adorns his office," — see below.

Last May Li Keqiang, the Chinese premier, spent an overnight at Ashford Castle, while enroute to South America and both Michael D. Higgins, Irish president, and Enda Kenny, taoiseach, have visited China in the past two years.

In 2014 Irish merchandise exports to China of €2.1bn amounted to 2.4% of total goods exports while in 2013 services exports of €2.4bn amounted to 2.6% of total services exports. Exports to China as a ratio of total export value was at 2.5% while imports were valued at almost €4.0bn.

Intel Ireland, the US chip giant, is likely Ireland's biggest exporter to China while commercial aviation leasing accounted for almost 40% of services exports in 2013.

Intel has a plant in Dahlin, north-east China, and Intel Israel said in 2013 that it was responsible for a third of Israel’s exports to China. Intel Ireland does not report export data.

In 2012 Enterprise Ireland told Finfacts that Irish indigenous companies accounted for 6% of Irish exports to China.

Bord Bia, the food agency, reported last January that Irish food and drinks exports to China were valued at €547m in 2014 — up almost 50% on 2013. This was 5.3% of total food and drinks exports in 2014.

Last February the Chinese government re-opened its market to Irish beef for the first time in 15 years. This news followed Irish beef re-entering the US market, making Ireland the first EU country to be allowed back into the US market since the BSE brain disease scare.

Both the Chinese authorities and baby milk formula producers are very sensitive about this market after China executed two executives in 2009 for their role in adding the drug melamine to milk. Fonterra of New Zealand, the world's biggest milk producer, had a minority stake in the responsible company.

Last May the Chinese government introduced restrictions on advertising to help promote breastfeeding by Chinese mothers by limiting sales of milk formula.

Reuters said that less than a third of babies are exclusively breastfed in China and the number is falling despite global health bodies recommending the practice for babies under six months. At the same time, China's infant formula market is set to grow to more than $30bn by 2017.

Armchair experts in the past have often spoken about only needing a small chunk of the 1.3bn population market as if it was not a challenge.

However, it's not easy and the world's main agri-food exporters are active in the market. There are no bonanzas and the Netherlands, the world's second-biggest agri-food exporter after the US, in 2010 had over 3,500 companies in the Netherlands exporting goods to China according to Statistics Netherlands (CBS) in 2012.

CBS calculated that a third of exports to China consisted of re-exports, against 46% of total Dutch exports. This means one euro of exports to China contributes more to the Dutch economy than the average euro of exports.

Denmark has about 30,000 exporters compared with Ireland's 4,000 and Statistics Denmark said this year:

"In recent years, China has been the fastest climber on the list of major trading partners. In 2014, China was the fourth largest supplier of goods to Denmark, accounting for 7% of all Danish imports. Trade is not quite so brisk in the opposite direction. Roughly 4% of Danish exports go to China, a fact which puts China in the 8th place among Denmark’s export markets."

Even small economies in Europe such as Ireland and Denmark can have diverse export sectors. Sea transport is by far Denmark’s most important trading activity with regard to services. In 2014 this service group accounted for 50% of Denmark’s exports of services and 39% of Denmark’s imports of services. 

Goods exports to China were valued at €3bn and services in 2013 were valued at €2.6bn.

China is not for the small firm that is lacking experience as an exporter to non-developed country markets.

Because of the distance from Europe, local production may be necessary and depending on the sector a local joint venture partner may be required.

The Chinese Diaspora do well in China and in some regions even a knowledge of Mandarin, the official language, is not sufficient as the local dialect may be dominant.

One guide advises: "In a nutshell, companies should only go to China if they have already developed what looks like being a feasible business proposition, and for no other reason...For new market entrants, given the learning costs involved, breaking even can only be achieved in the long-run. China is not the place for a ‘quick buck’ artist. The key question for corporate management to ask is: not 'will China make us money' but 'will we last in China long enough to make money?'"

The FDI sector then is the main opportunity for Ireland's Silk Road.

China's Qing dynasty was overthrown after 267 years in power by a republican revolution in 1911. It was a colonial power with the Manchus from northeast China ruling the majority Han people. Technological advances stalled and in 1793, the emperor rejected via a letter the request of a British delegation led by George Macartney, an Irishman, to open diplomatic relations with London.

Macartney wrote in his journal:

"The Empire of China is an old, crazy, first-rate Man of War, which a fortunate succession of and vigilant officers have contrived to keep afloat for these hundred and fifty years past, and to overawe their neighbours merely by her bulk and appearance. But whenever an insufficient man happens to have the command on deck, adieu to the discipline and safety of the ship. She may, perhaps, not sink outright; she may drift some time as a wreck, and will then be dashed to pieces on the shore; but she can never be rebuilt on the old bottom."

Emperor Qian Long in a letter to King George III said:

"I have perused your memorial: the earnest terms in which it is couched reveal a respectful humility on your part, which is highly praiseworthy. In consideration of the fact that your Ambassador and his deputy have come a long way with your memorial and tribute, I have shown them high favour and have allowed them to be introduced into my presence. To manifest my indulgence, I have entertained them at a banquet and made them numerous gifts. I have also caused presents to be forwarded to the Naval Commander and six hundred of his officers and men, although they did not come to Peking, so that they too may share in my all­embracing kindness...As your Ambassador can see for himself, we possess all things. I set no value on objects strange or ingenious, and I have no use for your country’s manufactures.”

A respectful humility from the King of England!

In 1990, before economic reforms took hold, China accounted for a mere 3% of global manufacturing.

China displaced the United States as the largest manufacturing country in 2010, as the United States’share of global manufacturing activity declined from 30% in 2002 to 17.4% in 2012.

Manufacturing value added amounted to 12.1% of total US gross domestic product (GDP) in 2013, according to United Nations calculations. Manufacturing is more significant in the United States, relative to the size of the economy, than in the United Kingdom, France, and Canada, but much less important than in Japan, Germany, Indonesia, Korea, and China. Chinese manufacturing value added accounted for 29.9% of its economy’s total output in 2013, according to the UN. The manufacturing share in China has declined in recent years, while the share in the United States has remained relatively stable.  

China, Xi football Dublin, Ireland 

Xi Jinping, then China's vice president, at Croke Park, Dublin Feb 2012

How will the state visit by Chinese president Xi Jinping to the UK affect the ‘special relationship’ between the UK and the US? FT Beijing bureau chief Jamil Anderlini discusses with Frederick Studemann, comment and analysis editor.

 

A bit of trivia on cultural differences from HSBC: