Traders undaunted by colonial shadow

Ice cream is warming Sino-British relations but rows over Hong Kong still sour Michael Heseltine's hopes of boosting UK trade

In 1793, when Lord Macartney headed a diplomatic and trade mission to China, he brought with him a large entourage plus two ships packed with examples of British manufacturing technology. He received short shrift. Emperor Qianlong famously sent back an edict to George III: "We have never valued ingenious articles, nor do we have the slightest need of your country's manufactures."

Yesterday, Michael Heseltine, President of the Board of Trade, wound up his seven-day trade mission to China. He hadmore than 140 businessmen in his group and seems to have fared somewhat better than Lord Macartney. "We are of the view that this visit by Mr Heseltine will play a significant and positive role in the promotion of trade and economic co-operation between the two countries," the Chinese foreign ministry spokesman intoned.

What is the state of relations between Britain and the world's most populous nation - and fastest growing market - two years before Hong Kong reverts to Chinese sovereignty? Mr Heseltine hailed the mission and his meeting with the Chinese Prime Minister, Li Peng, as "a very good start to a new chapter in Sino-British relationships". In Hong Kong, people might be forgiven for wondering what book Mr Heseltine was consulting.

Even during the fraught period of the early 1980s, when Britain and China were negotiating the future of the colony, there was a high level of practical dialogue between the two sides. Today that dialogue has ground to a halt and British officials are resigned to little improvement before 30 June 1997.

Many issues remained unresolved: there is still no accord on financing arrangements for Hong Kong's new airport, and the four-year-old pact on establishing a Court of Final Appeal, the apex of the post-1997 judicial system, has been thrown into doubt. There is no agreement on the nationality and right of abode status for Hong Kong residents, nor on the future of senior civil servants.

In Peking, the same foreign ministry spokesman who was so positive about commercial links, said London "should no longer do things detrimental to Sino-British relations ... should adopt a co-operative attitude ... reduce trouble, take more tangible measures to ensure a smooth transfer in Hong Kong".

Where does that leave Mr Heseltine's mission and the "very warm welcome" he received from Li Peng? The daqihou, or "big climate", is central to the Chinese view of diplomacy. One Western analyst explained: "For us, good relations grow out of tangible progress. For the Chinese, it is the opposite." If the atmosphere was as agreeable as Mr Heseltine claimed, one should expect tangible results.

It has always been difficult to determine how much the row over Hong Kong really impinges on the Sino-British trade relationship. The Jardine Matheson group in Hong Kong has certainly suffered for the support it was supposed to have given to the Governor, Chris Patten. And in 1993, local Chinese officials in Guangdong blamed the political climate for the failure of a British company to win a massive rolling stock order for Guangzhou's mass transit system, (though the decision probably had more to do with price).

The statistics paint an ambiguous picture. Like most of its competitors, Britain saw a surge in exports to China in 1993, with a 72 per cent increase. This buoyant growth, however, still left the UK looking rather feeble in terms of market share compared with its main European competitors; Department of Trade and Industry (DTI) figures for 1993 show UK exports at just 2.5 per cent, compared with Germany at 12.8 per cent, Italy 5.8 per cent, and France 3.5 per cent.

The DTI's figures for the first three months of this year show a meagre 3.3 per cent growth in British exports. Britain is still buying about twice as much from China as it is selling.

It is on foreign direct investment that Britain is really bucking overall trends. The DTI does not produce investment figures but according to China the UK is the biggest European investor in the country.

During 1993, British companies contracted to invest nearly $2,000m (pounds 1,300m) in China, and in 1994 agreed a further $2,750m. So in a year when the world's overall pledge of foreign investment in China decreased by a quarter, British companies' investment commitments increased by 40 per cent.

In 1994, total utilised foreign investment in China was up 23 per cent compared to 1993. But British firms tripled their spending from $220m in 1993 to$690m. Why then, if one asks to visit a British manufacturing base near Peking, are there so few factories to choose from?

Unilever established its first business in China in 1987; Racal opened a China Liaison Division and started a couple of joint ventures in 1983; Rolls Royce, GPT and other household names have been building up business in China for years.

But, whatever the official Chinese figures say, many British companies on Mr Heseltine's trade mission admit they were late in focusing on China. A number cited India as being a more obvious priority.

The country remains a daunting market. Red tape can strangle a businessman's enthusiasm at birth. There are cultural differences. "The Chinese style of negotiation. Long, protracted, really in-depth type of negotiation. You have got to learn the particular nature of business here," said David Paculabo, head of Racal's China Liaison Division.

Bureaucracy and an opaque legal system have created one of the most corrupt business environments in the world. The most difficult hurdles are often the most basic: China may have 1.2 billion notional consumers, but it does not have a distribution system to reach them. None the less, the sheer size of the market is commercial reality. According to Wu Yi, Minister of Foreign Trade, the total volume of China's imports over the next five years will be $1,000bn.

Such are the "tangible" incentives for Britain of improved relations with Peking, regardless of the problems over Hong Kong. But the fundamental question remained unanswered: was Li Peng's welcome for Mr Heseltine a calculated attempt to undermine Mr Patten? Or is a warming of the daqihou a first stage in getting back to business on the transfer of sovereignty?

Whatever Britain's hopes of a separate business relationship, Hong Kong, in the Chinese way of thinking, is bound to dominate the bilateral relationship.