Reeves insists she will act to meet ‘non-negotiable’ fiscal rules

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Rachel Reeves has vowed to act if her fiscal plans are blown off course by turmoil in the gilt market, as she announced a deal with China intended to boost Britain’s stagnating economy.

The UK chancellor, speaking in Beijing on Saturday, insisted she would meet her fiscal rules that have come under pressure after UK 10-year borrowing costs last week rose to the highest level since the global financial crisis.

“Those fiscal rules that I set out in the Budget in October are non-negotiable and we will take actions to ensure that we meet those fiscal rules,” she told reporters.

Reeves has indicated that spending cuts could be needed if £9bn of headroom in her fiscal rule — that day-to-day spending is covered by tax receipts — is wiped out by rising borrowing costs.

The crunch point will come on March 26 when the Office for Budget Responsibility publishes new forecasts. Reeves has signalled she would not put up taxes at that point — a move normally reserved for a Budget.

She said: “I committed just to have one Budget a year and that Budget will be in the autumn.”

The UK chancellor said “re-engagement with China” would deliver up to £1bn in value for the UK economy while defending her budget plans.

She met her counterpart Vice-Premier He Lifeng to strike a deal that included an agreement to broaden financial access for UK firms and lifting trade barriers on UK agricultural exports to China.

He said: “China has opened its doors, and it will only open wider to give the UK and other countries more development opportunities.” 

Reeves said: “Growth is the number one mission of this Labour government. It is to achieve growth that I’m in China this weekend.”

Labour has been on a charm offensive to improve ties with China following a turbulent final few years under the Conservative government. Bilateral relations have thawed after Prime Minister Keir Starmer and President Xi Jinping met on the sidelines of the G20 Summit in Brazil in November. 

Reeves’ trip has been overshadowed by a sell-off in the bond markets this week that pushed British borrowing costs to their highest level since the 2008 financial crash.

Investors have grown increasingly worried about government debt, the threat of stagflation and price pressures. Conservatives and Liberal Democrats said she should have cancelled her trip to Beijing.

The positive shift in the relationship with China stands in contrast to strained ties with the Tories. Towards the end of the term, London and Beijing were “barely on speaking terms”, said Kerry Brown, Director of the Lau China Institute at King’s College.

Beijing bristled when former prime minister Rishi Sunak labelled China the “greatest state-based threat” to the UK’s economic security. Sunak highlighted alleged state-sponsored cyber security attacks and criticised Chinese authoritarianism at home and assertiveness overseas. 

“Labour is trying to get back to the British default position on China — a relationship without great warmth or closeness, but pragmatic and balanced,” said Brown. 

HSBC Chair Mark Tucker, who co-chaired the summit, said the two sides are “working on ways to achieve and encourage cross-border investment in renewable energy generation and storage and new energy transport solutions where we have so much to learn from each other”.

Several leading Chinese renewable energy companies and electric vehicle suppliers have been preparing to invest in the UK, waiting for an improvement in geopolitical ties before proceeding, according to people familiar with the matter. 

Reeves said reforms to the UK listing rules would make it easier for Chinese companies to list in London. The City of London has been courting foreign companies to list on the London Stock Exchange following an exodus of companies moving their listings overseas or going private. 

The agreement was scant in detail on how it would achieve £1bn growth for the UK. The two sides agreed that China would issue its first overseas sovereign green bond in London this year as the capital positions itself as a centre for green finance. In 2016, China issued its first sovereign bond outside of China in London in the “Golden Era” of UK-China relations during David Cameron’s premiership.

Fast fashion company Shein has filed confidential paperwork to list in London after being rebuffed by regulators in the US. It is waiting for approval from UK and Chinese authorities before proceeding with an initial public offering with a planned market valuation of £50bn. 

The delegation included Andrew Bailey, the governor of the Bank of England, Nikhil Rathi, the chief executive of the Financial Conduct Authority, chief executive of Schroders Richard Oldfield and José Viñals, Standard Chartered’s chair. 

Reeves’ trip comes as parliament awaits the result of Labour’s UK-China audit, which will review the state of the bilateral relationship and is expected to develop recommendations on how to deal with China.

Sam Hogg, an expert at the Oxford China Policy Lab, said the audit will “likely be a tick box exercise”.