UK-China Trade and Political Risks: Navigating Portfolio Resilience in a Geopolitically Turbulent Era

The UK-China economic relationship has long been a paradox of growth and caution. Bilateral trade hit £107.5 billion in 2023, doubling since 2017, according to China Briefing, yet Q3 2024 saw a 13% annual decline to £89 billion, driven by a 27.3% drop in UK goods exports, the The Financial Analyst reported. This volatility underscores the fragility of a partnership strained by political tensions-ranging from human rights concerns to NATO activities-and regulatory barriers like the UK's National Security and Investment Act (NSIA) 2021, as analysed by Hogan Lovells. For investors, the challenge lies in balancing the economic potential of this relationship with the geopolitical risks it entails.

Trade Dynamics: A Tale of Two Sectors

While goods trade has faltered, the UK's services sector has shown resilience. In 2024, services exports to China rose modestly, maintaining a £9 billion surplus driven by intellectual property and travel services, as noted by The Financial Analyst. This divergence highlights a strategic shift: the UK is leveraging its strengths in intangible assets to offset vulnerabilities in manufacturing. However, the trade deficit in goods-£25 billion in 2024-remains a concern, fueled by high imports of electronics and consumer goods, a point also reported by The Financial Analyst.

The 2025 UK-China Economic and Financial Dialogue sought to recalibrate this imbalance. Agreements worth £600 million over five years, including improved market access for UK agri-food and legal services, are detailed in the UK-China fact sheet. Yet, these gains are shadowed by the NSIA's scrutiny of Chinese investments in critical sectors like steel and energy. The near-shutdown of British Steel by Jingye exemplifies the risks of over-reliance on foreign capital in strategic industries, as chronicled by Asia Times.

Political Tensions and Regulatory Scrutiny

The UK's geopolitical alignment with the West has intensified scrutiny of Chinese investments. The NSIA grants authorities powers to block deals deemed a national security risk, particularly in AI, semiconductors, and infrastructure, a point made in the Hogan Lovells analysis. This framework, while protective, has created uncertainty for investors. For instance, Chinese firms seeking to enter the UK's green energy sector-where the UK aims to become a "clean energy superpower"-must now navigate a dual mandate: economic collaboration and geopolitical caution, according to analysis from Castlestone Bridge.

Meanwhile, China's concerns over UK unilateral tariffs and NATO's role in global conflicts have further complicated relations, as reported by China Briefing. These tensions are not abstract; they directly impact portfolio resilience. A 2025 UBS report notes that investors are increasingly advised to diversify holdings in UK-China-linked assets, incorporating gold and fixed income to hedge against volatility.

Diversification Strategies for Resilience

In Q3 2025, global markets rallied amid improved investor sentiment, with Asian equities surging 12% and gold prices rising 15.7% as a safe-haven asset, according to a Simply Ethical review. For UK-China-linked portfolios, diversification must extend beyond asset classes to geographic and sectoral balance. Key strategies include:
1. Gold and Fixed Income: UBS recommends gold as a hedge against geopolitical uncertainty, citing institutional demand from China; quality fixed income and hedge funds also offer stability, as the UBS report argues.
2. Sectoral Diversification: Avoid over-concentration in sectors like steel or telecommunications, where Chinese investments are politically sensitive, as Asia Times highlights. Instead, prioritize green energy and financial services, where UK-China collaboration remains robust, per the UK-China fact sheet.
3. Capital Market Linkages: Initiatives like the UK-China Stock Connect and proposed ETF Connect programme provide structured avenues for cross-border investment while mitigating risks, as outlined in the UK-China fact sheet.

The Path Forward: Cooperation Amid Caution

The UK and China's shared goals in climate action and financial reform offer a counterbalance to tensions. The 2025 Economic and Financial Dialogue emphasized collaboration on green finance and capital market connectivity, as set out in the UK-China fact sheet, reflecting a pragmatic approach. However, investors must remain vigilant. The Labour Government's "Invest 2035" strategy, which prioritises foreign investment in AI and clean energy, will likely face pressure to reconcile economic openness with national security, a dynamic discussed by Castlestone Bridge.

Conclusion

The UK-China relationship is a microcosm of the broader geopolitical-economic tensions reshaping global markets. For investors, resilience lies in strategic diversification-leveraging opportunities in services and green energy while hedging against risks in politically sensitive sectors. As the UK navigates its post-Brexit identity and China asserts its global influence, the ability to balance cooperation with caution will define portfolio success in this turbulent era.