Kirsty Dorsey: Is China deal really such a great leap forward?

Whereas few high-ranking officials had previously ventured north of the Border, the man tipped to become China's next premier not only kicked off his UK tour in Edinburgh, but also arrived with a clutch of "good news" deals in hand.

Li Keqiang, China's 55-year-old vice-premier, delighted his Scottish ministerial hosts with confirmation of a major investment in Grangemouth, an agreement to deploy Scottish renewable energy technology in China, and the lifting of his country's ban on Scottish salmon imports. Though none of these deals were ignored by the media, the news that giant pandas Tian Tian and Yangguang would soon relocate to Edinburgh Zoo undoubtedly grabbed the biggest headlines.

It was enough to lead Enterprise Minister Jim Mather to later declare it had been "an exceptional week for Scotland on a global stage". That his comments were prompted by the release of weak Scottish export figures only further highlights the importance assigned to the link between stronger ties with China and Scotland's future economic prosperity.

However, questions remain as to how a relationship will work on a practical level between the world's largest country and one that has just a quarter of the number of inhabitants of the capital city of Beijing.

Added to this are the political sensitivities aroused by China's Communist-controlled government. Last week's four-day visit to the UK did not include a single press conference, reportedly because the Chinese feared the vice-premier might be asked awkward questions about human rights abuses.

While acknowledging the difficulties in dealing with companies backed by a Communist state, Scottish business leaders say that as long as it is legal to conduct business in China, firms should be encouraged to do so. Many such as Devro, Tullis Russell, Howden, Edrington, Weir Group, Clyde Blowers and Standard Life already do so, providing tangible evidence of the benefits of operating in China.

"Britain and Scotland are among the most open economies in the world, and yes, there are some downsides to that, but on the whole we have benefited enormously," says David Lonsdale, assistant director of CBI Scotland. "On balance, the positives greatly outweigh the negatives."

What doesn't square is the imbalance of trade between China and the UK, and particularly Scotland. Latest figures from the Office for National Statistics show that although the deficit with China shrank to a seven-month low in November, the UK still imported 1.8 billion worth of goods more than it sold into China.

According to the Scottish Government's latest Global Connections Survey, China currently ranks as the 15th largest overseas export destination for Scots-manufactured products, accounting for 325m worth of goods in 2009. That pales in comparison to the 3.29bn in goods shipped to the US - Scotland's biggest overseas export destination.

But Brian Ashcroft, policy director at the Fraser of Allander Institute at Strathclyde University, says it is misleading to use such bilateral trade flows as a measure of the success of economic ties. Though there are issues surrounding what he describes as "power relationships", benefits are available to both sides.

"There are issues about China being so big that in investment deals they can get much of the benefit, but that doesn't mean we won't get benefits as well," he says.

"Fundamentally, this is a good thing. But it needs to be thought about strategically, and we need to be sure we are getting a good price for what we are giving."

Ashcroft believes Scotland should as far as possible adopt the Chinese strategy of promoting joint ventures when it comes to inward investments. Though Scotland's small domestic market gives it less muscle than the Chinese when insisting on such structures, joint ventures tend to maximise the benefits of growth to the economy. "We need to think similarly," he says.

This is what happened in the case of last week's largest Scottish business announcement, the acquisition of half of the Grangemouth oil refining operations by state-controlled PetroChina.

The deal will help safeguard 1,400 jobs at the facility. Owner Ineos, which needed to relieve pressure on its balance sheet, is said to have complained privately during the past year that Scottish banks were unwilling to extend financial support on commercially viable terms.

With potential buyers of low-margin refining operations thin on the ground, the confirmation from PetroChina was undoubtedly something of a relief.

But despite being widely welcomed, some believe the role of foreign investors in strategic assets should be a matter of closer scrutiny.

There are concerns in some quarters that China could be the ultimate winner of relations with Scotland, buying up a number of crucial stakes or even whole companies in this country, and leaving Scots workers and key parts of the economy at the mercy of decision-makers based on the other side of the world.

"What would be the consequences in a few years if Scotland's only oil refinery is owned by the Chinese government?" asks Stephen Boyd, assistant secretary of the STUC. "We are not saying no -we just need to think through the possible implications."

Others attracting interest are firms in the green energy sector, as China has made no secret of its hunger for renewable technologies.

China is also keen to move its manufacturing base up the value chain. This is one of the reasons why companies such as engineering group Weir, which makes pumps and valves for industrial use, has so far succeeded with its expansion plans in the so-called "rising Dragon".

Announcing a further expansion of its Chinese operations earlier this week, Glasgow-based Weir acknowledged that the Asian giant would become an increasingly important part of its global operations. Speaking on the day of that announcement, chief executive Keith Cochrane said it was no longer imperative that Weir work with local partners out there.

"China is developing into a maturing market and it's perfectly possible for certain products to establish a position independently, but equally there are circumstances where partners add value," he said. "China is a huge market and we only have a relatively modest market share, but that's partly an opportunity."

Bob Hart, professor of applied economics at Stirling Management School, says rising income across the Chinese population could also bode well for manufacturers of consumer goods such as whisky.

Makers of Scotch, whose exports to China were valued at 44 million in 2009, received a significant boost last year when China said it would give legal protection by ensuring that any product labelled as "Scotch Whisky" in China must have been produced in Scotland.

Wendy Liu, Scottish manager for the China-Britain Business Council, says other firms that could benefit from rising consumer demand in China include those involved in textiles, tourism and "luxury" goods. Cashmere business Todd & Duncan of Kinross counts China's Ningxia Zhongyin among its major investors, while last year's launch of a Scottish golf brochure by China Holidays is expected to bring in more high-spending tourists.

Given the disparity in size between the countries, Stirling University's Hart says Chinese interest in just a few Scottish sectors could have "huge benefits" to the economy. He adds that there is no reason why both countries cannot flourish from a strengthened relationship.

"It is mutual compatibility, that is what matters," Hart says. "If you start thinking in terms of winners and losers, that is the kiss of death."