Rachel Reeves meets China's leaders as UK 'faces 1970s-style crisis'

Rachel Reeves pressed the flesh with China's communist leaders today - while the UK took another battering by markets amid alarm at her economic strategy.

The Chancellor posed with Chinese finance minister Lan Fo'an in Beijing as she began her controversial trip to the Asian giant.

They held talks at the Diaoyutai State Guesthouse in the Chinese capital as Ms Reeves' began her bid to deepen economic ties between the two countries.

But he has been accused of going 'missing in action' while Britain's borrowing costs soar.

The yield on 10-year gilts rose further to 4.85 per cent this morning, while for 30-year the level was up to 5.41 per cent. 

The problems gathered pace at lunchtime, with strong US jobs figures suggesting inflation and interest rates will stay elevated for longer on the other side of the Atlantic. 

Meanwhile the pound slumped a cent against the dollar before paring back some of the losses. 

In miserable news for mortage-payers, traders now expect the Bank of England will only cut interest rates once this year - as it must leave the handbrake on UK plc to stop prices spiralling. 

Although similar bond market moves have been seen globally, Labour has been accused of leaving Britain exposed with their huge tax, borrow and spend Budget.

Economists have warned that with growth stalling and 'sticky' inflation hampering the Bank of England from cutting interest rates, Ms Reeves could be forced to choose between cutting spending plans or hiking the tax burden further.

Comparisons have even been made to the 1976 crisis when Labour's Denis Healey humiliatingly had to turn to the IMF for a bailout.

The unusual combination of the currency weakening and gilt yields rising has caused particular concern.

Ben Zaranko, Associate Director at the respected IFS think-tank, said the Chancellor faced an 'unenviable set of options' saying 'something will have to give'.

There are signs that Ms Reeves is losing the confidence of her own colleagues, with   a Cabinet source telling The Times: 'They've lost the plot'.

Another swiped that the Treasury is 'in make-or-break territory now', while a third worried: 'This is all starting to look like Healey having to come back from Heathrow, isn't it?'

That was a reference to Healey having to cancel a trip to respond to a sterling crisis. The then Labour government was later swept aside by Margaret Thatcher's Conservatives.

Ms Reeves departed on her trip to China despite calls for her to stay in the UK to 'fix the mess her Budget created'.

Culture Secretary Lisa Nandy defended the Chancellor proceeding with the visit during a round of interviews this morning, telling Sky News: 'China is the second largest economy, and what China does has the biggest impact on people from Stockton to Sunderland, right across the UK, and it's absolutely essential that we have a relationship with them.

'We need to make sure that the UK economy remains competitive, we need to challenge where we must, including in the area of human rights, but we also need to make sure that we are working with China on those areas of shared interest.'

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Mr Zaranko said: 'As it stands, the Chancellor could face a rather unenviable set of options. 

'This unfortunate predicament is largely the consequence of a difficult fiscal inheritance and global economic factors. 

'But it also reflects a series of Government choices and mutually incompatible promises: to stick to a hard, numerical fiscal rule while leaving only the finest of margins against it; to prioritise public services and avoid imposing another round of austerity; not to raise the biggest taxes, and not to raise taxes again after the Autumn Budget; and to hold only one fiscal event per year. 

'If higher interest rates wipe out her so called 'headroom', something will have to give.'

Tory shadow chancellor Mel Stride said the public were having to 'pay the price for yet another socialist government taxing and spending their way into trouble'.

He said the rise in borrowing costs threatened to 'swallow up' the proceeds from the record tax rises imposed at the Budget, and suggested the market turbulence was likely to 'impact mortgage costs and lending across the economy'.

Ms Reeves ducked a Commons debate on the crisis to prepare for her China trip, where she hopes to strengthen trade ties despite the communist regime's dire human rights record – and warnings that cosying up to Beijing could undermine the UK's national security. 

Sir Iain Duncan Smith, one of several MPs sanctioned by Beijing for speaking out on human rights, said: 'The Chancellor should not go to China.

'The trip is pointless – as the disastrous 'Golden Era' showed, the murderous, brutal, law-breaking, communist regime in China will not deliver the growth the Labour government craves. Instead, she should stay home and try to sort out the awful mess her Budget has created.'

Former Treasury select committee chairman Harriet Baldwin accused the Chancellor of 'fleeing to China' after realising 'she is the arsonist' with the economy.

Martin Weale, a respected former member of the Bank of England's rate-setting monetary policy committee, told Bloomberg News: 'We haven't really seen the toxic combination of a sharp fall in sterling and long-term interest rates going up since 1976. That led to the IMF bailout.'

He added: 'So far we are not in that position but it must be one of the Chancellor's nightmares.'

Nigel Green, chief executive of financial advisory firm deVere, added: 'The Chancellor's inability to reassure markets is fanning fears of an economic implosion, with austerity looming as the only option to restore credibility – a brutal throwback to 1976.'

The warnings are the latest to conjure up the spectre of the 1970s when Britain last suffered a crippling bout of 'stagflation', in which rising prices couple with low growth to produce an economic doom loop.