Monday 4 February 2019 8:58 am

Don’t let healthy scepticism about China become paranoia

With Britain looking so intently at itself in the mirror of the Brexit debate, we are missing something important at the other side of the world.

The China slowdown is the most important single factor in the bad news that keeps coming out of Jaguar Land Rover, and it is causing many other companies to reassess their growth forecasts.

Less than five years ago, as president of the global Board of Trade, one of my main tasks was to help develop our excellent relations with the Chinese, described then as the “golden era”.

Ministerial visits in both directions helped to cement closer ties, manifested in rapidly growing trade, Chinese students coming to Britain, a welcome mat for Chinese investors, and potentially lucrative business for the City of London.

I liked to think that by promoting our creative industries in Qingdao and manufacturing joint ventures in Shenzhen, I was contributing to Britain having a commercial foothold in what, on some measures, is the world’s biggest economy ahead even of the US (and the second, at least).

I don’t see the same enthusiasm among my successors.

One reason is the slowdown in Chinese growth to well below historic trends, and below other Asian economies like India, Vietnam, and Indonesia. But an obsession with short-term trends is a besetting sin of British – and particularly financial sector – business thinking.

I recall that even when I was scenario planning for Shell 25 years ago, there were cautious voices in the west warning that China’s growth was a “flash in the pan”, unsustainable, and built on weak foundations or simply exaggerated by zealous statisticians.

To be sure, there are genuine challenges. There is a big overhang of debt incurred by companies and state entities during the extraordinary surge of infrastructure investment, which was China’s response to the 2008 global crisis. The financial sector is stuffed with bad loans.

The rebalancing to an economy driven by domestic consumption rather than investment and exports is difficult and happening slowly (though Donald Trump is actually acting as a catalyst).

And the extraordinary entrepreneurial energy unleashed by modern China is in danger of being stifled by political centralisation and the “anti-corruption” drive directed not only at the corrupt, but at President Xi Jinping’s rivals.

But these problems do not mean that China will collapse in a heap like the former Soviet Union. At worst, we are likely to see several years of disappointing performance and China no longer driving global, and particularly Asian, growth.

Moreover, the transformation of China into a modern economic superpower is a long-term project. Those who have engaged seriously with China have always understood that it would not smoothly evolve – economically and politically – into a clone of the west.

Instead, the key question now for us and the rest of Europe is whether to continue close engagement at a time of major tension. There are at present two western responses, and the difference is crucial.

The first is fundamentally hostile, seeing China as a security threat by virtue if its success and size – a viewpoint that is taking hold in the US. That would be a big mistake, since China’s reemergence is inevitable, and in many respects welcome.

The second is to concentrate on getting China to conform to international standards of trading and investment behaviour. It is not a poor developing country anymore, and should not be treated as such. Its model of “state capitalism” will have to adapt if there is to be meaningful cooperation.

That said, we shouldn’t allow healthy scepticism about China to become paranoia. Huawei is a case in point.

There are warnings that, in the brave new world of 5G technology, it is dangerous to allow a Chinese company to become one of our leading suppliers. I am sure that there are legitimate concerns, but I recall that these were aired throughout my five years as business secretary, and yet repeated, careful vetting of the company found no good reason to exclude it on security grounds.

The uncomfortable truth for the UK, and for those who promote Brexit in particular, is that these changes in China will not come through the rather toothless WTO, but through tough but constructive negotiations with the country’s main trading partners: the US, Japan, and the EU.

Trump’s belligerent economic nationalism and obsession with trade deficits are a distraction from the issues which we should be getting tough on: hidden subsidies to state enterprises, closed procurement, and the failure to honour promises to protect intellectual property.

And while the EU with its combined heft is able to be both tough and constructive, Britain on its own will be a largely powerless supplicant. I suspect that the Chinese, seeing Britain desperate for a trade deal of its own, will be looking forward to a tasty breakfast.

I am an optimist about China’s future and believe that we and the rest of the EU should be part of it. We are not in a “golden era”, but silver is better than either fools’ gold or base metal.


City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.