So we are cosying up to China. And why not? We are a trading nation and China will within the next 10 to 20 years pass the United States to become the world’s largest economy. It is already the world’s largest car market, its largest oil importer, and to take a less positive yardstick, its largest emitter of carbon dioxide.
But if closer relations suit us, these also suit them. China’s currency, the renminbi, will gradually be transformed to become fully convertible, held in central bank reserves and used for an increasing proportion of global trade. And its principal offshore trading centre will be London, because this is the world’s largest foreign exchange market. It is also the largest centre for managing cross-border investment. So we welcome Chinese banks and investors to use London as a base, just as we make it easier for Chinese tourists to get visas and come and shop. About time too, you might think, on both counts.
However, while we should welcome China as a more important trading partner, we should be aware that this is not an equal relationship. We are very much the junior partner. To understand how we fit in, first a look back and then a look forward. Thanks to the work of the economic historian, the late Angus Maddison, we know a lot about the relative size of the world’s various countries, going right back to the time of Christ. China was the world’s largest economy from around 1500, when it overtook India, until the late 1880s, when it was overtaken by the US. So, on a 500-year perspective, China’s natural place is to be number one. The US dominance of the past century will be over.
Of course, there will not be any one single moment when the baton is passed on, and, of course, Chinese people will remain much poorer in income per head than Americans. But this idea that US dominance is coming to an end is evident in, for example, criticism by the current Chinese leadership of the way the US is handling its debt limit issue.
Now look forward. Estimates of the date when China passes the US range from 2020 to the 2040s. The date depends on how you do the sums, in particular what exchange rate you take. However, I have not seen a single projection, not one, suggesting the US will remain number one beyond 2050. I find the BRICs studies by Goldman Sachs the most persuasive and their passing point is in the late 2020s. Another Goldman study projects the Chinese exchanges passing Wall Street in terms of market capitalisation, leading to the nice notion that a nominally communist country could simultaneously become the world’s largest capitalist one.
We fit into China’s world vision in a number of ways. We are not important enough to be a threat, unlike the US. Indeed, we could be a useful counterweight to the US, certainly in cultural terms, though of course not in economic terms. If you doubt that, ask why so many Chinese families choose to have their children educated here.
We have reasonable relations at a practical level. Though, in Chinese eyes, we mismanaged the run-up to the handover of Hong Kong, we had created a framework there for Chinese people to prosper, which became a model for development on the mainland. China also took our advice, and that of Germany, in the gradual liberalisation of the economy during the 1980s. The Russians, by contrast, listened to ideological American economists and it was a disaster.
So while we are, and will remain, junior partners, we are important and interesting ones. We can be useful to China, and they can be useful to us. That is not a bad basis for a relationship.
Ireland’s austerity agony is nearly over
Ireland’s last austerity budget was duly unwrapped yesterday. It is “last” in the sense that it prescribes one more year of grind before the country reaches, if not sunlit uplands, at least the prospect of modest growth and rising employment. The debts, alas, remain. However, Ireland may well return to the markets as a welcome borrower. The yield on its 10-year debt is down to 3.7 per cent, much lower than those of Italy and Spain. So the implicit chance of a default is much lower than theirs, and only one point higher than the UK. Welcome news not just for Ireland but also for the eurozone, which desperately needs a success story.
But if this is success, what is failure? Irish people have lost roughly 20 per cent of their real incomes as a result of the crisis – they are 20 per cent poorer than they were in 2007. More than 200,000 have moved abroad for work, with some 85 per cent of those in full-time jobs and reporting much higher satisfaction than before they left. A visit to Dublin showed me just how much of a sense of grind there is, and Dublin is doing much better than the rest of the country. We should welcome the prospect of an end to austerity, but what a price has been paid, and will continue to be paid.