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Hamish McRae: We still don't grasp how little we matter to China

Economic Studies

Wednesday 29 June 2011 00:00 BST

There is a mismatch. We in Britain perceive that it is our right, even our responsibility, to criticise Chinese human rights. In China such comments are seen as intrusive and offensive. When such matters are raised at a time of trade negotiations, as they have been this week during the talks between David Cameron and his counterpart Wen Jiabao, the disjunction leads to an obvious question. Are we acting in our self-interest to jeopardise exports to China by striking such a tone?

It is an obvious question but surely an overly simplistic one. True, our financial relationships with China are hugely important, both as an inward investor, where we are roughly parallel with Germany, and as an exporter. But there are other relationships that are just as important, maybe more so. There are more students from China in Britain than in any other country, more even than the United States. We have the historic link with China through Hong Kong, which became a model for the Chinese mainland free trade and enterprise zones, which in turn triggered the country's astounding economic take-off.

In any case, all experience of Chinese economic relations, whether in Britain and in other countries, is that politics is not allowed to get in the way of economics. The Chinese will pursue what they feel is their self-interest and that is that. So it is not really a question of our damaging trade relations with them; it is more a question of our still not quite grasping the scale of what is happening in China – or how unimportant our views are to the Chinese.

The economic facts are becoming more generally appreciated. This newspaper yesterday had a report on the new high-speed rail network that China was building: there will be more high-speed links than the rest of the world put together. Many people are aware of the various reports predicting that China is set to become the world's largest economy within 20 years, maybe much sooner. Some people know that China has become the world's largest emitter of carbon dioxide and (I prefer this one) that it produces two-thirds of the world's socks. And most people are aware that China is scooping up natural resources from all over the world, particularly Africa. But while we sort-of understand all this, these are still just statistics. We don't understand the shift in perception and in power.

Two things have happened. One has been the gradual, relentless overhauling of the West by China, passing France, Britain, Germany and last year, Japan in economic size. The other has been the way the recession has speeded up the shift. It changed everything. Not only did China keep growing, unlike the rest of us. Its banks did not need rescuing. Living standards kept on rising. And now, as we stumble out of recession, China's debts are lower than those of any G7 economy, so it is not held back as we all are by the need to pay back debt.

With success has come self-confidence. Money buys influence. So we have headlines in the press such as "China rides to the rescue of the euro" and "Chinese willing to buy more Spanish debt". I am not sure even China can save the euro in the long term, and part of the game here may simply be to remind the Americans that there are other currencies than the dollar.

But there is a swagger to China now that was more muted five years ago. Put it this way: five years ago the Chinese were interested in the way Britain organised its banking regulation, whereas now they don't think they have anything to learn. Can't say I blame them.

Now think of the way Western views on human rights might be perceived. The West does not seem very consistent in their application: look at the way Colonel Gaddafi was feted by, among other countries, Britain, and now is reviled. We are also seen as patronising in our relationship with Africa, with African leaders telling Chinese investors that they find it much easier to deal with them, the Chinese, than with the co-ordinators of Western aid programmes. And as for the way China deals with popular unrest, well, the riots in Greece suggest that European nations face a wave of dissent too.

Many of us will find this troubling. I happen to think that there are lots of things that China can learn from Western societies, just as there are things that we can learn from China. My point is simply that our relative economic failure has diminished our political influence. It does not matter what we say or think, not so much because we might lose trade opportunities if we speak our mind, but because we are not respected any more. The West's judgment on how to run economies has been proved wrong, so why should anyone listen to our judgment as how to run societies?

Inflation hits our living standards

The trudge continues. Some revisions to the first-quarter national accounts confirm growth at 0.5 per cent (or 2 per cent annual rate) but revise downwards estimates for last year, so year-on-year growth is now only 1.5 per cent. The culprit is inflation. Household income was up only 2.3 per cent year-on-year in the first quarter in money terms, but consumer inflation was 5.7 per cent. That is a huge drop in living standards, the worst since 1977.

During this recession, consumption has held up quite well, perhaps as a result of the surge in government borrowing. Now it is payback time. Yes, the economy is growing, and yes, output is switching to exports. That is what re-balancing is about. But I am not sure its advocates fully explained it meant consuming less and exporting more: virtuous, but not much fun.

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