A weakened Britain finally learns how to kowtow to Beijing
Chinese President Xi Jinping’s four-day visit to Britain this week will not include a stopover in Redcar.
The U.K.’s largest remaining steel mill, Teesside Steelworks, doused its ovens for the last time this week, the latest in a long line of victims of what the U.K. industry association calls a ‘tsunami of Chinese steel’ flooding the world. It was joined on Monday by Midlands-based Caparo Industries, which put the bulk of its operations into administration. And on Tuesday, Tata Steel announced nearly 1,200 lay-offs at two plants in Yorkshire and Scotland, which also seem doomed to close in the near future.
These events have less to do with global competitiveness than with China’s policy choices: specifically, its disastrous over-investment in industrial capacity and now its reluctance to let market forces punish its most egregious errors. This week, Beijing is leaning on the creditors of a distressed state-owned steel trader to stop them from putting the firm into bankruptcy by exercising their rights to repayment.
This probably didn’t make for polite table conversation at Tuesday night’s banquet in Buckingham Palace, where Queen Elizabeth and the Duchess of Cambridge showered Xi and his wife with the fairy dust of royalty ancient and modern. (Prince Charles, in a rare display of principle over expediency, stayed away—albeit in protest at China’s treatment of the Dalai Lama, rather than its ravaging of the north of Britain.)
In short, Britain is sucking it up big time this week, having finally learned to kowtow after a 218-year trade relationship in which it has tended to be the one handing out the humiliations.
Britain has been wooing China for some time. Earlier this year, it broke ranks with the rest of the world’s richest democracies and became the first of the G7 to join the new, Chinese-led Asian Infrastructure Investment Bank, an institution that Washington fears will challenge the pre-eminence of the International Monetary Fund and World Bank. Last month, when George Osborne, chancellor of the exchequer, visited China, he studiously managed to avoid mentioning human rights, even while in the restive western province of Xinjiang, where the Muslim Uighur minority routinely protests, often violently, against perceived discrimination.
What does Britain hope to gain in return for such deference? More exports would be nice, of course. The U.K. found the Chinese market strangely difficult to penetrate as long as it was trying to stop China from gutting democracy in Hong Kong. They’ve picked up nicely now that it’s thrown in the towel. The U.K.’s exports to China overtook France’s last year, but are still barely a quarter of Germany’s.
But most of all, Britain is gunning for increased investment from China to Britain. Long-term business investment in the U.K. hasn’t recovered meaningfully from the recession, and successive governments have been more concerned with keeping necessary investment off the public balance sheet, out of fear of showing the public just how high the budget deficit really is.
This helps explain why China’s 30% stake in Britain’s first new nuclear power station since 1995, a French-led project slated to cost an eye-watering $37 billion, has so far attracted the most attention from Xi Jinping’s visit. China may also get the chance to build two more reactors, using its own technology. (Nothing remains of Britain’s own nuclear industry after an electricity market reform made it unviable 14 years ago. To persuade the French and the Chinese to keep the lights on, the British government has locked itself into a guarantee to pay over $140 per kilowatt-hour for the plant’s output—over twice the current wholesale market price.)
Thankfully, Britain has a shot at achieving a few real and sustainable benefits from improved relations with China. One notable example is the $3 billion development of the Royal London Dock in east London, which Mayor Boris Johnson intends to become the capital’s third business hub after the City and Docklands. (Please don’t ask him any tiresome questions about the tender process or the developer’s alleged involvement in forced evictions in projects at home.)
Chinese investors are also backing a new $5 billion Paramount theme park in a depressed part of Kent, south-east of London (the organizers will be hoping to catch some of the tens of millions of new Chinese tourists who will be heading to Europe in the coming years). And Osborne is trying to get Chinese money to pay for $24 billion of infrastructure and housing projects in the north of England, an investment that might offset the political damage stemming from the steel industry’s woes.
All of these have at least a chance of success, given China’s desire to find a relatively safe, if low-yielding, parking spot for its massive pile of foreign assets; especially one not tied directly to the dollar.
Most of all, the U.K. hopes to become the biggest center for offshore business in renminbi. That market, far more important than the much more distant prospect of a link between the London and Shanghai stock exchanges, will surely survive whatever short- and medium-term problems the Chinese economy encounters, and will give China an influence in the global financial system that better reflects its place in the global economy.
The national security community might not like it, but the British government has accepted that, in a post-crisis world, China’s official reserves (and their proxies) are one of the most important sources of long-term investment capital available. It certainly isn’t waiting for Silicon Valley philanthropists or Wall Street to regenerate Manchester’s housing stock. The long-term price, in geopolitical leverage, seems only too obvious (the lack of desire to impose anti-dumping duties on Chinese steel through the World Trade Organization is conspicuous this week). But that will largely be a problem for future generations.
In the meantime, Westminster will have to comfort itself with the hope that trade and investment really do bring countries together, and pray that China will use its position as the dominant partner in a trading relationship with more wisdom and restraint than Britain did in the 19th and 20th centuries.