Mr. Mark Field (Cities of London and Westminster) (Con): May I welcome you to the Chair, Mr.Taylor? I often hear your interventions from the other side of the Chamber, but I hope that there will be slightly fewer interventions today than there normally are during the debates that I introduce on economic affairs. I shall speak in some detail about the implications for UK policy of relations between
China and the west, and about the global economic implications of those relations in what is obviously a globally-trading and highly-integrated world economy.
The collapse of Lehman Brothers last September triggered an unravelling of the global economy so swift that its cause and scope was beyond the comprehension of not only a bewildered public but most politicians and financiers. Since that time, a huge number of jobs have been junked, global trade has slumped spectacularly and Governments across the globe have borrowed unimaginable sums to shore up our ailing economies. The implications are so colossal and, indeed, so long term that we do not know their true cost, and I suspect that we will not do so for a considerable time.
If we are to understand the broader reasons why that unravelling has occurred, we should examine the crucial relationship between the world?s biggest economy?the United States?and its eastern pretender,
China. For many years, that relationship has driven globalisation, but it now has the potential to wound fatally that same project. For a decade or more, the United States?along with the UK?has pursued a model of growth based on debt-fuelled consumption, and the cash and cheap goods provided courtesy of
China. Pursued to its limits, that relationship has become dangerously unbalanced, and the myth of its sustainability was brutally uncovered when the complicated financial mechanisms that had hitherto propped it up dramatically collapsed during the past year or so.
The consequences of that imbalance are not yet fully apparent and their impact is still difficult to predict. However, it seems certain that the change will be profound and troubling and that the west?s position in the world may never be the same again. In the 1970s and 1980s, Wall Street received a number of breaks, which began with the dollar?s link with gold being broken by the Nixon Administration?s repudiation of Bretton Woods. Later, of course, when Ronald Reagan was President, he ended capital controls. The global bond market expanded and the
US economy was liberalised, opening up American savings and pensions. With US pension funds ballooning, Wall Street for the first time had access to a huge new source of finance, which it sought to invest to maximum value. Corporations were encouraged to invest globally, to exploit new markets and to demand the highest return for their shareholders, who were often ordinary American pension holders.
Alongside all that came a hollowing out of the US manufacturing industry as companies looked abroad for cheap goods and labour. Indeed, similar trends were afoot on these shores. By the mid-1980s, the American manufacturing sector was increasingly taking advantage of competitively priced, non-unionised foreign workers by moving much of its production abroad. That process only accelerated when the end of the cold war introduced millions more workers to the global economy. The working classes of America were invariably the losers of that deal, but politicians made the case that the benefits to the US would somehow outweigh their collective plight as new employment would be found in services, technology and the like. Workers would be reskilled and the vulnerable would be caught, in the short term at least, by the welfare system.
China was poised and ready to take advantage of those developments following decades of economic darkness, at least as far as the west was concerned, since the emergence of Chairman Mao in the 1940s. The more pragmatic regime of Deng Xiaoping adopted an open-door policy from the late 1970s. The country moved away from command socialism and concentrated on developing strategic industries with the global market very firmly in mind. The United States happily paved the way for further Chinese integration into the global economy, culminating in China?s eventual admission to the World Trade Organisation in 2001. That final step was partially aimed at shrinking the trade deficit between the two countries, but in reality that deficit has ballooned, especially in the past decade.
Whilst China did liberalise and open certain sections of its economy, it also kept the door closed to its domestic market. By casting aside the established rules of free trade,
China became the overwhelming beneficiary of globalisation, exploiting western markets while reinforcing its own role at the centre of an increasingly powerful Asian market block. That powerful Asian market block will be the reality that we will all face. It will be a challenge, but should also present great opportunities in this country in the decades to come.
China simultaneously built up its own internal market and service sector, accrued vast reserves and began to secure stakes in strategically important commodity corporations and those that agreed to transfer technological know-how.
By the late 1990s, the income of the average US citizen had begun to stagnate as the hollowing out of western economies continued apace. To disguise that somewhat unpalatable problem, politicians in the US and here in the UK, its most closely related economic cousin, eagerly took advantage of the low inflationary environment provided by cheap Asian labour. They turned to high consumption as an economic model, fuelled by debt, which was often racked up against Chinese reserves, in the private and public sector. With easy credit and cheap mortgages, US and UK individuals were able to borrow cash as never before, with a false perception of wealth embedded by access to cheap Chinese goods.
Meanwhile, financial services in the west thrived to manage the seemingly insatiable demand for new investment instruments. For politicians in America and China, the relationship between the countries seemed, for so long, to be a classic win-win situation. In the US, citizens could enjoy cheap money and cheap goods, while in China, the immature manufacturing sector boomed as hungry western markets were exploited. For sure, even in the late 1990s, there were some nagging doubts about the sustainability of that arrangement, but to rectify them would have caused short-term economic difficulties and would have got politicians in the west, who always have an eye on the electoral calendar, into hot water with angry voters. Furthermore, the United States was still in the driving seat and would be able to dictate the terms of that relationship with China?or so we thought. Make no mistake: China will not emerge entirely unscathed from this global recession. A slump in demand has already led to extensive Chinese unemployment, and social upheaval may follow. Given that China relies so heavily on the healthy US consumer, it is conceivable that the unbalanced, overly dependent relationship may yet develop into a tight economic alliance. Nevertheless, China remains on a growth trajectory that seems likely to take its economy past that of the United States by 2050. The US Treasury and its ailing banks have without doubt been stabilised by Chinese loans and loans from other sovereign wealth funds from the Middle East. The US market remains very dependent on cheap Chinese imports, and it is hard not to conclude that China holds most of the cards when negotiating the terms of its bargain with America. What is more, its ascendancy, and that of its near neighbour, India, may be just beginning.
Last year, as the financial system collapsed at a breathtaking rate, US and European banks and Governments quickly borrowed colossal sums to shore up their operations. That borrowing was largely funded by China?s vast surplus. In that way, a trend that was already in motion?a shift, as I always put it, of economic power eastwards?has been markedly accelerated. The legitimacy of western capitalism has always been bound up in the idea that it can best deliver prosperity to the masses, offering many millions a route to middle income stability each year. But as jobs and money have been sucked eastwards, that mass prosperity, for the west at least, may no longer be guaranteed. The wealth of the past two decades is increasingly being regarded as an illusion, and the competitive edge that the US and Europe might have had over China and India in services, technological development and scientific research might just as easily be taken from us. China is churning out millions of industrious, well-qualified engineering and technology graduates every year or two. As it controls stakes in so many western corporations, it is also able to transfer and copy intellectual wealth with ease. Soon the powerhouses ofAsia could be undercutting western labour in not only manual but white-collar and the most highly-qualified management positions.
I have visited China twice,three times if one includes my trip to Hong Kong in 2006,and I have seen at first hand how rapidlyChina has been able to transform itself. On my last trip, I led a delegation of local Chinese business folk from my constituency,Chinatown, in Soho, is, of course, in the Cities of London and Westminster, and we visited the two booming cities of Beijing and Shanghai. I was accompanied by half a dozen British-born business men from the London Chinatown Chinese Association. During the first leg of our trip, we stayed in the Pudong district of Shanghai. Only 15 years ago, Pudong was just a handful of small farming villages, but it has since been swallowed up into the enormous Shanghai metropolis, and the Chinese have built from scratch a financial district that, in addition to having countless skyscrapers, is populated by 2.8 million people. Shanghai?s overall headcount is now about 20 million, which is three times the population of London, which is Europe's biggest city.
Whilst out there, I also travelled on the Maglev train that links Pudong to Shanghai's international airport. The technology for that electromagnetic train system dates back to the 1930s?it was a German invention, but it was adapted for commercial use only relatively recently. We smoothly travelled at some 430 kph, or 275 mph, on that state-of-the-art transport system. In all, the 21-mile journey took eight minutes from start to finish; one can just imagine the degree to which a Maglev link between the City of London and Heathrow would ease the strain of doing business here, although I suspect it would also mire us in the endless planning wrangles to which major infrastructure projects in the UK are subject.
During that visit, I also saw the sparkling, state-of-the-art dock development. That involved driving across the 20-mile Donghai Bridge, which is the longest bridge across water in the world, but took a mere three years to build. The port, which has been developed on largely reclaimed land in the bay outside Shanghai, features acres of containers stacked up, literally, as far as the eye can see. It had been only a few years since my first trip to Beijing, but the change in China's political capital was enormous not least because that metropolis was, at that juncture, preparing for the 2008 Olympic spectacular. So, we can only imagine what China will achieve in the coming decade. So, what will China do with the strong hand that it has now engineered? Many assume, perhaps naively, that along the path towards economic superpower status, China will inevitably become more open, democratic and western. We assume, in this country?or perhaps just hope?that it will abide by the western ideals that have shaped the world?s international institutions and laws in the past 60 or so years, and that it will perhaps play by our rules. But all those notions betray a fundamental misunderstanding of how China operates. Westerners have confused the material wealth brought by access to cheap credit and cheap goods as a physical demonstration of our superiority in the world. However, the debt accrued by the west has come at a cost, a cost that perhaps too many outsiders, certainly in the political class, do not fully appreciate, but that will become apparent in the decade ahead, in terms of both future economic health and, more importantly, global influence.
China has played, and continues to play, a patient game. Not for that country are the quick fixes and instant gratification inevitably pushed for by western democracies. Indeed, a more long-term strategy has been pursued, best illustrated by Deng Xiaoping?s 24-character strategy: observe calmly; secure opposition; cope with affairs calmly; hide the extent of our capacities; bide our time; maintain an assiduous low profile; never claim leadership; and made some contributions apparently from the sidelines. I believe that it is inconceivable thatChina will not now seek to exercise its muscle on the international, diplomatic and military stages as a result of the strong hand that has been quietly won economically in the past decade. In fact, that power is already manifesting itself. Take, for instance, China?s refusal to condemn explicitly the nuclear ambitions of either Iran or North Korea. Look at its military action in Tibet, despite the international outcry, and the continued unease in Taiwan, of which, I suspect, we have heard only the first Act. The influence that China exercises across large swathes of commodity-rich Africa, from Sudan to Zimbabwe, is also apparent. Similarly, from the Caribbean to the south Pacific, it is systematically buying up influence at the United Nations among its smallest sovereign nations. I have seen with my own eyes the number of countries that only a few years ago recognised Taiwan but that now recognise the People?s Republic of
China, and those countries are all individual voters in the UN. China is increasingly likely to reject US military, economic and humanitarian pressure, even when it is under Barack Obama?s leadership. It will have greater success in any future competition for resources and power and will be able to ignore the norms and rules, as we have set them, of the international community. What does all that mean for the UK? I am interested to hear what the Minister will say, and I appreciate that his eyes are now slightly closer to home, following his latest promotion, on which I congratulate him, but I am sure that he will have some things to say about this matter, and no doubt his successor, when looking at Chinese affairs, will have this at the top of the agenda.
Curiously, now that the price of our national profligacy has been put into sharp focus, policy makers seem determined to return to business as usual. Further borrowing and the maintenance of historically high levels of public expenditure seem, I fear, the order of the day, as the Government seem reluctant to prepare voters for some very inconvenient truths. With typical impatience, the media are already beginning to ask when the recession will end, as it hunts for green shoots in every dark corner. The cold reality, however, is that we must accept that for too long this country has been living way beyond its means, riding a wave of abundant credit, low inflation and inflated house prices, which have combined to create a false hope of ever-rising living standards. As a medium-sized economy primarily reliant on a hitherto booming financial services industry, we shall remain vulnerable, I fear, for some time to come.
For those middle-income folk outside the gilded corridors of finance who are unwilling to accrue wealth largely via housing debt, the economic stagnation has become ever clearer well before the recession. Average salaries and wages have stagnated for almost a decade, a fact that has been disguised by the grossly inflated asset prices, particularly private housing. For younger people in particular, merit and hard work were no longer translating into secure, well-paid jobs and affordable homes. Despite this, I believe that the past 15 years will soon be regarded, and for some time to come, as having been the very best of times. The long, hard slog of a slow recovery will be difficult to swallow for a nation used to assuming that its debts would never be called in. British employees are owed nothing more than the Asian sweatshop worker, and even the graduate-level openings of tomorrow might equally be filled in the decades ahead by qualified and hard-working 20-somethings from the east.
A rapid return to sustainable economic growth cannot be taken for granted. Complacent hopes of British exceptionalism might not see us through. We might not have the money to cushion this blow, as we have had in the past, with a generous welfare system. In the short term, we need to take a long, hard look at the books and sharply pare down our spending commitments. In the longer term, we need to make a strategic decision on the direction of our economy: whether to gamble our future on the possible resurrection of the financial services industry alone, going it alone as some sort of beacon of dynamism, or whether to diversify our economy and, implausible as it might sound today, tie our future more firmly to Europe in the hope that our strength-in-numbers approach will shield us from the stiffest of economic competition from the east.
The City of London, which is in my constituency, is already acutely aware of the increasing influence and economic power of China and has been preparing for Chinese growth for some time. Over the past decade, the City of London Corporation has actively sought to engage with the Chinese leadership and with Chinese regional governments and business leaders, particularly since China became a member of the WTO eight years ago. While much of the corporation?s work in China has been undertaken by representative offices in both Beijing and Shanghai, the City?s annual, high-level outward visits involve a significant role in advancing relations for visiting delegations. The City appreciates that the regular interaction with China?s economic decision makers is vital to London?s continued position as an international financial centre as it provides the City with an ongoing opportunity to influence the development of China?s financial sector. It is an approach that is already reaping dividends. China?s State Council has cited the City of London as a model for Shanghai. The willingness of both countries to engage openly and share expertise has resulted in a greater flow of trade, which benefits UK-based industries in financial services and those firms seeking to expand and grow in a developing market.
With emerging markets accounting for an increasing share of world growth, London knows that it can no longer act in isolation if it is to remain a leading financial centre. The City has therefore worked to foster a web of financial, educational and cultural connection with traditional financial centres, such as New York and Hong Kong, but also with Shanghai and Bombay. Under the umbrella of the memorandum of understanding between the City of London and Shanghai, the corporation has also developed a strong partnership with the Shanghai financial services office, which is tasked with developing Shanghai as a financial and maritime centre. That interaction provides a vital insight into the thinking of the Shanghai government and gives City firms attending round tables and meetings access the Chinese officials. It also allows the UK model to be better understood by China and helps UK firms to win business as the Chinese financial sector grows. The corporation has also been supporting the Treasury?s economic and financial dialogue with China. That collective effort to assist UK firms, share UK expertise and reinforce with the Chinese authorities the fact that there is a two-way benefit of greater trade flows is vital to the success of many UK-based financial services firms, especially the large number seeking to expand in China. As a result, 13 of the 79 qualified foreign institutional investor licences available are held by UK companies, which is higher than for any other European country. UK firms have been sharing knowledge of the corporate bond market in order to reduce China?s reliance on the banking sector, and those UK banks will be well placed when foreign banks are allowed to underwrite corporate bonds.
Due to the work being done to link the UK financial services industry to China, the UK now runs an invisible trade surplus with China, in which the balance of trade is about 2:1 in Britain?s favour. That contrasts sharply with our visible trade balance, which runs 5:1 in China?s favour. UK banks now account for 10 per cent. of foreign banking in China, generating significant revenues for the UK. Our companies are heavily involved in Chinese markets for insurance, legal services and other professional services. For instance, PricewaterhouseCoopers, the global accountancy firm, is the leading firm in China, measured by fee revenue, followed by Ernst and Young, Deloitte and KPMG. Amid all the gloom and doom in the financial services industry, from our own shores and perhaps also from Wall street, there are some good news stories, and this has been one specifically important are, and I would be interested to hear what the Government will do to ensure that it continues to work in that fashion.
Thankfully, the City of London welcomes China?s increasing role in the global economy and regards it as not only a major opportunity for UK firms, but a way of influencing Chinese policy. China will remain a major exporter, but the City believes that Chinese leaders accept that a balanced economy also requires increasing domestic consumption. The UK-based financial services sector can play a crucial role in that and will feature prominently at the Shanghai Expo in 2010. By working in partnership with the Chinese Government and firms, the City of London Corporation seeks to derive maximum benefit for UK firms in mainland China, and from Chinese firms establishing operations in the UK and becoming part of the international financial centre that is the City.
The recent economic demise has never been outside the bounds of possibility. History is full of banking crises, burst bubbles and periods of economic darkness, but the breathtaking speed at which economic power will shift firmly to the east is new. The fundamental imbalance in the economic relationship between the United States and China will now either cause that relationship to implode, or problems will be prolonged and made more acute by a continued tsunami of debt. Either way, the coming decades are likely to be shaped by the emergence of an increasingly confident China that is keen to flex its muscle economically, politically, culturally and, in short order, I suspect, militarily. Others may wish to discuss further the military aspect. Understandably, given the constituency that I represent, my speech has focused more on matters economic and financial.
I believe and fear that the west?s hope that it can somehow assume continued dominance in the knowledge economy may prove optimistic. Within the next 20 years, it is quite likely that intellectual property rights as we know them, be it licensing, patents or copyright protection, which have underpinned the west?s competitive advantage, will undergo an overdue radical, philosophical shake-up. An ever more assertive China will argue that traditional IP structures are no more than the west?s attempt to impose its own form of protectionism to suit its particular demographic.
We should not assume that the dominance of our values in determining global trade will remain unchecked. If there is to be a longer-term price for our collective indebtedness, I fear that it will be for the UK to watch, with increasing impotence, it become our turn to suffer as the rules of the global trading game are changed to our detriment. It is fundamentally for that reason that we need to get balance back in our economy and reduce the debt at the earliest opportunity.
I look forward to hearing what the Minister and other Members who wish to contribute to this debate have to say. As I said, the subject is rather wide-ranging, and I have perhaps focused unduly on matters financial and economic. I hope that others will feel that that they can speak openly about matters in respect of
China that are closer to their heart.