The UK is China’s new bezzie pal… or is that the other way around? What do we need from China and what do they want in return? Time for some explaining;
This year the UK government signed up for the Asian Infrastructure Investment Bank (AIIB).
This is a proposed investment bank which will focus on developing infrastructure in Asia. Think: roads, railways, airports.
The UK was the first non-Asian country to join the AIIB, followed rapidly by other European countries.
By backing the bank, we won a place in China’s good books.
Now the Chinese President Xi Jinping makes the first state visit to the UK in 10 years. Our prime minister David Cameron says the UK can be “China’s best partner in the west”.
So why are we suddenly being all friendly?
China has the second largest economy in the world, after the USA. Unlike Western countries, China’s economy is growing fast. For the past few years China’s economy has grown at a rate of 10% per year. Compare that to the UK’s economy, which is growing at around 0.7% per year.
Academic Martin Jacques mentions that the last time a Chinese President visited the UK, our economy was bigger than China’s. So there. Now the tables have turned, and some predict China will be bigger than the USA in a few years. So it makes sense for us to cosy up to the world’s new superpower.
Put simply: China’s economic worth is going up and the UK wants in.
The UK wants a slice of the Chinese pie as China’s wealth means it can invest in UK projects. China is interested in backing investing in UK nuclear power, the high-speed HS2 railway and the “Northern Powerhouse”.
FYI the Northern Powerhouse is the Conservatives’ idea to invest in the north of England to boost the economy of the area, focusing on the cities of Manchester, Liverpool, Leeds and Sheffield.
Ummm, not exactly.
Some economists were skeptical when the government started schmoozing China. You see, although China’s economy is still growing, it’s growth rate is slowing down. We explained it for you in a neat video;
This year China’s growth rate slowed to around 6.8%. The Chinese Stock Market suffered some major drops in value. All signs that the country’s economic model may not work in the long-term.
In simple English: China’s economy might be in trouble; UK investment might be a bit of a gamble.
Part of the reason the Chinese economy was doing so well in recent years is because it exports products to other countries.
The downside is that these cheap exports are threatening British jobs. As the Chinese President arrived the Tata Steel company announced that 1,200 UK jobs will be cut in Scotland and the North.
They blame cheap Chinese exports for lowering the price of steel. So much for the Northern powerhouse.
Joining the Asian Investment Bank didn’t do much for UK relations with the USA. The Americans see the new bank as a threat to the International Monetary Fund (IMF), the international organisation set up to ensure the stability of the world’s economy. They also aren’t happy about the Chinese building massive sea bases in the South China Sea.
The Communist Party is China’s single political party and asserts strong control over its people.
Officially the country’s constitution allows freedom of speech, however the government uses media regulations to censor what information is released.
Anti-government bloggers and activists are often jailed and prisoners are reportedly beaten and electrocuted. China has the death penalty and last year China handed out the highest number of death sentences in the world.
Earlier this year students in the Chinese territory of Hong Kong protested against the Chinese government, claiming that new rules made it easy for the Communist party to screen out candidates they don’t approve of.
In the UK protests over human rights abuses are expected throughout President Xi’s visit. Labour leader Jeremy Corbyn was warned by the Chinese ambassador not to make a fuss about China’s human rights.
However, it’s worth saying that life in China today is a whole lot better than it once was. Martin Jacques notes that the country has lifted 600 million people out of poverty, “arguably the single biggest global contribution to human rights over the last three decades.” Fair enough.
The Chinese Ambassador to the UK acknowledges that “China and the UK differ very much because we have different history, different culture, we are in different stage of development”.
He added “it’s natural we have differences, even in regard to human rights. In China we care more about rights to better life, to better jobs, to better housing.”
The UK has been criticised in the past for doing business with countries which have questionable human rights. The excuse often given is – it’s not our country; we shouldn’t interfere. Yet if we’re not doing business with a country, does that mean we’re quicker to point the finger over human rights abuses?
Is teaming up with the Chinese a smart move by the government? Should we ignore China’s human rights record?
China’s economy is slowing down and the Chinese Stock Market is about to crash. What does this mean for the rest of the world?
Economy; “the state of a country in terms of the production and consumption of goods and services and the supply of money within the country”
So a strong economy is one which grows at a stable rate, increasing the amount of money in the country. A weak economy is one that is unstable and may shrink, decreasing the amount of money in the country.
The Chinese economy is made up of a vast amount of goods and services – just think how many technological goods, clothing and cars are produced in China. China has a population of around 1.3 billion people and Chinese labour costs are exceedingly low. These factors make China’s economy the second largest in the world (the USA is the largest).
For the past few decades the Chinese economy has been steadily growing by around 10% each year. That all changed this summer. Economic growth slowed down and the Chinese Stock Market saw a massive drop in value.
The Chinese economy relies on investment from other countries. This is because it’s economic model is based on exports. This means selling goods and services to other countries.
China is the largest exporter of goods in the world. The export model means the majority of Chinese goods are exported to other countries, rather than being consumed and used within China itself.
This doesn’t mean that goods made in the country can’t be sold to the Chinese people, but for the moment most companies are focusing on selling abroad. China’s top export products include computers, telephones and office equipment. Last year China’s exports were valued at $2.34 trillion. Wowzers.
Like China, other Asian countries like Japan, Thailand, Indonesia and South Korea use the export model to make money and increase living standards. Nevertheless there is and was a catch: the model is not sustainable.
The Export model made China one of the leading economies in the world. It aims to bring money into the country by industrialising. For China this meant encouraging investors to build factories and transport links in order to build and sell even more products.
China encouraged foreign investment from other countries by establishing “special economic zones” in the 1980s. These zones are areas in the country with special tax benefits for foreign investors. Offering lower tax rates to companies means they are more likely to set up shop in the country.
Foreign investment means more money coming into the country. China’s low wages means manufacturing costs are kept low, meaning more profit for businesses. However, as the China Business Review notes, it didn’t matter how cheaply China could make things as “developed economy demand for manufactured products cannot increase without limit”
In plain English: eventually there will be a limit to what other countries can afford to buy from China.
The Economist agrees that the model is “only a part of the answer to establishing a sustainable economy”.
Economic strategist Patrick Chovanec explained to the Washington Post how “after the financial crisis in 2008, there were signs that… other countries could not afford to go deeper into debt to consume that much. So you started to see a significant falloff in Chinese exports”.
Meaning: China’s exports were dropping, as countries couldn’t afford to buy as many Chinese goods. Given the Chinese economy depends on exporting to other countries; this was a big problem.
To understand Chinese government’s plan to boost the economy we need get our heads around the Stock Market. Don’t panic if you didn’t study business (we didn’t either).
Businesses need money in order to expand and grow. To raise this money quickly the bosses sell off part of the company.
One way of doing this is to sell shares in the company. A share is literally a share in the ownership of the said company. The more shares you have, the more of the company you own.
Think: Dragon’s Den (Shark Tank if you’re American).
Investors buy into the company by purchasing shares. The company uses the cash they receive to grow and expand. Investors hope that the value of the company will increase. If it does their shares (the part of the company they own) also become more valuable.
This is sometimes called owning Equity or Stock in a company.
Shares are bought and sold on Stock Markets. Some, like the New York Stock Exchange, are actual locations where stock traders meet to buy and sell. Others, like the Nasdaq, are virtual market-places where traders complete deals via computer.
After the Global Financial Crisis China’s economic growth began to slow. Within a few years the growth had dropped from 10% to around 7%. This seems like a small change but it was not good news for China.
The Chinese government wanted to boost economic growth. One of their ideas was to change the rules of the Chinese Stock Market. For the first time many ordinary Chinese citizens could buy shares in companies.
Chinese government thinks: more local investment = bigger economic growth.
Government-owned media (newspapers, TV, radio) encouraged people to invest. Many Chinese families borrowed money to buy shares, or invested their savings. They hoped that their shares would eventually grow in value. Between 2014 and 2015 more than 40 million new stock market accounts were opened. However, many of these new investors had no understanding of the financial market. Doesn’t exactly sound like a recipe for success.
As millions of new investors started placing borrowed money into the stock market, share prices were pushed up to inflated levels. The Chinese government realised that allowing people to buy all these shares with borrowed money was a bad idea.
First, if people ended up losing money by making a bad investment then they would then owe a lot of money. Second, these inflated prices were bound to drop at some point.
When they eventually did, investors panicked and sold off their shares to pay back the money they had borrowed.
This mass selling pushed share prices down even further and in June 2015 the market crashed downwards. The equivalent of $3 trillion was lost as a result of the drop in share prices. Not a good day to be in finance.
The government tried to encourage business by reducing the value of the Chinese currency, the Yuan. This was meant to make Chinese goods cheaper, encouraging other countries to buy them. So far it hasn’t worked. Investors around the world still fear the problems in the Chinese economy will spread abroad. This isn’t just paranoia BTW; it could actually happen.
At the moment only 1.5% of Chinese shares belong to foreigners. Despite this fact, the slowing of growth in the Chinese economy and their recent stock market crashes are affecting financial markets in the UK, Europe and America. Put simply: when the Chinese economy goes a bit wobbly, we all feel the effects. Yes, “wobbly” is a technical term.
The BBC reports how stock markets in London, New York and Paris are also seeing drops in value. The value of the FTSE 100 (the UK’s top 100 companies) dropped by around 5% – the largest fall in value this year. These British companies lost the equivalent of £60 billion as a direct result of China’s economic problems.
To recap: there is strong evidence to suggest that China’s export model isn’t working. Economists argue China needs to switch to an economic model called Domestic Consumption (whoever said economics wasn’t sexy?!). In this model goods and services created in the country are bought and used within China.
To achieve this the Chinese government needs to encourage Chinese people to consume more. For example; they attempted to increase the number of washing machines sold to Chinese people in rural communities by distributing coupons and offering a discount.
We’ll have to wait to see if the issues in the Chinese economy lead to trouble around the world. But things don’t look good.