Can China spare Britain a few billion?
Economic diplomacy is back in a big way. That was the message from last month’s G20 summit, and it continues today with high-level UK-China chinwag.
The system that failed the world plunging trade and global growth to contractions not seen since World War Two was a system that was international. Gaps in regulation existed between nations. Massive imbalances between nations affected borrowing, currency markets, and global credit availability.
Today at the grandly titled UK-China Economic and Financial Dialogue, the chancellor and the Chinese Vice Premier Wang Qishan have a chance to start sorting the mess out.
The Chinese are particularly interested in Britain’s bank bailout, there’s talk of an agreement on stock market listings and trade. But the relationship could change radically in the coming years and be captured in just one piece of a dialogue: “Spare us a few billion?”
The hundreds of billions of dollars lent by China to the US became an issue in the presidential election, and one of Hillary Clinton’s first acts as US secretary of state was to thank China for its continued faith in its investments in America. Well as I blogged last week, that faith is being tested, and China seems to be involved in a slow motion flexing of its monetary muscle.
Will this affect Britain? I was intrigued by a report from Morgan Stanley’s global currency team which ranks the UK as the most fiscally vulnerable of all the G10 countries this year, though that situation improves next year.
Part of that vulnerability is the dependence on foreign financing. Much is made of the 56 per cent of US government debt which is funded by foreigners. The number for the UK is 32 per cent, but the UK does not have the cushion of being a world reserve currency.
The equivalent figure for Japan is just 8 per cent, so even though Japan has a thumpingly larger national debt (2009 IMF projection for Japan gross national debt: 217 per cent of GDP/ UK: 63 per cent) the vast proportion of that is raised from Japan’s own domestic legions of conservative savers.
Not so for Britain. That’s why I would love to know if the chancellor is doing any sort of sales job with the Chinese on the solidity of UK government bonds.
These days China has its own blockbuster stimulus packages. It can no longer afford to fund other nations too.