China Crisis?

19th July 2020

Xi Jinping

Xi Jinping – spearheading China’s economic development

The anti-Chinese rhetoric of the United States, effectively the declaration of a second Cold War by President Donald Trump, has taken grip in the UK this week with the decision to cut investment from Chinese firm Huawei in the UK’s 5G network.

A report by the European Commission published in March last year indicated that across the European Union, of which the UK was then a member, Chinese investment totalled 9.5%, up from 2.5% in 2007.  This compared to investment from US and Canadian companies, which stood at 29.5% down from 42% in 2007.

The amount of Chinese foreign direct investment in the EU was rising rapidly, peaking at €37.2bn in 2016.  However, it has since fallen away following a slowdown in Chinese investment globally.  Nevertheless, China now owns, or has a stake in, four airports, six maritime ports and 13 professional soccer teams in Europe.  It estimated there has been 45% more investment activity in 30 European countries from China than from the US, since 2008.

Across Europe the major focus of Chinese investment is in the UK, Germany, Italy and France.  In addition, the new Silk Road programme, the Belt and Road Initiative (BRI), which aims to invest in major infrastructure programmes to increase trade between China and Europe, has twenty European countries on board, including Italy and Russia.

The reason cited for the Huawei ban in the UK is security.  Making the UK 5G network so dependent upon Chinese technology, it is argued, poses a risk as the company is allegedly controlled by the Chinese state.

However, the UK has been keen to encourage Chinese investment in other areas, including the proposed Hinkley Point C nuclear power plant in Somerset, and in a wide range of businesses in the manufacturing and financial sectors, totalling over $20 billion in 2017.

The real story in terms of foreign direct investment into the UK is that the United States by far and away tops the list, with over 23% of foreign direct investment in the UK in 2017 coming from the US.  The UK government is keen to keep the US on board, especially to negotiate a post Brexit trade deal, so compliance US foreign policy remains a priority for the Tories.

The situation is further complicated by the situation in Hong Kong.  The reluctant return of Hong Kong to the Chinese in 1997 has long been a sore point in British ruling circles who see the city as a financial haven and a bridgehead into China, both economically and politically.  Hong Kong was seized by the British in the mid nineteenth century and Britain was subsequently granted a 99 year lease on the colony in 1898 by a weakened and corrupt Chinese state.

The turnover of the island back to China in 1997 came with an agreement to preserve Hong Kong’s capitalist system, the One Country, Two Systems agreement, an attempt by a struggling imperialism to keep a foothold in China and use Hong Kong as a focal point of opposition to the Chinese state.  Recent democracy protests, aimed at securing the secession of Hong Kong from China appear to have been part of this long term strategy.

Not surprisingly the reaction of China has been robust, with the passing of new national security legislation, while the US response has been to ramp up the odds as Donald Trump heads towards a November presidential election.  Latest reports suggest not only an increase in sanctions on Chinese goods by the US but travel restrictions on Chinese Community Party members. The mindset of the US administration was outlined by US Attorney General, William Barr, recently who accused China of conducting,

“…economic blitzkrieg – an aggressive, orchestrated, whole of government, and indeed, whole of society campaign to seize the commanding hights of the global economy and to surpass the US as the world’s preeminent superpower.”

This is the real threat as far as the United States is concerned.  The hegemony of the dollar as the international default currency; the loss of political and economic influence in South East Asia, Africa and Latin America, as developing countries find the terms of trade with China to be less exploitative than those with the West; the loss of influence and investment opportunities in Europe as Chinese technology makes inroads into areas previously dominated by US technology giants.

Concerns about human rights and democracy may look good for the headlines and make Donald Trump feel and, to some, appear righteous ahead of the election in November.  The real deal for the US however, with the UK hanging on its coattails is, as ever, about the cash.  Expect the anti-Chinese rhetoric to continue in the coming months but expect deals to be done behind the scenes all the same.

Like it or not, the West cannot ignore China as an emerging superpower.  Plotting to undermine China will no doubt continue but in the short term the West will have to learn to live with the reality of China’s place in the world.

 

 

 

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