China: Opportunities, Challenges, Risks

Focusing on the strong historical links between the UK and China, increasing trade and tourism, scientific and academic exchanges, the growing emphasis on services, investment and finance, and the “partnership for growth, reform and innovation” now shaping the relationship between the two countries, Sir Sebastian Wood believes there are enormous opportunities in China for business – and the next generation…

Sir Sebastian began by declaring that China defies generalisations because of its complexity and contradictions. One of his predecessors said that the expression “China expert” was in fact an oxymoron, and that “anyone who defines himself as an expert on China is also a moron.” Books about China come out all the time, Sir Sebastian continued, written by “experts” who have never even visited China, whilst people who have lived there for years “struggle to write a single paragraph about it.” With this in mind, Sir Sebastian then proceeded to share his own experience and his opinions of China, first as a member of the team who negotiated with China to determine the future of Hong Kong and, since 2010, as the UK Ambassador.

Over the last 40 years, China has emerged from the chaos of the Cultural Revolution to become the world’s most powerful economy. According to the World Bank, it is now the world’s largest economy in terms of purchasing power. This may be described as an extraordinary moment in history, but it is actually a return to normal – China was the Number One economy for 18 of the last 20 centuries, and the 19th and 20th centuries were simply aberrations or “blips” in economic history. China’s re-emergence will have a profound impact on all of us, “psychologically and emotionally,” and the question now is how to respond to this “seismic shift” in the balance of power.

There are huge opportunities in China for the UK, but it is also important to acknowledge the risks and challenges involved. Since 2010, China has seen an “extraordinary transformation”
and has made some “far-reaching strategic decisions.” It has relaxed control over people’s lives, allowing them more freedom to choose where to live and to work – in the process lifting half a billion people out of poverty and creating a new class of modern consumers who can buy and sell property freely. The Chinese Government has privatised and modernised many state functions, mobilising under-used resources and catching up with Western technology, and opened up more to foreign investment.

For 30 years, the economy has grown at an incredible rate, doubling in size every 7–8 years; but recently its leaders realised “the juggernaut was running out of road” – wages were starting to rise and competition from other developing countries was also increasing. China’s banking system had been like a “giant conveyor belt”, taking money out of people’s savings
to finance state-owned businesses, to invest in building infrastructure, real estate and factories, and the rate of return was beginning to slide. From 2008 inwards, as the global recession deepened, China’s economic model started to look “increasingly unsustainable.” It needed to slow down investment and increase consumption, and pay more attention to the services sector and the environment. To achieve more sustainable growth, it needed to be able to innovate more – with goods invented and designed in China, not just made in China.

These bold reforms would only succeed by tackling vested interests. Market forces needed to play a much bigger role, and the role of the State had to change from “command and control” to enabler. In Sir Sebastian’s opinion, the Chinese Government’s actions are now starting to “match the rhetoric.” There has been a clampdown on corruption and the market has become a bigger influence – some investments are now being allowed to fail, interest rates, land and energy prices are gradually being liberalised, and the country aims to become more open to overseas services companies.

There may have been no “Big Bang” changes, said Sir Sebastian, but “make no mistake, there are big systemic changes taking place.” Peasants may not yet be selling their land, and no big state-owned enterprises have been broken up yet, but economic growth has slowed from 10% to 7%, and this deceleration has happened without creating mass unemployment, as more private companies start to emerge. Even though the debt to GDP ratio is still increasing, Sir Sebastian is optimistic about future growth and prospects for further reforms – and opportunities for the UK.

The last stage of China’s development played well to the economic strategy of Germany, because of the strong emphasis on industry; but the next phase plays to the strengths of the UK, because of its strength in the services sector, innovation, education and research. The UK is also more open than any other country to foreign investment and, in return, China can
also help the UK “rediscover its exporting mojo,” he added. “The next two decades should be a golden period for the economic relationship between China and the UK.” And this is recognised by both countries as a “partnership for growth, reform and innovation.”

The relationship between China and the UK continues to strengthen. British exports to China have doubled since 2010, despite the recession, and this bucks the trend – during this same
period, China’s growth has slowed and other countries’ exports to China have decelerated. “China has noticed how open we are to Chinese investment,” said Sir Sebastian. Whilst other countries have resisted, seeing Chinese investment as a threat to their national sovereignty, the UK has been open to significant investment in industries, including oil and gas, and London is emerging as the main trading centre of the Chinese currency in the markets’ central time zone.

According to China’s own figures, the UK is also the number one destination in Europe for Chinese visitors (490,000 last year; a year-on-year increase of 20%). There are approximately 130,000 Chinese students at UK universities, rising 10% per year, whilst 24% of post-graduate students in the UK are from China, just 1% less than the UK contingent. In addition, there are 230 joint partnerships between Chinese and UK universities, including joint campuses, and Chinese scientists co-author more papers with UK colleagues than scientists in any other country apart from the US.

There is also “untapped potential in new markets such as healthcare,” Sir Sebastian said, with China keen on bold experiments and welcoming foreign investment in new hospitals. The NHS has a good name in China, he added, and UK healthcare companies have already won business this year worth £390 million. Other sectors with huge potential are energy and the environment, as well as financial services – “new markets where the UK can be a first mover, and the knowledge economy partner of choice.”

“China is very open,” Sir Sebastian continued. It is looking for ideas and recognises the UK’s experience as a pioneer in industry, education, science and finance, as well as in tackling
pollution. The two countries also have much to share in terms of learning the lessons of history, with the UK well placed to support reform and help China build its new markets. This is reflected in the fact that during a period of austerity, the UK Government’s network in China has grown substantially. “My message to business is to embrace the opportunity,” Sir Sebastian said. Young people should also “Think China” and get Chinese experience through studying or visiting. “Knowledge of China could be the best investment of your career,” he added.

Turning to international challenges, Sir Sebastian said that although there are still 100 million people living in poverty, the aggregate effect of China on the global economy is now vast. The huge current account surpluses helped to create the debt bubble in Western countries. China generates more greenhouse gases than the UK and the US combined and has higher
per capita carbon dioxide emissions than the EU, whilst its huge appetite for resources has a huge impact on commodity prices. So, despite China’s continuing challenges as a developing country, the international community needs China to get more involved in managing shared international challenges, including trade openness, climate change, biodiversity, microbial disease, conflict and terrorism. It may remain preoccupied with domestic issues, and its per capita income wealth may still be just a fraction of the West’s, but the world needs China’s leaders to do more – including being part of an agreement on an international framework for restricting emissions.

There are also risks involved in China’s re-emergence, Sir Sebastian said. Big historical shifts in the balance of power can lead to conflict, and there are also territorial disputes with some of its East Asian neighbours. But neighbouring economies are deeply intertwined and no one wants conflict, so it is vital China works with other countries to improve mutual understanding throughout the region. The UK is neutral concerning territorial disputes in the region, but it does have a big stake in the peace of the region and encourages all countries
involved to avoid any increase in tension.

Turning to Hong Kong, Sir Sebastian said he regards the successful handover of Hong Kong in 1997 as an “extraordinary success story” in UK/China relations. In the run-up to 1997, many outsiders were doubtful about the idea of “one country, two systems,” but this “innovative constitutional arrangement” has been upheld. China was also suspicious of the UK’s intentions, before the handover, but “we handed it back as a prosperous territory, teeming with ingenuity and enterprise.” The lesson is that the UK and China can and should trust each other. On the current demonstrations, Sir Sebastian said that Hong Kong’s prosperity and stability would be further underpinned by universal suffrage, and the UK encourages all parties now to engage and agree on detailed arrangements which can deliver universal suffrage, and a meaningful advance for democracy in Hong Kong, in 2017.

The world has seen some alarming developments in recent times – in Ukraine and the Middle East, and the growth of nationalism in domestic politics, as well as the threat from Ebola – but Wood is confident that when historians look back at this era, the re-emergence of China at the heart of the global economy, culture and politics will be seen as the defining development of our times. The UK and China have a unique opportunity to be partners for growth. This is just the take-off stage in our relations, he added, and the UK can make a huge contribution to China’s development, whilst China, in turn, becomes a source of new vitality to the UK – with young people well placed to take full advantage.