Recent economic analysis suggests that he's taking a big riskby Jay Elwes / September 22, 2015 / Leave a comment
Earlier today, George Osborne delivered a speech in Shanghai in which he looked forward to a “golden era for the UK-China relationship.” Among the ideas put forward in the speech was the decision to connect the London and Shanghai stock exchanges, meaning that Chinese cash will flow into UK markets—and vice versa—in an arrangement described by Osborne as a “win for China and Britain.” This comes in the wake of the recent announcement that Chinese investment will be used to develop the Hinkley Point nuclear Reactor in Somerset, a sign that Britain and China are drawing ever closer in their financial and investment relationship.
There is a logic to this courting of China by Osborne. China is a vast surplus country and Britain a deficit nation. If Chinese capital could be better deployed in London’s financial markets or on the Somerset coast, then—well—why not?
Osborne’s Chinese overture involves deep risks. There is concern among senior economic analysts that the Chinese economy is dangerously flawed, and that government reforms are weakening it further. China’s economy has typically been based on exports, allied with high levels of government spending. More recently, the government has tried to change this, by encouraging private enterprise in the hope that Chinese consumers would earn more, spend more and boost domestic demand. But as the government has lowered levels of infrastucture spending, growth has slowed dramatically, from a pre-crisis peak of around 14 per cent to a rate now estimated at 4 per cent (Chinese economic data are issued by central government, and so considered questionable.)
Willem Buiter, the Chief Economist at Citigroup recently published a paper on China. His remarks were unequivocal: “We believe that there is a high and rising likelihood of a Chinese, emerging market and global recession scenario playing out.” Buiter puts the probability of a global recession in the next 18 months, driven by Chinese weakness, at 55 per cent. The worry, he says is that a recession, beginning in China, could spread among other emerging economies, many of which are already in recession, such as South Africa and Brazil.…