The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (18 page)

A new strategy emerged, and a new type of Chinese investment is on the rise.

On the other side of the world, on Merseyside, another revolution is brewing. Not amongst the dockers, or within the local Labour Party. This is a new geo-economic revolution, a revolution in which China is starting the next phase of its planned ascent. China is now using its financial muscle to invest in Western infrastructure rather than Western debt.

The willingness of the Chinese state to use its giant national piggy bank to fund Britain’s infrastructure is trumpeted as vindication of the UK government’s tough fiscal policy. It is quite some coup for Chancellor George Osborne, the result of meticulous attempts to woo great vats of capital from the East. British government ministers actually present investors from China and the Middle East with lists of UK infrastructure projects looking for investment. Even before the election, the men running China’s wealth funds were surprised by the inviting offer from Gordon Brown that almost everything in the UK was for sale, bar defence and media. It was some contrast to the attitude they had faced in Paris and Berlin. The approach has paid off. Britain is at the front of the queue, way ahead of the Eurozone banks, which would dearly love a helping Chinese hand.

China’s capital is heading to places like the Wirral rather than the financial districts of Paris, Milan or Madrid. The Atlantic Gateway is the name given to an extraordinary project at the mouth of the River Mersey, a project that is regularly mentioned at bilateral ministerial meetings between Britain and China. Developers Peel Holdings have created a Chinese-style vision of extraordinary transformation and development of old dockyards, involving the construction of extensive new office space, skyscrapers housing thousands of apartments, and waterfront leisure facilities. This is the Wirral Waters project, and it is twinned with a similar development on the Liverpool side of the Mersey. This truly is designed to be the Atlantic Gateway to Britain from China in many ways.

‘I want Chinese tenants, I’ve already got a Chinese business partner, and I want a Chinese bank,’ says Lindsey Ashworth, Development Director at Peel. ‘Money is very tight at the moment. China has trillions of dollars that it’s sat on that it wants to invest. We work together with China really well, it’s a marriage made in heaven.’

To kick off the Atlantic Gateway development, up to a thousand Chinese manufacturers will share a massive trade centre to showcase their products to the whole of Europe – a bridgehead in the European Union for Chinese exports and investment. It is the first of its kind in western Europe and includes space for Chinese manufacturers to use local labour for final assembly that would officially count as ‘made in Britain’, and therefore offer free access to the whole European Union.

The Atlantic Gateway is just the start. If this project goes to plan and overcomes local planning concerns in Liverpool, there is a remarkable prize. The developers happen to own the Manchester Ship Canal, and are tilting the marketing of their project to meet the appetite for Chinese-style mega-investments of tens of billions of pounds. Think Chinese funding for a mega-city connecting Liverpool and Manchester, and you might begin to understand the ambition and the spoils that are up for grabs. This is the sort of scale of project that is required by Chinese financiers used to funding ports built on artificial islands, 30-kilometre bridges, and entire new cities.

When I asked Jin Liqun of the China Investment Corporation if China was going to pay for Britain’s infrastructure, he giggled like one of the more avuncular Bond villains. ‘We would be more than happy to step in and invest in the infrastructure development in the UK. Your country has a very good infrastructure over the years but it needs upgrading, needs renovation or you need new infrastructure facilities. I’m very much encouraged by the vast amount of opportunities we could have in your country. CIC has put a lot of money into your country.’

Mr Jin’s attitude to the UK stood in contrast to his colourful scepticism about European labour laws, which he says makes workers ‘slothful’ and ‘indolent’ are thus the ‘root cause’ of the Eurozone crisis. But many in Europe are wary that China is using its financial muscle as a form of diplomacy – to achieve EU ‘market economy’ status, and freer trade with Europe.

The strategy of investing in Western infrastructure has been sanctioned by the Chinese leadership since 2011. In many ways it is a benign development, one that could help to rebalance the world’s lop-sided economy. The result could be a global infrastructure boom modelled on China’s own infrastructure boom, a modern equivalent of the post-Second World War Marshall Plan by which the USA sought to rebuilt war-torn Europe and so halt the spread of Communism.

The new Chinese strategy represents a profound and ironic flip – historically, diplomatically and economically. Liverpool was once the most important port of the British Empire, an empire that in the nineteenth century had forced China to accept European control of its most important trading ports – the so-called Treaty Ports, which included Shanghai and Guangzhou. Now Liverpool itself is set to become the bridgehead of China’s new ambitions in Europe. And these ambitions go much further than the Atlantic Gateway. Almost all British government departments are suffering from shrunken capital budgets, but ministers are constantly claiming that various foreign sugar daddies, in the form of sovereign wealth funds like the CIC, are queuing up to pay for a whole range of infrastructure projects, from faster broadband and high-speed rail lines to new ports, roads, power lines and nuclear power stations – almost everything. There is some irony that despite Britain’s historically low government borrowing rates, it is effectively the governments of other nations paying for jobs-rich infrastructure. A fiscal stimulus funded by state borrowing. Just not the British state.

Chinese firms face some competition from other state-owned sovereign funds. Britain’s attraction is its disintegrating and obsolescent Victorian infrastructure. The London Gateway deep-sea port at Thurrock in Essex is literally a new piece of British land, dredged out of the Thames Estuary, Dubai-style, by Dubai Ports Worldwide. It will allow the new generation of monster cargo ships to offload close to London. As London Gateway’s vice-chairman, Jamal bin Thaniah, says, ‘In comparison to major developments in the Middle East and China, we noticed that some of the infrastructure in this part of the world, regretfully, is lagging behind in terms of capacity… For this reason there is a business opportunity.’

It’s not just Britain that China is interested in. The Chinese have offered to share and sell their high-speed rail technology to California. Many of the investments China would like to make in energy, aerospace and manufacturing, are off limits in the USA, which fears that its security would be compromised. No such restrictions hold sway in Britain, however. Almost everything is for sale.

But the question is, what do the Chinese want in return? I asked Mr Jin if his organisation was just a tool of China’s global economic and political ambitions. He impressed upon me that China’s Sovereign Wealth Fund had the highest levels of modern ethical standards, and would not, for example, invest in tobacco or arms companies. ‘Mutual understanding is very important,’ he told me. ‘So far there was some mistrust from the perspective of the European countries. We are confident that through our behaviour and our actual work, you can enhance your trust in CIC. ’Tis a consummation devoutly to be wished.’

It was not really an answer to the question. Great Britain, the nation that used to fund and build roads, railways and ports around the world, now wants the world to fund and build Britain’s own roads, railways and ports. The empire – that is, the new Chinese empire – just struck back. And it did so quoting
Hamlet.

Many believe there are other profound ways in which Chinese influence can rebalance the world economy. According to them, if things go to plan, Gangnam Style will save the world. Specifically, if China goes Gangnam Style, the world economy will rebalance in a benign way, maximising growth and prosperity for West and East alike.

Let me explain. For most of the world, ‘Gangnam Style’ is an amusing, faintly annoying Korean pop song accompanied by a crazy dance. For anyone looking through an economic lens, however, Gangnam Style was far more interesting, an ironic critique of the absurdities of the crass consumerism that has emerged across South Korea over the past decade.

In the 1980s and 1990s, South Korea had its own export-led manufacturing boom. A key feature of this was the thriftiness of Korean households. For thirteen consecutive years, Korean households were the number one savers in the rich man’s club of world nations, the OECD. Koreans saved around 25 per cent of their income. After the Asian financial crisis of the late 1990s, however, household saving collapsed, dropping as low as 0.4 per cent in 2002, and staying below 3 per cent in recent years. It was a spectacular fall to the bottom of that OECD savers’ league table.

South Korea’s reputation for household thrift evaporated in an orgy of housing speculation, child tuition fees and credit-fuelled purchases of expensive Western brands. If the same happened in China – which could come about if the government allowed the renminbi to increase in value – China’s exporters could reorientate towards their massive domestic market. The USA and Europe could benefit, too, from a more consumerist China. Imbalances would begin to rebalance.

At the Shanghai Union lighting factory, manager Lizzie Lieng is considering whether, or how, to embark on this very shift towards the domestic market. In the early years of the twenty-first century, Shanghai Union boomed by selling chandeliers and metallic green post-boxes around the world. But international custom has been tough after the financial crisis of 2007–8. ‘Before, we just ignored the big market in our own country,’ she told me. ‘Maybe it’s more simple to do exports.’ The problem is the design of the lamps, aimed at the export market. ‘If we can, we hope we can change the demand, but it takes time to get Chinese customers to like these types of lamps,’ she said.

In the aftermath of the financial crisis, the Chinese government actually offered subsidies to rural residents to help them buy certain models and makes of refrigerator and air-conditioning units. The aim was to help divert the production of China’s factories towards its own 1.3 billion people. But creating a Western-style consumption culture is a challenge in a country where around 40 to 50 per cent of take-home pay is saved, says David Wei, one of China’s business elite. Mr Wei, who ran an internet portal for the international showcase of China’s factories, explained: ‘It’s healthy to have a high savings culture, because neither individuals nor countries can live on credit forever. But savings that are too high are also not very healthy. We need a balance, we want Western countries to save a bit more and Chinese people to spend a bit more. And it might be beginning to happen because young people are spending more, but the older people are still saving.’

Despite the trend among the young identified by Mr Wei, it seems that the ethos of saving a high proportion of one’s income is far more deeply entrenched in China than in South Korea, say. Speak to the migrant workers, and they are dismissive of the idea of reducing their savings, given the lack of job security.

In the city of Dong Guan, unemployed migrant worker Li Chun Rong gives some idea of the hardship she and her fellow workers have to endure. She had lost her job in a shoe factory. She had hoped to leave her baby with her elderly parents in Sichuan province while she worked in the factory, but her father became ill, so her mother had to plough the fields, meaning her mother had no time to look after her baby grandchild.

‘Our family at home cannot afford fridges and washing machines,’ she said. ‘We migrant workers don’t have much money to spend. We don’t dare to spend money. We have to send our children to school and take care of our parents. Everything costs money. There’s some kind of health insurance at home. It covers very little. It is us who have to take care of our parents.’

Conventional economic models of saving do not appear to work in China. The middle-aged save the least, while the young and the old save the most – a ‘U’-shaped graph of savings against age. The theories of famous economists from Franco Modigliani to Milton Friedman suggest the opposite, an ‘N’-shape, as people save more in middle age to spend in retirement. Keynes’s insights might provide a better explanation of saving in China: the precautionary motive.

At the jobs fair in Dong Guan, around the corner from where I talked to Li Chun Rong, Yi Bin stresses the reason why workers such as himself need to save so much. ‘There isn’t a sound social-security and healthcare system in China,’ he explains. ‘We won’t know what to do if we’re seriously ill. This is what our savings are for.’

Remember, under the
huzou
system, Yi Bin has limited access to healthcare, education, pensions and worker compensation in Dong Guan. Migrant workers fear for their entire future in the all too frequent industrial accidents or even a road accident. But Yi Bin has an idea that could revolutionise the Chinese economy. ‘Once we have a good social security system, everybody will spend,’ he tells me enthusiastically. ‘Who doesn’t want to enjoy life? We all only have a few decades to live. Of course we want to live better and not be too frugal.’

The building of social security systems in China and other emerging economies is one of the great challenges for the world economy. Few leaders in these countries are much impressed by the European welfare system. But they will have to provide. What would a Chinese National Health Service look like? Part of the spike in Chinese savings rates can be dated back to a pension reform that severely limited retirement payouts to state workers. Financial markets will need to develop to help the Chinese masses save and smooth their incomes over time.

In China, however, the experts refute the notion that high savings really are the problem. The flipside of the ‘savings glut’ in China that America complains about is the ‘investment famine’ in the rest of the world that China is only too keen to point out. Even the management consultants McKinsey & Co. – those high priests of Western globalisation – calculate that there is a $20 trillion investment shortfall in infrastructure around the world, as Western countries have drastically slashed their investment budgets. Leading Chinese officials such as Justin Lin point the finger of blame for this, and for the imbalances generally, firmly at the USA. There are three reasons, the Chinese argue: lax regulation of Wall Street, super-low interest rates from 2001, and the role of the dollar as the global reserve currency. China, they point out, has trade deficits with other East Asian countries. Over the past twenty-five years, China has simply replaced Japan as the main contributor to the US trade deficit. As much as 60 per cent of China’s exports are made by foreign-owned companies, many from the USA. The iPad and iPhone are the most famous US-invented contributors to the USA–China trade deficit.