China to the UK's aid?

 
File image of trains at Clapham Junction on 8 February 2007 Could Chinese investment help get the British economy back on track?

Here comes China once again, riding to the rescue of a struggling European nation, delving into its bulging wallet to help out. That at least is what we are encouraged to believe from today's talk of China investing in UK infrastructure. But it's not quite so simple.

The logic of it sounds unimpeachable. China has an urgent need to find ways to invest the foreign exchange it is hoarding, Britain has an urgent need to stimulate growth and creaking, outdated infrastructure. So is this a partnership just waiting to happen?

In today's Financial Times the head of the China Investment Corporation, the country's sovereign wealth fund, Lou Jiwei, writes that "infrastructure in Europe and the US badly needs more investment". Then he goes on to say the China Investment Corporation is keen to "participate in... the UK infrastructure sector".

Mr Lou has about $400bn (£256bn) of China's huge foreign exchange reserves under his control and a mandate to invest it to earn decent returns for Beijing. UK Chancellor George Osborne is looking for a mere $30bn for his National Infrastructure Plan and needs to reassure voters that the UK can get back to growth.

So it should be an easy deal. Mr Osborne may be thanking the Chinese for what looks like a vote of confidence in his plan. He can presumably say to other investors: "Look the Chinese are keen, you should be too." China looks both savvy and generous. So everybody wins.

Well, not quite so fast.

Spending hangover

The first thing to say is that more Chinese investment overseas should be welcomed. China has built up its reserves through its surpluses with countries like the UK. So Beijing is piling up money and the relationship is unbalanced. Investing some of that cash directly into infrastructure projects in the UK, rather than buying UK government bonds, can help create a more balanced partnership.

Worker stands on scaffolding for new shopping mall in Hefei, Anhui province, on 27 November 2011 China has embarked on a building marathon over the last decade

But there are a couple of caveats. There is a widespread belief that China has found a secret recipe for growth which basically involves building lots of stuff - infrastructure, railways, airports, roads and the like. So, the logic goes, the UK just needs to take a leaf out of China's book and build things too - hey presto, problem solved.

But not everyone is quite so convinced that throwing money at infrastructure projects is the best idea for growth. Quite a few of those critics are here in China.

In his article Lou Jiwei writes that "infrastructure spending is an important way to boost consumption, and it also acts as a spur to economic growth. One need only look at China to see what can be achieved... in the wake of the 2008 financial crisis, the government introduced a 4tn yuan economic stimulus package, with a large part of the money directed into infrastructure. As a result China's annual economic growth rose from 6.8% to more than 10% from late 2008 to the end of 2009."

The problem is the spending binge can lead to a serious hangover. The key question is whether the stuff you are building is actually worth the investment? Will it generate benefits or be a burden on future taxpayers?

One prominent Chinese economist I was talking to yesterday was saying he thought China's senior policymakers had realised their stimulus programme had not been worth it, the investments they fear are wasteful, they have simply created more problems, and he pointed to the example of high-speed rail.

China has already been expressing an interest in Britain's plans to build high-speed railway links. China's own high-speed railway network has been lauded as a symbol of this country's far-sighted infrastructure investment policy. But there are many here who now fear the high-speed rail network may turn out to be a white elephant, too expensive, saddled with massive debts that it will never pay off - a wealth destroyer not a wealth generator.

The terrible crash at Wenzhou earlier this year in which 40 people died when one bullet train rammed into another has also caused alarm bells to ring. It has been blamed on a variety of causes, faulty equipment, poor management to name two. But the basic question is whether the rapid roll-out has led to corners being cut.

Good PR?

In his Financial Times article Mr Lou goes on to call for what look like special terms for any investment in the UK. He asks for "pro-investment policies to create an attractive environment" including "reducing taxes and offering bank loans at discounted rates", and says governments seeking external investment "should relax regulatory restrictions".

As a potential investor the head of CIC will of course be seeking the best deal he can get. But if he's so convinced infrastructure is a good investment, then does he really need relaxed terms? One of the concerns in China is that cheap funding has led to poor investment decisions, and relaxing restrictions in a rush to develop may not be a good thing for all sorts of reasons - financial, environmental or safety-related.

The other caveat is that we've heard some of this before. Chinese officials have at several points in the past year been quick to say how interested they are in all sorts of investments. We have been told that they are holding talks about buying Italian bonds, or are looking at Greek debt, or Spanish debt. But there is a feeling that there is more talk than action going on.

In fact, I'd suggest, what we have seen is that China is becoming quite savvy at getting good public relations from this speculation. It's not telling us how it's going to invest, so much as creating the impression that it has the ability and desire to "save the world economy".

A few weeks ago the suggestion China would buy Eurobonds came just as the head of the European bail-out fund was in Beijing. He went away empty handed. Now it's the idea of investing in UK infrastructure that comes just ahead of the UK chancellor's midweek statement on how he plans to boost growth. Good timing for maximum PR impact.

So first we have to see whether China is going to invest its cash. Then the question is whether the investment is worthwhile for all involved. And remember, when it comes to the real benefits of some of China's own infrastructure programmes the jury is yet to deliver its verdict.

 
Damian Grammaticas, China correspondent Article written by Damian Grammaticas Damian Grammaticas China correspondent

Uncovering China's illegal ivory trade localisation->translate("watch"); ?>

Demand for ivory in China has pushed levels of poaching to new highs. The BBC's Damian Grammaticas investigates China's illegal ivory traders.

Watch Damian's report

Comments

Jump to comments pagination
 
  • rate this
    +2

    Comment number 1.

    Although we should not seek a deal at any cost, investment in infrastructure has at least an eye on the future. Certainly beats throwing money at 5-a-day officers, diversity coordinators and the like.

    Not sure I would trust Gideon to get a good deal mind.

  • rate this
    0

    Comment number 2.

    People talk about China as a "friend in need" or "rescuer" etc., while the US President publicly declared that China beside all that money is still a "poor" nation humnanistically, neglecting all the good things that China has done, including millions of people (including Tibetans) lifted out from poverty.

    The saddest of all is that China is very much singled out and not considered as one of them, especially by the Western nations. The reason why is perhaps because China is not like Japan and South Korea. It is not ready to accomodate the US and Europe the way these two nations do.

  • rate this
    0

    Comment number 3.

    Chinese investment could do no worse than the rip off financial sector here in the UK who always want something for nothing.

  • rate this
    -4

    Comment number 4.

    Western companies that invest in China are oft liable to heavy taxes and discrimination: Walmart / Coca Cola / Carrefour to name a few.

    I'd like to know how the Chinese are going to invest and will the UK government treat Chinese investments with the same level of contempt that Western companies receive in China??

  • rate this
    -2

    Comment number 5.

    China is poor compare to theUSA.Just read how much Billions of Dollars theUSA has spent in Foreighn Aids between year 2001 and 2010.Go to:http://www.vaughns-1-pagers.com/politics/us-foreign-aid.htm
    Organizations Disbursing U.S. Economic Aid
    Organization 1997 Appropriation
    (Millions of dollars)
    Agency for International Developmenta $7,723 Other U.S. Aid Organizations $251
    World Bank Group $742 Regional Multilateral Development Banksc $245 United Nations and Other International Organizations $272
    Export-Import Bank $715 And remember there would be no U.N. with out U.S.A.

 

Comments 5 of 40

 

This entry is now closed for comments

Features

  • Krak des ChevaliersSitting targets

    How ancient treasures in Syria are being bombed to pieces


  • Mesut Ozil's tattoo reads "Only God can judge me"Ink explained

    Nine World Cup players' tattoos decoded, and one who refuses


  • Google sweetsName game

    Would Google have made it as BackRub?


  • Putting a coin in supermarket trolleyMinor annoyance

    Why are Morrisons getting rid of coin-locks on trolleys?


  • A graphic on the Human Events Facebook page comparing Jackie Kennedy and Michelle Obama.First ladies

    Why is Michelle Obama being compared to Jackie Kennedy?


BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.