Britain is currently rolling out the carpet for Chinese President Xi Jinping, in a public display of such desperate and obvious neediness that it’s managed to upset both human rights campaigners and British nationalists at the same time. That’s a relatively rare achievement.
David Cameron and his government have made considerable Chinese investment into Britain a major reason for the visit, claiming that it will produce £30 billion ($US46.4 billion) in deals, according to the FT.
But one Beijing-based economist just made an interesting argument that suggests Cameron’s economic reasoning is warped.
Michael Pettis is a professor at Peking University’s Guanghua School of Management, and a former Wall Street trader. His blogs on the Chinese economy are widely read by investors, analysts and journalists. He’s one of the economists who has been predicting the country’s debt problems and slowing growth for a long time.
In a long blog post, Pettis describes Cameron’s “almost teenagerish excitement” at his relationship with the Chinese government. Here’s the full, brutal quote:
One of the few recent bits of cheer in our otherwise very glum world has been the almost teenagerish excitement with which David Cameron has been BFFing. It’s not all just unconditional friendship, however, and apparently he hopes to get big deals and significant inward investment announced in the next week. It sounds good, but, a firm grasp on the accounting identities would identify which kinds of “big deals” are likely to boost GDP and which merely to shift the locus of GDP creation.
But as well as being a cutting criticism of Cameron’s breathless attempts to gain favour in Beijing, there’s an interesting argument about investment and debt there too, which suggests that if anything, Britain already has too much investment from abroad in relation to the rest of the economy.
Standard & Poor’s, the last credit ratings agency that gives Britain an AAA grade, notes that no other country has a worse external liquidity metric. That’s a wonkish way of measuring how much the UK’s exports, currency reserves and foreign income streams are outweighed by the country’s financing needs from abroad.
The UK’s lending from outside of the country is extremely high — the metric is essentially measuring the level of risk that a sudden disappearance of outside liquidity would cause. Any further investment funded from the outside world adds to that risk.
Pettis goes on, twisting the knife:
For a rich, developed country like England, inward investment almost always affects growth adversely (unless it brings technological and managerial advances with it) and never more obviously so than when interest rates are struggling against the zero bound and every country is urgently trying to export excess savings. As one of my exasperated PKU students asked me after class last Saturday when we discussed the president’s trip: “So everyone agrees that it is good for England to get much more foreign investment, and everyone also agrees that it is bad for England to have a much bigger trade deficit. Don’t they know it’s the same thing?”
Economists aren’t totally united of the importance of those sort of liquidity metrics, or how much external balances — what’s owed to a country by the rest of the world, compared to what’s owed to the rest of the world to a country — matter in the advanced world.
The view that current account deficits don’t matter very much is sometimes referred to as the “Lawson Doctrine,” after former British Chancellor Nigel Lawson.
Whether you care about them very much or very little, encouraging Chinese investment in the UK will make the imbalance larger. Any Chinese investment becomes an asset providing some stream of income to them. That Chinese asset is also a British liability.
So encouraging British companies to welcome Chinese investment (and take on more debt) runs somewhat against the current government’s rhetoric that debt levels are too high anyway.
Financial Times writer Giles Wilkes had a pithy response earlier this month during Chancellor George Osborne’s trip to China last month, asking why “flying 15000km to beg for Chinese cash is a better way of funding UK infrastructure than just borrowing at 3%.”
You might ask the same thing about why it’s worth rolling out the red carpet for Xi.
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