What on earth are you doing in China, George?

City Editor ALEX BRUMMER says the Chancellor’s trip is foolish, very badly timed and potentially dangerous

GEORGE Osborne prides himself on his encyclopaedic knowledge of foreign politics, and it might seem astute for him to be playing the statesman in China while David Cameron suffers the slings and arrows of Lord Ashcroft’s unauthorised biography.

But the Chancellor’s political antennae should have signalled to him that his current trip to China — and indeed his enthusiasm for all things Chinese — comes at the worst possible time.

As important as it may be for Britain to secure its nuclear future, mortgaging it to the secretive leaders in Beijing by giving them a stake in two power stations — Hinkley Point in Somerset and a plant at Bradwell in Essex — is a risk to our economic and national security. It is the first step towards giving the People’s Republic a stranglehold over the UK’s energy supply.

This controversial move also comes at a moment in history when our closest ally, the United States, is threatening to impose sanctions on China amid systematic hacking of the Silicon Valley digital giants.

Tumbling

Aside from the deeply concerning issues of hacking and nuclear secrets, there is the little matter of China’s economic woes. All the signs are that after several decades of uninterrupted growth, which placed the People’s Republic on the path to becoming the world’s largest economy, fissures are opening up.

Sharp falls on the stock markets in Shanghai and Beijing began in July and have continued since then, sending share prices — and the value of ordinary people’s pension savings — tumbling in Britain and around the world.

Worse than that, the sharp fall in Chinese growth and manufacturing output is having a calamitous effect on the price of commodities, from wheat to copper, iron ore to petrol.

Advanced nations such as Britain are gaining in the short term from low inflation ( a result of those falling prices), but the medium-term impact could be disastrous. On the London Stock Exchange, where many of the world’s biggest natural resources firms are based, share prices are crashing, with the FTSE 100 index yesterday plunging below the 6,000 mark because of unease over the China crisis.

Copper mines are being closed across Africa and the developing world, and here at home the Redcar steel plant, in the hard-pressed North-East, stands on the verge of administration as the price and demand for steel plummets.

On a daily basis, major companies, including RollsRoyce, Burberry and the Johnnie Walker spirits group Diageo, caution that the rapid slowdown in China could affect future sales.

One fully understands why the Chancellor is reaching out the hand of friendship to China. He recognises that after nearly five years of stagnation in the eurozone, Britain’s biggest market, it needs to seek new regions in which to sell goods and services, to boost our export earnings.

Mr Osborne is also anxious that the City of London, as the world’s most important financial centre, is not bypassed by the increasing importance of Asian business hubs such as Hong Kong and Singapore.

That’s why he has gone out of his way to make sure the City becomes a leading location for trading the renminbi, the Chinese currency.

His latest initiative involves bringing the China Construction Bank, one of the country’s largest, to London to act as a clearing house for the Chinese currency here. In exchange, fund manager Aberdeen is to become the first UK financial group to be given access to China’s stock markets.

Yet observers caution that in building economic and financial ties to China at this moment, Mr Osborne needs to recognise what he is getting into. For the recent turbulence on Chinese markets has illustrated how little the country’s rulers really understand about capitalism.

If anything, the panicked reaction by the authorities in Beijing, such as freezing trading in thousands of shares, and the arrest of financial journalists writing about the crisis, is deeply worrying. Indeed, the seizure for an entire week of the British hedge fund Man Group’s China chairwoman Li Yifei — for what she later bizarrely described as ‘meditation’ — shows a callous disregard for free markets.

She was reportedly taken into custody to assist with a police probe into market volatility, though there was no suggestion she had done anything wrong, and when she re-emerged she sought to play down the incident. But such curious developments do little to inspire faith in the West that China is playing a straight bat.

A senior IMF official told me last week they were just as worried about the apparent lack of economic expertise in the upper echelons of the Chinese government as they were about the slump in the economy.

Clumsy efforts to install confidence in the Chinese markets have worked in the opposite direction, with an estimated $520 billion (around £340 billion) of capital leaving the country in the past five financial quarters.

Sting

The unwinding of growth in China — partly a result of the leadership seeking to switch from an exporting to a more domestic economy — has been dramatic. After several years when output expanded at nearly 10 per cent, it fell to 7.4 per cent in 2014, its lowest in 24 years.

China is widely expected to miss its own growth target of 7 per cent this year, with the IMF lowering its forecast for this year to 6.8 per cent, falling to 6.3 per cent next year.

Before embarking on his solidarity mission to Beijing, the Chancellor might have been wise to consult with the Governor of the Bank of England. Speaking this week, Mark Carney described China’s ‘economic miracle’ over the past three decades as ‘extraordinary’, noting that it ‘has helped lift billions of people around the world out of poverty’. But there was a nasty sting in the tail.

He said that China’s performance in recent years had been bolstered by a vast build-up of debt, which amounts to 200 per cent of the People’s Republic’s total output. An explosion of credit, not dissimilar to that in the West before the 2008 crash, was the result, he argued, of ‘shadow banking’, a little understood market which allows loosely regulated unofficial lenders to move money around the world without scrutiny.

Potentially, as with the subprime mortgages that triggered the financial crisis, this could be a time-bomb not just for China but for the rest of the world.

Indeed, the American central bank, the Federal Reserve, postponed an early rise in interest rates last week because it fears the shocks from China’s troubles could knock the robust U.S. recovery off course.

Tense

What an irony that at the very moment the Chancellor is seeking to position Britain as China’s greatest friend in the West, the Americans — responsible for opening up the Communist regime to capitalism under President Nixon in 1972 — are heading in the opposite direction.

The visit of President Xi Jinping to the U.S. this week for a summit with President Obama will be a tense affair. The White House is under pressure to impose trade sanctions on Chinese companies responsible for stealing secrets from tech giants including Apple and Microsoft. It also fears China has been developing technology that allows it to launch cyberattacks against American infrastructure during peacetime.

And there are more physical manifestations of China’s power for America — and Britain — to worry about. Obama will surely object forcefully this week to China’s territorial ambition in building airfields on reclaimed islands in the Pacific, as part of a plan to assert its hegemony over the South China Sea.

At such a time of economic paroxysm, a build-up of debt, and concerns about cyber theft and military expansionism, it seems extraordinary that Britain is placing its nuclear future in the hands of the Chinese.

In spite of its economic advance, China has one of the worst human rights records on the planet — a subject barely raised by Mr Osborne.

Britain’s search for new markets is admirable. But by placing faith in an authoritarian state with little understanding of political, media or economic freedom, we are moving in a dangerous direction indeed.