Bonds that tie China. UK

After a long history of misunderstandings, China and uk are turning the page

Economic and financial leaders from China and Britain met in London on Sept 8 at the Fourth Economic and Financial Dialogue between the two countries. With the world's cash-strapped developed countries competing with each other for attention and investment from a growing and cash-rich China, it's obvious why Britain might regard a special relationship with China as furthering British economic and strategic interests. But how can a bilateral conference with Britain - not even the largest economy in Europe - attract the attention of a senior Chinese policymaker?

The published dialogue agenda demonstrates that the way the world is shaping up has made both sides realize that past difficulties between the two countries must not be allowed to stand in the way of a dynamic relationship. As a fellow-member of the United Nations Security Council and a longstanding member of the global community, Britain has an important role in assisting China to play its new enhanced global role, while also helping China to meet its own development objectives. By cooperating with Britain, China gets access to a European platform with a special American relationship and the world's most important international financial services centre. For its part, Britain gets a chance for its companies to catch up with their major competitors and an opportunity to help shape key policies, like bank regulation, in the world's major emerging economy. Gone, at last, is the implication that China, the emerging country, is the pupil and Britain, the developed country, is the teacher.

The inclusion of global issues like climate change and green energy, as well as global economic rebalancing, and the affirmation of the role of the G20 demonstrates the strategic nature of the China-Britain relationship. It's important to China that the G20 succeeds the G7/G8 grouping as the global organization which decides on key economic and strategic issues, because the G8 (which emerged during the 1970 oil crisis) is dominated by the United States and includes Japan, America's long-time post-war ally in the Pacific, but does not include China. Japan and the smaller European countries stand to lose global influence from the G20's emergence. Amidst this global jockeying for position, Britain's historic importance as the head of a once-powerful global empire, together with its position as the second largest European economy, and as a key American ally gives the country a diplomatic importance greater than its geographic or economic size would suggest. Britain's commitment to support the G20 as the new global grouping of significance makes it more difficult for American, Japanese or other interests to restore the G7/G8 as the global decision-maker.

As for global rebalancing, under its Conservative government, Britain has cut spending to reduce public debt, in turn reducing domestic demand and the British current account deficit. It's a strategy that continues to attract criticism from British economists and business leaders, but it leads the way for deficit reduction in the over-indebted developed countries, the other part being for the surplus countries, led by China, to provide more domestic demand to drive global growth via an increase in imports.

Another matter near to the Chinese heart was also on the agenda of the China-Britain dialogue - China's full market economy status. The status of "full market economy" makes it much easier for China to avoid complaints from its trade partners of product "dumping" - selling below production cost - which may lead to restrictions on Chinese exports. A "non-market economy" is assumed by the world's trade authorities to produce goods at subsidised prices which do not reflect the full cost of production.

So achieving "free market" status has important consequences for China, the world's largest exporter. China has been trying for at least 10 years for its economy to be accepted as a "free market" economy by the West, particularly by the United States, but has failed. In this respect the acknowledgement of Britain, itself a champion of free trade and open markets, is a big step forward for China in its struggle for American recognition of its free market status.

Of particular interest to Britain is its development as the main platform within Europe for Chinese outward investment, which rose by 20 percent year-on-year to $51 billion (37 billion euros) worldwide in the first seven months of 2011. Since 1980, as Britain's own traditional manufacturing sector has shrunk, Japanese investment in Britain, particularly in the auto industry, has become very important to British employment and exports. Britain's persistent trade deficit, which totalled over $100 billion in the first eight months of 2011, makes China potentially as important an investment partner to Britain as Japan has been. Britain is China's eighth largest export market, and for the eight months to August, British exports to China grew at nearly 50 percent year-on-year. Britain is a rich source of technology for Chinese companies anxious to develop beyond producing relatively simple products which have been designed by others.

The encouraging growth of shared strategic and economic interests between China and Britain has developed in spite of a history of misunderstanding, even conflict. Following the development of a one-sided trade in Chinese tea, porcelain and silk in the 1600s and 1700s, neither of the two early British trade missions to China (Lord Macartney's in 1792-4 and Lord Amherst's in 1816) met with success. The result was the Opium Wars, which resulted in China's humiliation, followed by the country's dismemberment by the then-major world powers, led by Britain, and finally in 1911 the end of dynastic rule in China. Although Hong Kong's emergence after 1949 as a British colony and as a successful trading port was a constant reminder to the new China of its historic downfall at the hand of the imperialist powers, the city's increasing economic usefulness to China provided an important link between the two countries, even when official relations were difficult (or non-existent). Since 1997, Hong Kong's continued progress since its return to China has provided a strong basis for a forward-looking Sino-British relationship.

Although Hong Kong's success has underpinned mutual confidence between China and Britain, for a long time that same success diverted Britain's commercial effort from the Chinese mainland to Hong Kong. While in the 1980s and 1990s the major German, French and American companies went direct to Beijing or Shanghai to develop their Chinese business, spending time to form relationships with the major Chinese mainland companies, their British competitors were focussing on developing their China business through their Hong Kong subsidiaries. By the time that British companies realized that Hong Kong was several thousand kilometers away from the big decision-making centre in China, their foreign competitors had gained a big strategic advantage.

Finance plays a key central role in the China-Britain relationship, with this dialogue suggesting the interesting possibility of London becoming a centre for the development of offshore renminbi trade. It was in London in the 1960s and 1970s that the offshore American bond market (the Eurobond market) developed. The city is perfectly positioned to bring buyers and develop a market for bond issues denominated in the Chinese currency. Developing the renminbi as a major international, or reserve currency, alongside the dollar, the euro, the yen and the British pound is of benefit to China. Increased global demand for the renminbi would lower borrowing costs for Chinese issuers, while reinforcing China's position as a pillar of the global financial community, and bringing China the profits to be gained as an issuer of an international currency, known as seignorage.

With the weakness of the world's major developed economies and the ongoing financial crisis in Europe, there's a growing case for the renminbi, supported by its huge army of Chinese savers, to play a major role globally. To this end the agenda supports the increased inclusion of the renminbi in the IMF currency, the SDR. London continues as the major global insurance centre, and here too the dialogue agenda stresses close China-British cooperation in the research and development of specialized insurance.

From the success of the dialogue, it's clear that China and Britain now see each other as a key strategic partner. Who could have guessed such an outcome 15 years ago, when Hong Kong was still a British colony?

The author is visiting professor at the Guanghua School of Business, Peking University. The opinions expressed in the article do not necessarily reflect those of China Daily.