Treasury Select Committee Visit - China

Utterly amazing, is what I think of China........

From the visible lack of personal freedom (and the astonishing lack of concern about it, even from those who live with it) to the remarkable growth story and the vast economic ambition, all cloaked in an aspiration of 'harmony', China is like nowhere else.

Last time I came with a rucksack 20 years ago, and I remember the extreme poverty, the way we foreigners were literally touched and poked as if we came from another planet, and how everything was so dirty and run down. And the cockroaches...

Now, visiting Shanghai and Beijing as part of the Treasury Select Committee delegation, it was like entering a new world. The purpose of our visit was to look into the issue of Global Imbalances (i.e. the massive trade surpluses in the East - plus Germany- versus the massive trade deficits of the West). What role have global imbalances played in the financial crisis? How can a rebalancing take place? What will happen if it doesn't? What lessons can Britain learn from the way the Chinese government handled the crisis? What will Chinese economic reforms mean for Britain?

Huge questions, and my mind is still buzzing with the vast amount of information we gleaned from 5 days of nonstop meetings with Chinese officials, economists, business people and bankers and from the pretty inspiring visits to:

1. Yu Wu commodities market - the biggest under cover 'buyers market' in the world with over 60,000 shops under one roof and where you can buy literally every basic product under the sun. Buyers fly in from around the world to put in their orders. Apparently at one point 95% of the world's button supply came from this one market!

2. The astonishing TEDA - Tianjin Economic Development Area. Once barren salt flats, in 1984 (notice how long ago the concept was conceived...right at the start of the 'de-communising' of China) the Chinese Government granted to the Tianjin Municipal government the infrastructure (electricity, drainage, roads, trains, water etc) to build an economic zone here. It is one of many now sprung up across China. We took the high speed train from Beijing (30 mins) to Tianjin, 6th biggest city in China (population of 12 million). TEDA has 6 specialisations: electronics and telecommunications, automobile, biopharmaceutical, aerospace, new energy and new material. It's year on year growth is between 20 and 30%. It has new housing set around a lake with shopping malls, a golf course and brand new schools. Population is 550,000 people, referred to by the Vice Mayor of Tianjin as a 'village'. It is truly impressive.

Other visits were to a Tesco 'green' distribution centre and to a Chinese hosiery factory where we got a tiny insight into life for the workers. It's not glamorous even bearing in mind we were probably shown the best of it. Many workers come from rural areas, live in dormitories and send their pay home to their families. However conditions in both places looked reasonably good and most parts of China have a minimum wage that (from a low start) has risen each year by well over inflation. All part of the growth story, and probably the reason why there is little social unrest.

We held countless meetings, usually in the formal Chinese style where the two senior people (Andrew Tyrie on our side, as Chairman of the TSC) would sit side by side in large armchairs with a beautiful floral display on a table between them, with interpreters sat behind and the Committee members in armchairs lining the left hand side of the room and their own staff lining the right hand side. Tea would be poured, consisting of loose leaves in a mug of hot water and many polite speeches would be made before we got down to serious questions.

We learnt an incredible amount, not just about the facts of China's amazing growth, but also about the urgent need for greater economic and financial reform in China if they are to continue on their current trajectory. The 'elephant in the room' was always that of democratic reform. The closest we got to an answer on what their plans are, is that the Communist Party are bending over backwards to ensure greater accountability within a one party system. They believe (not surprisingly) that with a population of 1.3bn, a multi party system could not have achieved the recent dramatic improvement in quality of life. One official told us that now, in the 12th '5 Year Plan', there is recognition that economic growth is an insufficient target. Instead the target should be improved quality of life at all levels. In other words, there is a sense that provided growth continues at 8% or better year on year, and this translates into a real improvement in living standards across the board, then social harmony will be maintained.

So can China continue to grow at 8% year on year or better? Without exception the answer from the Chinese was 'yes'. Chinese productivity is rising fast; average income is rising 15-20% p/a from a low base; the response to the financial crisis of a massive increase in public sector infrastructure investment has created capacity for growth. Investment now accounts for 50% of GDP, both from public and private investment, the latter mainly in creating more capacity for export.

The big problems for China that most Government officials focus on are their 'internal' imbalances: per capita income is more than three times greater in the urban and East Coast areas than in rural regions leading to rapid urbanisation with both Shanghai and Beijing now over 20m population; domestic consumption rates are only about 30% (vs 65% in the US) - this is because there is no meaningful welfare net, healthcare or State pension as yet. The Government is moving to change this, now offering a pension of 120RMB (£12 a month) against an average p/c income of RMB 30,000 p/a, some subsidised housing etc.

Savings are a high proportion of income partly because government controlled deposit rates offer a negative net return - therefore people 'oversave' and there is also a tendency toward asset bubbles (housing, the stock market, even alcohol).

A key focus for Government must be to increase domestic demand and reduce reliance on exports. We went there thinking the Chinese should be as worried as we are about global imbalances, but the truth is that their perspective is a China- centric one: with the Eurozone turmoil reducing overseas demand, with the 6% appreciation of the RMB and with the growing cost base as domestic wages increase, they recognise exporting their way to success is not the ultimate answer.

So to grow domestic demand means real reform, and this is where it all became hazy......the local economists and bankers told us what needs to happen: enforceable land and property rights; market pricing for energy; ability for foreigners to list on Shanghai stock exchange; market interest rates etc etc, but it was unclear what will actually happen in this current 5 Year Plan. On the question of tax rates, where consumption taxes are around 60% (so another reason for low consumption) the Vice Head of the Financial Committee (sort of Andrew Tyrie's equivalent) said that tax reform is too difficult to tackle right now and must wait for future plans.

We also asked lots of questions on Chinese debt, around 18% of GDP until you add in 'local' debt, believed to increase the debt total to 80% of GDP. The local debt is due to the infrastructure investment. This is another hugely 'growth dependent' issue - if the economy grows the loans should be ok, but if growth stalls or there is a global 'shock' e.g. from a Euro breakup, then the government would have to stand behind the loans, and the Beijing IMF Rep suggested China would need another fiscal stimulus of around 3% of GDP.

It was all a very circular debate, pointing to the vital need for economic and fiscal reform leading to increased domestic demand and a lower reliance on export markets. I was left with the sense that growth is the only answer, but long term growth requires reform, and that is unlikely to happen anytime soon. The change of leadership at the top of the Party due in 2012 is another reason why reform will be slower than needed.

China offers huge growth potential to the UK - particularly in the traditional financial services areas such as pensions, insurance, savings and mortgages, where only a tiny proportion of the vast population have access to such products. In TEDA, one of the great success stories we were told about is a joint venture between Standard Life and a local Chinese company that now has 80% of the Tianjin market for life products.

Another big area of potential is in 'brands'. It really struck us how smitten the wealthy Chinese are with designer brands, whether it's cars, clothes or electronics. They have no major brands yet themselves, and we should be seizing the opportunity for taking a share of the fast growing luxury market. It's no surprise that Bicester Shopping Village is so popular with Chinese visitors to Britain!

We tried very hard to get a strong feel for Chinese views on the global picture. What did come across is that we certainly can't rely on China continuing its policy of slow appreciation of the RMB; we also got no sense of the timing of any planned deregulation of the currency. It was clear that China is focused on enhancing domestic growth but is not afraid of a continued high trade surplus. We had one interesting comment that China believes the world must save the Euro to avert global economic disaster, and that the Chinese will contribute via the IMF rather than the EFSF. They expect their role at G20, IMF and World Bank to continue to grow as they become an ever more important global player.

My overall impression is of a vast and largely untapped economic powerhouse. The hotels we stayed in were at the cheaper end, but with world class facilities and service - they have clearly got the hang of 'customer service' and the infrastructure (train stations, airports) is also world class. On the other hand, when you go onto wi-fi there is a slightly sinister message telling you that the police may monitor your internet usage and when footage came up on the BBC TV channel about Tibet, the programme shut down for a minute.

The trip probably raised more questions than it answered, but was a fascinating insight into what will soon be the world's biggest economy.

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