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Saturday 26 May 2012

Is China the new England (only bigger)?

Some time last year, China became a predominantly urbanised nation – more than 50 per cent of its people now live in towns and cities. The Middle Kingdom today, in fact, looks a lot like the England of the 1890s, says Stephen Green of Standard Chartered. He’s issued a report saying the two entities are remarkably alike – except in China, it’s all happening on a far, far bigger scale. One thing that China needs to emulate from England, though, is ‘market-friendly institutions’ free of political control.

Some time last year, China became a predominantly urbanised nation – more than 50 per cent of its people now live in towns and cities. The Middle Kingdom today, in fact, looks a lot like the England of the 1890s, says Stephen Green of Standard Chartered. He’s issued a report saying the two entities are remarkably alike – except in China, it’s all happening on a far, far bigger scale. One thing that China needs to emulate from England, though, is ‘market-friendly institutions’ free of political control.

Green points out that, against a backdrop of a rapidly urbanising society, contemporary China and the England of the Industrial Revolution dealt with specific challenges in similar ways. Both aggressively promoted exports to ensure demand for a jump in output. Exporting to the world also acted as ‘a vector for absorbing foreign technology’ – for China, IT and aerospace are only two areas that spring to mind. In England, East Anglia absorbed Continental know-how and became the centre of Europe’s woollen cloth production – ‘by 1700, Italy’s cloth sector was deadissimo’. But China’s reliance on exports today exceeds that of 19th century England – English exports stood at 15.7 per cent of GDP in 1801, while China’s export value-added was about 20 per cent of GDP before the 2008 crisis. 

Both China and England benefitted from protectionism, notes Green. England kept its food markets protected – ‘before 1828, grain imports above a certain level were banned in order to protect farmers’ – as China partly does today. And under the 1722 Calico Act, English cotton manufacturers got protection from cheap Indian linen imports – by the time the act was repealed in 1774, a thriving spinning industry had been created, giving England’s manufacturers a huge advantage over their Indian competitors.  

The most obvious difference between China and England, says Green, is that ‘China’s urbanisation is happening on a much larger scale’. One can fit the London of 1800 into today’s Beijing about 18 times, he notes. China is also urbanising at a much faster rate – its urban population as a share of total population grows by 0. 5 to 1 percentage point a year, while the rate in 18th century England was only 0.05 point.  

China’s industrial growth, in fact, is happening at ‘warp speed’. The expansion’s been seeded by some $1 trillion of foreign direct investment stock, ‘and all those factories and technologies are linked into global consumers’. Furthermore, this is intelligent capital – ‘there is enormous scope for leap-frogging 250 years of research, trial and error, and random innovation’. China could, for instance, computerise its entire economy in a few years – ‘a huge short-term productivity bang for the buck’.

It’s safe to say that Green is bullish on China, despite an increasing number of his research peers predicting a property investment bust this year. However, he notes that industrialising England had one essential ingredient that China doesn’t – ‘adequate, market-friendly institutions’. Green cites Nobel-winning economist Douglass North and others who’ve pointed out that milestones like the Magna Carta, the Common Law and the Glorious Revolution helped protect the merchant classes. ‘The idea here is simple and powerful: only when political power is controlled can the rule of law be properly established, and only when there is rule of law can savings be invested with confidence.’

Indeed, it was the 1688 settlement that gave England the competitive edge over a continental Europe where kings held sway, as well as over the ‘private business-hating, imperial-bureaucratic China’ of the time.

The argument’s been made many times before – at some point, China’s control economy will cease to help its behemoth economy and instead become a hindrance. In the end, it’s the ‘market-friendly institutions’ – in other words, democracy – that keeps an economy on a healthy, sustainable trajectory. But the recent signs are that China is increasingly nervous about allowing its citizens more civic freedoms – it’s clamped down on Twitter and other social networks because it doesn’t even want an Arab-style Spring, let alone a Western-style liberal democracy. It’s also showing an increasing twitchiness to Western cultural influence in everything from books to movies. Fanning the growing paranoia, President Hu Jintao recently said: ‘international hostile forces are intensifying the strategic plot of Westernizing and dividing China’.

China is adept at copying everything else, but it doesn’t appear to want to copy Western-cultivated freedoms, either in the political sense or in the full economic sense. That is the point where, unfortunately, it appears to have put up barriers to entry.

More articles from: Clarissa Tan | this section

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