China was always the Ashley Madison of public money. Finance ministers with an infrastructure problem would sneak off to Beijing for a quickie billion and return with smiles on their faces. The Chinese seemed willing and no one need know. George Osborne and David Cameron have done it for HS2 and Hinkley Point. Boris Johnson can’t keep his hands off Chinese skyscrapers. Now something dreadful has happened. Someone has told the Chinese people where their savings have been going. Does it matter? Of course it matters. Any student of economic history knows that when a swiftly urbanising economy exports its surplus savings – as Britain did in the late-19th century – it loses touch with reality and goes into recession. Money is tipped into African railways, Brazilian mines and Russian bonds. China has been tipping cash into worthless transport and energy projects around the world, or storing it in empty London towers. It encourages reckless governments to get involved with stupid projects that no sane banker would support.
Any bubble stock market is a danger to all. As Shanghai’s prices more than doubled it was clearly going to burst. When the regime is as dirigiste as China’s, that doubles the risk to others. China’s sovereign wealth can be withdrawn as quickly as it was splurged. Whether the Chinese market crash can single-handedly return the west to deflation is doubtful, but that is the risk.
The west became so scared of inflation in the 20th century that it has yet to handle deflation, the greatest menace facing the world economy. People stop spending and firms stop investing. Governments lose revenue but can borrow cheaply and duly pile up debt. That is met by austerity, which merely feeds deflation. The level of spending in the economy collapses. Look at Greece.
The old solution of quantitative easing failed to channel spending power into the economy, merely into banks. On this Labour’s Jeremy Corbyn is right. In a time of deflation, money should be printed and spent, not printed and saved. It should boost transfers and cut taxes. Get goods and services moving. Let the markets decide what needs investment and what does not. If you need more infrastructure, subject it to due Treasury scrutiny.
Going to China to beg for what is essentially political investment for vanity projects that no European would touch is no route to economic recovery. British chancellors should stay true to good capitalist investors, and avoid temptation from the east.
