According to caricature, George Osborne is confident to the point of being cocksure. Confident about his deficit reduction plan, confident about his intentions for the Conservative Party, confident about the progress of history and where it’s taking him.
But, for one with apparently so much confidence, the Chancellor sure can sound apprehensive at times. I started recording these moments during the last Parliament; they came whenever there was particularly sour economic news from overseas. America edging over a fiscal cliff? Europe already over and plummeting? Emerging markets going down too? This is when Osborne would talk, as he did to the International Monetary Fund in 2012, about “risks to the recovery”. He wanted to steel us for the worst.
And now, at the beginning of this Parliament, apprehension is oozing back into Osborne’s everyday talk. This time, it concerns China. “Britain is a very open economy … And so we are affected by what happens,” he told spectators on Monday. He made sure to say the c-word – claiming he was “reasonably confident” that Europe wouldn’t immediately suffer – but saying it isn’t the same as being it. Even if it were, that “reasonably” hangs heavily. Qualified confidence is not total confidence.
As it happens, the passage from total confidence to qualified confidence, or worse, is effectively what China is experiencing. Even when the country’s growth rates began to slow, there was still enough assuredness among investors to keep its stock markets going full pelt. The main Shanghai index more than doubled in the year to this June. Investors grabbed money from anywhere they could, including $264 billion worth of loans, to get in on the action. The Chinese central bank encouraged them with a range of stimulus measures.
But then? Well, you probably know the story by know. The Chinese Government eased back on its easy money, and explored other ways of boosting the economy, such as currency devaluation. The marketeers responded with alarm. Were all these stock gains simply a result of the stimulus? Were the companies behind them not actually worth so much? And what about all the cash I borrowed from the corporate sharks?
Many observers will, as usual, be looking to their tattered copies of John Kenneth Galbraith’s The Great Crash 1929 for answers – or at least for analogies. There, in the fourth part of the third chapter, they’ll find a wonderful account of America’s own stock market boom in the year before the crash. Galbraith describes it as a “mass escape into make-believe,” and one which was then found out. China too embarked on a mass escape into make-believe. It was then found out.
The question that follows is about how much of China’s economy is also make-believe. A correction isn’t a bad thing in itself – we could do with some of our own, not least in the prices paid for middling English footballers – so perhaps it’s fine that Chinese indices have returned to where they were in February 2014. Or perhaps it points to a wider malaise, and there’s still further to fall. Fearful markets, slowing growth, slack production and indebted individuals are seldom a healthy combination. It could be worse than China’s reticent government wants to admit.
Our own Government, and particularly the Chancellor, will be hoping that it isn’t. Osborne wasn’t kidding when he suggested that Britain’s openness to China creates problems. Our banks are owed about $193 billion in outstanding loans made to Chinese companies. There’s another $32 billion in exposure to credit derivatives. That’s a lot of money to be counting on from debtors, particularly if those debtors suddenly become less solvent.
This knock-on effect on Britain’s banks would probably be Osborne’s first concern were China to fail. But knock-ons have knock-ons. From the banks to the wider economy, just as during the last recession. I haven’t yet seen any estimates for how our recovery might be affected by a Chinese slump – if any readers have, I’d appreciate it if you’d link to them in the comments section – but there are ones from abroad that are suggestive and scary. Société Générale reckons that it could knock 1.5 percentage points from global GDP growth in a year.
The parallel, so far as Britain is concerned, would actually be the last Parliament, not 1929. Worse-than-expected growth would beget smaller-than-expected tax receipts which would mean slower-than-expected deficit reduction. The official target is to achieve a budget surplus in 2019-20, and it’s currently expected that Osborne will achieve one of £10 billion in that year. But, if the Office for Budget Responsibility has to once again revise its forecasts in an unhappy direction, this slim margin could disappear. China, which was only mentioned once in the OBR’s latest Economic and Fiscal Outlook, would have undone the Conservatives’ great promise.
By itself, this would be embarrassing for Osborne, as would his previous efforts to strengthen the ties that bind Britain with China. Let’s all point and laugh at the Chinese money that’s being used to build a new nuclear reactor at Hinkley Point, or at “China’s new alternative to the World Bank” that George has signed us up for despite the concerns of diplomats. Teeheehee.
But could it be more than embarrassing? In a political sense, I suspect not. The last Parliament also demonstrated that Osborne has a lot of leeway with voters. Deficit forecasts were increased, triple-A ratings were lost, the economy was a constant concern, and yet the General Election still yielded the result it did. And that was against Eds Miliband and Balls. The Chancellor will surely be glad to test his credibility against Jeremy Corbyn’s.
The economics of the situation are much more dangerous. In the short-term, there’s the soothing prospect of cheaper imports and even cheaper oil. Beyond that, there’s the prospect of damage to everything from our public finances to our banking system to our exporters. And how would policymakers respond this time? Interest rates are already as low as low can be. Quantitative easing has already been taken to new extremes. Infrastructure spending has already been increased. The range of available stimuluses is limited.
And this is what it comes down to: stimulus. Our own FTSE 100 index has doubled in size since QE was introduced. Household debt is rising in response to low interest rates. But what about when there is no easy money, when rates are increased? China is demonstrating what can happen when stimulus is removed. It may not mean a downturn. Britain might not emulate it. But it oughtn’t fill anyone with confidence.