Cailean Bochanan

4th October, 2015

I had the impression that Osborne’s recent and startling announcement of various deals with China, including the integration of our financial markets, no less, had been met by a stunned silence. But John McDonnell, the new Shadow Chancellor made this reference to them in his speech to the Labour Party Conference:

“I found the Conservatives’ rant against Jeremy’s proposal to bring rail back into public ownership ironic when George Osborne was touring China selling off to the Chinese state bank any British asset he could lay his hands on.”

“Ironic” is putting it mildly: The Chancellor has essentially admitted the failure of the Thatcher revolution and called in the state to rescue Britain. Only it’s not the British state, which no longer knows how to run anything unless it’s into the ground. You might have thought the left would be enjoying this “irony” a bit more than they appear to be. More, for example, than William Keegan writing in the Guardian who is dismayed that Osborne is “kowtowing to a communist Chinese government” and denounces his “cloying approach to a regime notorious for its abuse of human rights”. Keegan is something of a soft left neo-keynesian and , therefore, those criticisms could be largely expected. What about the hard left?
In an article in Socialist Worker Alex Callinicos gives us the line. He is, of course, scrupulously politically correct:

“The problem here isn’t that the companies are foreign-owned.”

Why shouldn’t foreign companies take the place over? Don’t they have rights too? The problem lies elsewhere. Callinicos points out that Chinese companies are “still subject to considerable state control” and that capital “is still not allowed to flow freely in and out of the country” However, Callinicos insinuates this is changing and China is embracing the free movement of capital.
So we have two major threads in this leftist discourse: on the one hand, dealing with China is wrong because China is communist and , on the other , it is wrong because China is no longer communist.
Callinicos goes on to denounce the fact that Chinese investment will be centered on the the City of London at the expense of the “national base of companies operating in Britain.” Callinicos’ thinking in all this is particularly fuzzy. Capital exported from China can still be and is controlled by the Chinese leadership for all their rhetoric about free markets. This is particularly true of the banks. As Dend Xaoping himself used to say:”Whatever you do keep control of the financial system!” In addition, I don’t believe the behavior of Chinese banks will merely replicate that of our own: riding high on bubbles and carry trades, manipulating rates and prices and laundering funds of dubious origin. If they did China certainly wouldn’t be in the position it is today. Anyway, as Osborne announced, there is already large scale Chinese investment in the real economy, largely in infrastructure and housing. There is every reason to believe that this would increase with funding available from Chinese banks operating in the City. The principles of Chinese finance contradict completely those the City of London. We are, therefore, looking at systemic change in the British financial system.
The British left desperately need to get to grips with this issue and quickly. This is because they have essentially abandoned their neo-Keynesian perspectives and accepted the need to balance budgets. But how can they reconcile this with their claim to be anti-austerity. Balanced budgets imply genocidal austerity unless there is some countervailing tendency. That tendency is incoming investment something which, seemingly unbeknown to the left, we have been beneficiaries of for decades. All that is happening,as Osborne’s policy shows, is that the form this investment takes is changing.
For a long time China was obliged to accept fiat pounds to cover its massive trade surplus with Britain and reinvest these pounds in UK government bonds. This was win/win for Britain and largely explains the surprising prosperity of post-Thatcherite Britain. The bankruptcy of the City and its subsequent bailout changed all that. China ceased to buy new UK government bonds (note that, in addition to its massive trade deficit, Britain no longer has a current account surplus not including trade) although they agreed not to divest from existing bonds, sinking sterling. Instead, they wanted to reinvest the surplus funds in the UK. So, on the one hand, we can no longer fund our deficit with Chinese bond purchases and on the other we have the prospect of hundreds of billions worth of inward investment. So balanced budgets and Osborne’s policy are two sides of the same coin. It would be truly reckless to embrace balanced budgets without wholeheartedly welcoming the incoming investment which will render the outcome far less austere. The left are caught in a dilemma which they must resolve if they don’t want to be outflanked by the Tories.