The Fog Lifts: How the UK Manages China

President of China, Xi Jinping arrives in London, 19 October 2015. Photo by Foreign and Commonwealth Office / CC BY 2.0


 

It was the “reddest of red carpets.”

In October 2015, Xi Jinping made the British kowtow, an act the once mighty British Empire has refused to do since 1793 for the Chinese. The pageantry-filled visit to London clearly demonstrated China’s power on the international stage and the influence of Xi Jinping – a leader who has slayed peers and the untouchable retired senior cadre of the Politburo Standing Committee. The press was alight about how Britain had sold its soul in order to make this visit happen for the purpose of getting some Chinese investment.

The genesis of this national humiliation hidden in a bespeckled presentation of crowns, gowns, and carriages, started with the Chinese government’s diplomatic freeze directed at Prime Minister David Cameron for his visit with the Dalai Lama. It was all one British jig after another from that moment.

The Mayor of London and the Chancellor of the Exchequer visited China promising to open up more visas to Chinese tourists. The Chancellor went on to eagerly promote trade opportunities between the two countries, and British officials consistently remained mum on issues related to human rights and the Hong Kong protests. Topping off this behavior was the British government’s agreement not to meet with the Dalai Lama again and its eagerness to join China’s Asia Infrastructure Investment Bank in spite of U.S. requests to not do so. Then of course, to make it extra sweet, the monarchy sent Prince William to offer Xi the Queen’s personal invitation to visit the UK. If those actions don’t demonstrate a British stiff upper lip, what possibly does? Clearly, gone are the days of Churchill.

This storyline is a lie.

Xi’s visit did not represent the culmination of British defeat. It represented the culmination of high-class tactical diplomatic maneuvering on the part of the UK to achieve long-term strategic advantage. To understand why this is so, it is important to realize that Xi’s visit, crucial for both China and the UK, was about London becoming the central hub for RMB foreign exchange transactions.

With London already handling 40% of the foreign exchange market, being the primary dealer of RMB outside of China is critical to maintaining London’s long-term dominance. Xi needed the UK because his economic plans and political legacy cannot afford to wait for some other country to develop the market scale of the UK.

It is well known that the Chinese must transition their economy from an export orientation to a consumer and services driven economy. The internationalization of the RMB is critical to this transition.   The long-term viability of the Communist Party’s legitimacy depends on it. As China ages and becomes more educated, there are simply fewer people able and willing to work in the factories that were at the heart and soul of the country’s export-oriented economy. Additionally, asking the graduating students of Chinese universities to go back to the factory floor would undermine the implicit promise that the Chinese Communist Party stands for progress and a shift away from the backwards thinking of other Chinese political eras. Furthermore, the leadership of the Party has routinely stated that by 2020 China will be a “xiaokong” or moderately well-off society. Meeting this self-proclaimed target depends on China’s economy cooperating with authorities’ designs.

Unlike China, the UK and its politicians are not under the gun to make some grand transition happen. In fact, given the overall perspective, they had much less riding on Xi’s visit. The UK is the world’s leading financial center, with a hefty portion of the multi-trillion dollar foreign exchange trade passing through The City. The financial sector contributes 8% to the gross value added of British GDP. Financial services exports are 29%. Jeopardizing London’s role as the center for the foreign exchange market by losing possible RMB business would be bad, but that loss would take a long time to take effect compared to the pressure cooker that Xi has to deal with in China

While the UK didn’t want to lose the RMB deal, it was already one of the largest global RMB markets and it’s projected to keep growing. Outside mainland China, only Hong Kong beat out London for RMB trade. Great Britain was already in the market, but sealing this deal put the UK in a more competitive position vis-à-vis Hong Kong and other global financial centers.

It’s a completely different story for China, and especially Xi. Time was not on Xi’s side. Xi needed the deal to close sooner rather than later. The longer Xi waited to close the deal, the more risk he incurred to his primary objective of reinforcing the Party’s legitimacy in 2020, or as Xi is apt to say, delivering the “Chinese Dream.”

Since 2011, the British had the aim of creating London into a global RMB hub. Cameron’s 2012 visit with the Dalai Lama was not a big deal, except for the fact that it came at a sensitive time for China: leadership transitions and an international scandal. Unsurprisingly, the Chinese lashed-out because they could ill-afford the perception that they were so embroiled in domestic issues that outside powers could meddle in their affairs. The Brits seem to have realized that they put the Chinese in a precarious position, so they avoided addressing sensitive topics. The Queen’s personal invitation to Xi allowed him to seal the deal without having to appear soft on the British government.

Xi required this deal for his legacy and that of the Party’s. Xi was not going to be able to play chicken forever. Throughout the build-up to October 2015, the British always held the higher cards. Instead of calling his bluff and poisoning the air, the Brits gave Xi face by not calling him out. In the end, the Brits walked home with the bank, further cemented their international financial leadership, and got some nice side investment deals. Xi got the opportunity to save his and the Party’s legacy.

Nicholas Iorio is a private-sector international security affairs consultant specializing in the Asia-Pacific. He has previously been published in The National Interest.

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