Anthony Hilton: Closer ties with China could be both sweet and sour

The fall in the Shanghai stock market that so enlivened an otherwise dull August saw peak-to-trough losses of a quite astonishing $2.9 trillion (£1.9 trillion), according to Richard Sharp, one of the external members of the Bank of England’s Financial Stability Committee.

By comparison, the losses in American subprime mortgages that sparked the global financial crisis of 2007-08 were “only” around $400 billion — so barely one-seventh as much.

The difference was that the subprime losses were incurred by financial institutions at the heart of the system and that those banks were so heavily borrowed and so badly managed that they would have been unable to cope with even a trivial loss, let alone the rather larger hit which subprime entailed.

The result of the subsequent banking instability, panic and collapse was — lest we forget amid the Government-prompted rush to be nice to bankers again — that the crisis cost the US economy alone some $4.5 trillion in the period 2007-09.

According to the International Monetary Fund, the hit to this country over those two years was £370 billion — so it is not altogether surprising that the Labour Government had financial problems, given that its entire tax take in one year at that time was less than £700 billion.

Although George Osborne seems to have persuaded everyone otherwise, it was the banking crisis, not Labour profligacy, that caused the huge deficit in our public finances.

The bigger point, however, in the week that sees the state visit to this country of Chinese President Xi Jinping is that perhaps we should be rather relieved China is not more closely entwined with the global economy.

If $400 billion of losses in the US was enough to spark a crash with the potential to bring the system to its knees in 2007, what havoc would this summer’s Chinese losses of $2.9 trillion have caused if they too had landed on the doorstep of the western financial institutions and other big players in the international system rather than the being borne by hapless Chinese domestic investors?

Much as one would support efforts to develop the City as the centre for offshore trading in the Chinese currency, it should not be forgotten that it is neither costless nor risk-free.

The more China is integrated into the global financial architecture, the more the country’s instability will impact on everyone else. That could be a very high price to pay.

We have already had a foretaste of this, of course, in the non-financial world. The arrival on the global stage of hundreds of millions of Chinese workers from 1990 onwards caused the price of labour to drop worldwide as low Chinese wages were transmitted to the West either by European factories relocating to China or by western firms being forced out of business because they could not compete against cheap Chinese imports.

Thus a defining feature of the past two decades in the western world is that the vast majority of people have seen no real increase in their incomes.

We are currently living through a second shock. When China was growing flat out — as it was until a couple of years ago — it sucked in a huge proportion of the world’s raw materials, and in effect priced everyone else out of the market. China could grow or the rest of the world could grow but there was not enough for both to do so at once.

In effect, the western world was crowded out.

Now, in contrast, China’s slowing means these commodity prices have tumbled, with oil being the most obvious everyday example, and that is giving the rest of the world the chance to get back on its feet.

On a different tack, in various parts of the world, there are top-secret centres that seek to track interference with the world’s computers and occasionally let in journalists to show off what they are doing.

These organisations monitor the global communications networks and that allows them to map quite easily where the attacks are originated and occasionally the location of the potential targets.

The visual result projected on these giant wall maps of the globe is a cross between a New Year’s Eve fireworks display and those spaghetti-like route maps you find in the back of airline magazines.

But what becomes obvious from the patterns created by all the data is that China is one of the main places from which this is coming.

Who knows what the motivation may be or how much of this, if any, happens with the approval of the government — but it does seem a strange way to engage with the global business community.