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George Osborne courts China – but does he have enough to offer? | John Ross

Efforts to make the UK a currency trading centre are crucial, but China may not be so keen for a base in the troubled City

George Osborne’s deal to make the UK a major trading centre for China’s currency, the renminbi, demonstrates that the City of London is trying to retain its role as the offshore base for the world’s reserve currency.

The City rebuilt itself in the 1970s primarily to be the non-US trading centre for the Eurodollar market but, as this market declines, it wants to become the offshore centre for the rising reserve currency – the renminbi.

The British economy urgently needs this. Contrary to the chancellor’s bluster about the UK now being a relative success, only held down by eurozone infection, no other economy in the world has suffered as great a decline as the UK during the financial crisis – a reality only masked by the government declining to state the effects of a huge sterling devaluation.

Gauged by actual international money – that is, the dollar in current market prices – no other national economy has shrunk even remotely as much as the UK. The fall in UK GDP from 2007-10 was 2bn, compared to the next worst-performing national economy, Italy, with a decline of bn. In other words, in real international terms the fall in UK GDP was more than eight times that of the next worst-performing economy. When 2011′s figures are published they will show no significant recovery.

Germany recovered from the international financial crisis in significant part through its orientation to China – Germany now exports more to China than to the US. In the last four years, China’s economy grew by 42.2%, and the US by 0%, so Germany’s reorientation away from a stagnant US economy, and towards the rapidly growing Asian ones, was a move that paid off handsomely. Osborne clearly hopes to replicate in financial services what Germany achieved in manufacturing.

The problem is that the instrument Osborne is using to spearhead this reorientation, the City of London, is the one that caused the UK’s economy to fall deeper than any other. Germany has something serious to sell China – its high-quality machine tools are exchanged for China’s medium technology consumer goods to the mutual benefit of both. China’s gain from the new agreement with London on the renminbi is evident – it has no intention of engaging in a Thatcheresque rapid removal of exchange controls, and therefore requires one or, ever better, several offshore bases, to conduct its increasing overseas renminbi operations.

Britain is certainly right to want to take up such an offer – if not, China would merely use Frankfurt, Dubai, Singapore or some other centre to complement Hong Kong. The problem is that while London may have applied to become the European version of Hong Kong, China sees a more integrated Europe as its key partner – the UK is too small an economy to be an adequate counterpart for China, only the US and the EU are on a scale that can fulfill that role. Therefore China has repeatedly made clear it supports greater EU integration – which, unfortunately for any UK strategy, is something David Cameron has just opted out of.

The UK has just taken a tactical step forward in a necessary reorientation towards China. But unless it can combine this with reintegrating itself in the EU it will not be able to turn this into a coherent strategy towards what, in about five years, will be the world’s largest economy – and soon afterwards the world’s reserve currency. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds