Corporate Q&A

Still a golden opportunity?

The inventor of the ‘BRIC’ concept shares his views on the Sino-US trade war

Jim-O'Neill1-w

O’Neill says China needs to rethink its Belt and Road programme

Earlier this year Jim O’Neill was elected chairman of the esteemed British think tank Chatham House. The well known economist – whose official designation is Lord O’Neill of Gatley – is probably best known for conceiving the acronym BRIC (Brazil, Russia, India, China), which became an investment phenomenon and later a political grouping. Indeed, in China O’Neill is known as the ‘father of the golden brick four countries’ (though South Africa would later be added).

The former investment banker joined David Cameron’s UK government as Commercial Secretary to the Treasury in 2015. Here he oversaw the Northern Powerhouse – a policy to boost development in the north of England – as well as being tasked with improving British business ties with China. He was in Hong Kong this week in his new capacity as chairman of Chatham House and he spoke to WiC about China, trade wars and Trump.

When did you first go to China? And when did you first sense it was having a global impact?

My first trip was in 1990. But I think I took a definitive view that China was having a global impact in 1998, owing to its role in the Asian Financial Crisis. It played an indirect role in bringing an end to that crisis. In essence the Chinese persuaded Treasury Secretary Robert Rubin to intervene to stop the dollar rising – otherwise the Chinese would have to devalue. Rubin realised that would bring another vicious cycle to the Asian crisis.

When I saw all of this it made me begin to explore the size of China and its role in the world. In fact the stirrings in my head of the BRICs idea kind of started in 1998 when I began to think ‘hang on, this place has been growing at 10% a year for most of the decade’ and nobody had really got across – at least in my mind – how relevant this might be.

So when I coined the term BRICs in 2001 China was really at the centre of my thinking.

Do you think the current Sino-US trade war is necessary?

Necessary – that’s an interesting word. Maybe. In some ways this odd character Donald Trump has crystallised this nagging American thing about China, which has been there for the past 25 years.

What is interesting – and slightly worrying about it – is that this is one of his many crazy ideas that is pretty popular with the Democrats. It looks to me as though various members of Congress are annoyed that they hadn’t thought earlier to be as tough on China as Trump.

Maybe it has been necessary. In fact, those that want to pursue more genuine reforms in China are probably pretty pleased that Trump has put them under the spotlight.

Have the mid-terms changed the mood on the trade war?

I don’t see a change on this issue. I think this has unleashed a long held ‘thing’ about China, some of which is illogical but some of which is genuine.

I often joke that Trump’s advisers are about 30 years out of date. The past decade has all been about the new China and not this idea that China just undervalues labour and is very good at unfair competition. I believe that’s a very old fashioned and not so relevant view. However, where it is valid is that China clearly does things to support its state-owned enterprises internationally that are against the spirit of the WTO.

Will Trump succeed in getting supply chains to go back to the US? Or are they too entrenched in China?

The future of China and its relevance for the world is all about the Chinese consumer, so this obsession with China and supply chains is a bit out of date.

Will they all move back to the US? Very unlikely. I will say that I wouldn’t be surprised if we get some sort of trade deal between China and the US.

So you have an optimistic scenario for a reset in relations and some kind of accommodation on trade?

Yes. I’ve learned over the years never to let a crisis go to waste. China needs to adapt its trade policy. Unless you get a brutal thing like Trump, how else was it going to happen?

I’ve often thought one of the greatest things that happened to China was the Global Credit Crisis. China went into that with its current account surplus at 10% of GDP. And over 10% of China’s GDP was in exports of low-value rubbish to the US. Talk about a warning signal [for Chinese leaders] – do we really want 10% of our GDP vulnerable to that? It led China to change.

My optimistic scenario is that China is quite good at dealing with change, particularly when it is forced to do so from the outside.

Xi Jinping made a speech this week on self-reliance in the tech sphere. This follows another ban on US components being sold to Jinhua, a semiconductor firm…

I did see that. This again has helped the Chinese realise that certain parts of how they are developing make them vulnerable to the whims of whoever is running Washington. So in some ways it is helpful.

Are Chinese M&A deals in the US now dead on arrival, particularly those that involve technology or major American brands?

Probably. Then again, and I may be wrong about this, quite a lot of the acquisition boom we saw in recent years was because these Chinese companies had too much cash. Did they really know what they were doing? There were some crazy acquisitions.

Do you think we are we entering a twin track world in the tech sphere: a BRICS/ BRI world versus a US-EU one? Put another way, are we splitting into the parts of the world where Huawei can win contracts, and the parts it cannot?

I don’t know the answer to that. But you mention BRI [the Belt and Road Initiative], and a controversial view that I’ve developed this year is that the Chinese have got to rethink how they promote BRI. When I talk to Chinese policymakers about it, they won’t say it publicly but I think they know they’ve made a mistake. They can’t even get India to turn up to meetings about it. Every week some other part of Asia basically complains about BRI.

But as to whether we have a twin-track world… Are Western governments going to not want to be part of 1.3 billion Chinese consumers using technology? You can see with Google’s announcement [on a new search engine tailored for the Chinese market] that they want to revisit being part of the Chinese tech world because it is so huge. Apple has sold more iPhones for the past four years to the Chinese consumer than the US consumer too.

Apple is probably the most vulnerable to worsening Sino-US relations…

I agree with that. But if it really gets bad, the whole world has issues. If you look at the changes to nominal GDP this decade, 85% of it has come from two places: China and the US. So if these guys fight, everybody loses directly or indirectly. Apple would be a huge loser, but so too would BMW, for instance.

China has been the single most important marginal driver of global growth for 20 years. So if it is dragged into a dangerous fight over trade, there is no winner.

When you were in the British government you focused on China during a period dubbed as a ‘golden era’ in Sino-UK relations. Where do things stand now?

I was part of the development of the golden era! Slightly strangely – two and a half years since Theresa May took over from David Cameron – I detect a strong latent love for the UK from the Chinese. I think that’s partly because of the Asia Infrastructure Investment Bank and the UK signing up to it quickly.

It’s almost like the Chinese machine is trying to pretend it’s still the Cameron and Osborne era. I meet a lot of mid-level Chinese visitors and you can feel that they really are still into the UK!


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