Britain’s chancellor of the exchequer talks China, globalisation, the EU and his country's place in the world with our Bagehot columnist

THIS week my column covers George Osborne’s trip to China and his attempts to make Britain the country's “best partner in the West”. Relations between the two have recovered since David Cameron’s 2012 meeting with the Dalai Lama—and no British politician is more closely associated with that shift than the chancellor. That matters not just because he is a leading figure in the new Conservative government, but also because his chances of succeeding Mr Cameron as prime minister by 2020 have never looked better.



As music thudded and Beijing’s beautiful people mingled outside in the garden (ahead of a fashion show for Superdry, a British clothing brand about to expand into China), I sat down with Mr Osborne in the British ambassador’s residence for a discussion on Britain's role in the world. I started off by asking him about his trip.



NB: The interview has been lightly edited for clarity.



George Osborne: I find it such a fascinating and interesting country. Each time I come back something has changed and it’s moved on in leaps and bounds.



Bagehot: When did you first visit China?



George Osborne: I visited China in the early 1990s essentially as a student—just after I had left university—and I backpacked around the country. I went to Beijing and Shanghai but also Chengdu (where I’m going again [on this trip] for the first time since then). I took the boat from Shanghai to Wuhan, went to the south of China as well. And now when I turn up I’m in the embassy car and I’m whisked into the pavilions to meet the Chinese leaders, but it’s good to have seen this country with a backpack on my back, staying in a hostel.



Bagehot: What are your memories of it back then?



George Osborne: What’s interesting to me is what’s changed: Beijing at the time was quite a staid and dull place, Shanghai was the place with all the energy—although Pudong had not yet been properly developed. And what’s interesting is whilst Shanghai has gone stellar—literally, in these massive buildings which have appeared since I first visited—Beijing has become a much more vibrant and interesting place. A lot more business is done here. Tech Temple [which the chancellor had just visited], that start-up business with its distressed, brutalist interior…



Bagehot: You could be in Old Street.



George Osborne: Literally, you could be in Old Street or you could be in San Francisco. And that fact would have been inconceivable when I came to Beijing as a student all those years ago. So each time I come it’s amazing to watch the development of this incredible country.



Bagehot: Fast-forwarding a bit, how has Britain’s relationship with China changed over the five years of your chancellorship?



George Osborne: Look, we have made a determined effort to ensure that—as I have put it today—Britain is China’s best partner in the West. And that has been a conscious decision.



Bagehot: Was it taken right at the start of the coalition government?



George Osborne: Actually it started out of our economic and financial co-operation. My opposite number at the time was Wang Qishan, who is now very senior in the Chinese government, and we started this process of working with China to internationalise the renminbi. And that became a very fruitful channel of co-operation and led to substantive steps forward in our partnership. Because the danger of these sorts of dialogues is that nothing of substance comes out of it; there’s a lot of talking but nothing is ever actually agreed. But we set the tone early on, and I tried to do that five years ago: what is the concrete decision that has been taken today? And if you take, for example, this latest dialogue, the People’s Bank of China is now going to be issuing central bank instruments through the London markets, something that has never happened outside China.



Bagehot: Not just nice words?



George Osborne: Not just nice words. Substantive progress on the economic and financial channel. But in the past couple of years we have been able to start to broaden that. The Olympic Games gave us an opportunity to start talking about security issues for China. The big cultural delegation I have brought here… We are broadening this relationship on every front. China is absolutely one of the biggest players in the world and if Britain wants to be connected to the world it has to be connected to China.



Bagehot: If you were explaining this to one of your constituents in Tatton, or anywhere else, how would you explain what the opportunities that China offers mean for ordinary people in Britain?—not just in the City of London, not just in Old Street.



George Osborne: I would tell my constituents to come with me to the edge of my constituency in Cheshire, where it meets the border with Greater Manchester, and they will see there cranes in the sky, a vast construction site for what is called Manchester Airport City. That is literally on the border of my constituency. And there are a load of people working on that construction site who are British. And when the buildings are constructed there are going to be a load of companies there employing British people; local people. And that investment is coming from a combination of the government (me designating it an enterprise zone), Manchester City Council working with me to attract foreign investment and then Chinese investment coming in, one billion pounds of Chinese investment. So that is, I would say, a really concrete example, a visible example you can go and see today, of the benefits for British people across the UK, not just in the centre of London, of Chinese investment. And we want to see more of it. We have agreed today further steps towards building this nuclear power station in Somerset [Hinkley Point C] with Chinese money. There’s another concrete advantage for British people (maybe not as visible as the cranes over the Manchester Airport skyline), but the fact is I do not need to stump up billions and billions of pounds of taxpayers’ money to build a new nuclear power station, as all previous nuclear power stations have been built—money I can’t then spend on the health service or can’t then spend on the education system or can’t use to cut taxes. This approach means I’ve got Chinese investment doing that for me and I don’t need to use taxpayers’ hard-earned cash for it. So it’s a bit more intangible but it affects every single taxpayer in the country.

Bagehot: Notwithstanding the benefits, there must be a bit of you that worries about the volatility of the Chinese economy when you are hard-wiring Britain so thoroughly into China’s economic success or otherwise.



George Osborne: Well look, at the moment we are hard-wired into the European markets—50% of our exports go to Europe—and that has not been good for the UK. So I’m not saying “make Britain entirely dependent on China”. I’m saying “let’s diversify a bit”. When I became chancellor, China was our ninth largest trading partner. This is the world’s second biggest economy. China was doing more business with Belgium than it was with Britain.



Bagehot: You think we under-performed?



George Osborne: I think we more than under-performed. I think we woefully failed to connect Britain to the growing Chinese economy in the previous decade, and I have sought to remedy that. China is now the sixth biggest trading partner with the UK. We have attracted now the lion's share of Chinese investment that is going into Europe. Neither of those things were true five years ago. And I think it is absolutely central to our economic plan as a country not only that we put our own house in order but that we better connect ourselves with other parts of the world, particularly the faster growing parts of the world. I’ve made this point publicly but I make it again: even a China growing at 7% or indeed less is still adding to the world economy an economy equivalent to the UK or more. So there is massive opportunity there. And one of the exciting things for me has been bringing Jim O’Neill [former chief economist of Goldman Sachs] into the Treasury. I went to get him, phoned him up, said: “look Jim, I need you to become a Treasury minister.” He’s helping a lot on the Northern Powerhouse, which he has written reports about, but to have one of the world’s foremost experts on the Chinese economy sitting next to me, literally, in these meetings and being with me on this trip is a sign of our intent to take China very seriously and make sure Britain benefits.



Bagehot: On that, what role does the Foreign Office play? Because this trip is very Treasury-driven. You have talked about the next “golden decade” [in Britain-Chinese relations].



George Osborne: Yes.



Bagehot: What role does the Foreign Office have in that?



George Osborne: The Foreign Office is a very important arm of the British state and I think Britain has a fantastic diplomatic service. We are the only country in the world spending 2% of our national income on defence and 0.7% of our national income on aid. We are the only country in the world doing both of those things. And far from shrinking the Foreign Office in China, while I have been the chancellor and my colleagues William Hague and Philip Hammond have been in the Foreign Office, we have opened a consulate in Wuhan, we have increased our staff here [in Beijing]. We have reduced, frankly, the Foreign Office footprint in a lot of those European capitals where every single one had quite a big Foreign Office establishment, and just rebalanced the Foreign Office a bit. Not so we neglect Europe but so we take even more seriously the rest of the world.



Bagehot: You have been speaking in quite a mercantilist way throughout this trip and your Chinese colleagues have reflected on your “pragmatism”, but your reputation in Westminster is as someone with strong views about Britain’s role in promoting liberal democracy and human rights. How do you reconcile those two things?



George Osborne: Well first of all this is an economic and financial dialogue. But what I’m interested in is Britain projecting itself abroad, and through that its values and the things it holds dear. And I don’t think you do that by refusing to talk to the world’s second-largest economy. In fact, that is positively counter-productive in my view. So I see absolutely no contradiction. I think Britain needs to get out there on the world stage and make itself heard. And for much of my political career, there has been a sense of retreat from the world stage because of what happened in the Iraq War. I think the Cameron government is turning that around, reversing that sense that there existed in our society that the world’s problems were all too difficult and that we didn’t want to be part of it. But these big commitments we make on the defence budget, the aid budget, and our willingness to go out now and really sell that message, really show that Britain is coming back.



Bagehot: But if Britain is to be “China’s best friend in the West”, does that not create new responsibilities for Britain to sit down with China and say “we’re not happy about this, we’re not happy about that”?



George Osborne: With any friendship you can always raise issues of concern, and I’ve done that on that trip, but I’ve done it privately; I haven’t used megaphone diplomacy. And I’ve also been a respecter of the fact that China is a country that contains one fifth of the word’s population and has a civilisation stretching back 5,000 years. You can have a dialogue with the Chinese on many different levels. And just as it wouldn’t be right to only to have an economic dialogue with China, equally you shouldn’t restrict your dialogue solely to issues around, say, human rights. You can raise all those issues, and that is what reflects a mature discussion. So I don’t think essentially we have to choose between being partners in China’s economic development and being proud defenders of British values.



Bagehot: In recent years the financial crisis, the rise of UKIP, perhaps even the election of Jeremy Corbyn [as Labour Party leader], have suggested that there are new challenges in Britain to the public’s consent for globalisation, for global markets. Are you concerned by where the public’s mood is on that?



George Osborne: Do you know, I actually take a slightly contrarian view on this. Because that is the fashionable theory. I would say that it is not surprising that after a massive recession, the great recession of 2008-9, that there is some political reaction to that or that the public debate is shaped by that event. It would be extraordinary if it hadn’t been. But if you look at—generally—the reaction in our country, I do not see the rise of some great protectionist sentiment. In fact those who advocated that at the recent general election, both in the Labour Party and in UKIP, were rejected. I see no real argument in our country that is concerned that an Indian company owns our most successful car manufacturer or that the sewer system under London is being renewed in part by Chinese investment. There are the odd voices that express concern but they are very marginal and they are not being listened to by the British people. So I am actually quite encouraged and I think, actually, the UK is coping with globalisation a lot better than most other European countries. And that is reflected in the fact that (whilst of course there are people who are still unemployed) our unemployment rate is low and (whilst of course we need to export more) we are attracting a huge amount of inward investment into Britain. So I’m not saying “job done” but I am actually pretty confident that Britain can be one of the biggest winners from these big global changes that are taking place and indeed become the richest of the major economies in the world in this coming generation.