The Great Fall of China and the West Midlands

04/09/2015  -  9.05

Mike Haynes, Professor of International Political Economy

The crash of the Chinese stock market is sending shock waves around the world. In the murky world of global finance nobody really knows who is owed what until it is too late. So the social media interested in financial markets are alive with questions about how exposed the UK financial system is to any China effect. But the fall-out from any crisis will also be felt in the West Midlands because of the way China has become an important market for goods produced in the region.

Although China is still only partly developed, its economy has grown at nearly 10 per cent per year for the last thirty years compared to an average of just fewer than three per cent for the world economy as a whole. One result is that 70 per cent of the world's destitute who have been lifted out of poverty in that period have been Chinese. Poor though most Chinese still are, the new generations of urban workers live much better than their parents and grandparents, who toiled in the paddy fields. Another result has been that China, with its population of 1.4 billion, now produces around 12 per cent of global output.

China's growth has been peculiar. Some people in China have grown incredibly rich. The number of billionaires is second only to that in the US. But the level of inequality has also grown to very high levels. The reason is that wages have been held down to encourage both investment and rapid export growth.

This has produced the serious distortions that underpin the current problems in China and its relationship with the world economy. Britain has done well in its financial dealings with China, which may now be put into question in any extended financial crisis. But its poor manufacturing performance means that it has been running a huge deficit with China in what is called merchandise trade - the stuff that we can touch and feel. In the battles of the high street pound shops and the supermarkets, we see a reflection of the way in which the UK sucks in cheap Chinese imports.

But the one region that does export massively to China is the West Midlands. In fact, in 2014 China was the region's biggest global partner. As manufacturing in the UK has been hollowed out, two types of company have survived better in the West Midlands - those producing some types of industrial equipment like JCB and those producing cars and especially luxury cars like Jaguar Land Rover. China's elite needs the machinery to build the new cities, roads and factories and it loves the luxury cars to celebrate its rule. 

Whether this makes moral or political sense is an interesting problem. If China's financial crisis turns out to be underpinned by a crisis in its real economy then it becomes an economic problem for the West Midlands too. Demand for machinery and cars will inevitably falter. UK exports to China have grown by some 70 per cent since 2010, carrying a significant part of any export recovery. And this has been especially important in limiting the damage done by the economic crisis in the West Midlands. No other region has had its success in exporting to China but no other region so depends on it. There could be an indirect effect too as falling demand from China weakens growth in other parts of the world where the economy has been pulled up by Chinese demand so also dampening their interest in UK exports.

Economies always go through cycles and if China does fall -  it will rebound. The trouble is that an awful lot can happen in an intervening period of crisis.