Chancellor's speech to the British Chambers of Commerce in Hong Kong.
Ladies and gentlemen, thank you for coming – and thank you for asking me to speak again to the British Chambers of Commerce.
I spoke to this Chamber three years ago. I said then that relations between Britain and Hong Kong had always been deep and strong – but I said that the economic relationship could be even deeper and stronger.
That has proved to be the case. Thanks to the work of the British Chambers of Commerce and its members, Hong Kong and the UK are now doing more business together than ever before.
I want to talk to you today about the opportunities that this deeper integration brings for both our countries.
But as two of the most open, free-trading, financially connected places on earth, we also understand more than most that deeper global integration brings new risks as well.
And so I also want to talk about what we can to do tackle those global risks head-on, both internationally through organisations like the G20, and in countries like the UK.
Of course Hong Kong and Britain have always had a special bilateral relationship.
That’s about much more than our historic and legal ties.
It’s about our shared values.
It’s about the influence that your culture has had on British life – and that our culture has had here.
It’s based on the thousands of Hong Kongers who study and work in Britain and the quarter of a million British citizens who choose to work here in Hong Kong.
And of course it is also about our inextricably intertwined economies.
So whereas others could make the mistake of seeing Hong Kong as nothing more than a jumping point for trade with mainland China, we in Britain know just how important Hong Kong is as a destination its own right.
You are the UK’s second largest market for goods in the Asia-Pacific.
You are the source of just under 30% of the profits of two of the UK’s largest banks, HSBC and Standard Chartered
More investment comes to the UK from Hong Kong than from the USA, Canada and Singapore combined.
This relationship brings jobs and prosperity for both our economies.
Just look at companies like Hutchinson Whampoa, who I’m seeing after this. It is the single largest foreign investor in the UK. It is responsible for around 35,000 jobs in everything from ports to telecoms to the water supply.
Look at companies like MTR, who I am also visiting later today. They run two of the main commuter rail lines in London and the South East of the UK.
Over here in Hong Kong they are working with British firms like Kier and Laing O’Rourke to deliver new infrastructure projects including the extension of Admiralty Station and the new high speed rail link to the mainland, which I am looking forward to seeing later.
And it is not just about large global players.
This year, while the Shangri-La hotel opens in London’s biggest skyscraper, the Shard…
…On the other side of the river a small Hong Kong tech company called Advanced Merchant Payment will be opening in London’s Tech City.
They will be providing innovative financial services to SMEs and their banks.
And when they wanted to expand outside Asia, they choose to come to our country first - because we have the best environment for start-ups, a world class financial services industry, and one of the most open and competitive economies in the world.
It’s only been three months since I was last here. But even in those three months I detect growing optimism about the economy here – and across Asia.
And every time I come here I sense the energy and the ambition of a continent assuming its place at the heart of the global economy.
Of course Hong Kong is also hugely important to us as the prime gateway to and from one of the biggest parts of that global economy - mainland China.
Almost a tenth of all our exports into China flow via Hong Kong. That’s a huge proportion.
And almost two thirds of all Chinese outward investment comes through here in one form or another.
But Hong Kong has this special position because of its own inherent strengths.
Three hundred British firms base their regional headquarters here, not just because of Hong Kong’s prosperity.
But also because of Hong Kong’s stable government and strong legal system.
As my colleague, the Foreign Secretary, said this month: Hong Kong’s success is underpinned by its autonomy, rights and freedoms - guaranteed by the Joint Declaration- and the best way to preserve Hong Kong’s strengths is through a transition to universal suffrage which meets the aspirations of the people of Hong Kong.
How that is achieved is for the people of Hong Kong, and the governments of Hong Kong and China to decide.
What I want Britain to do is to build on this special relationship with Hong Kong, so that together we can be a bridge – and not a barrier – to trade between mainland China and the world.
For strengthening the relations between China and the UK has been a very important personal priority of mine as Chancellor of the Exchequer.
When I was last here in Hong Kong, before Christmas, I arrived off a ferry from Zhuhai, at the end of a long visit to China and after the conclusion of a very successful Economic and Financial Dialogue between our two nations in Beijing.
Those talks represented the next big step forward in the UK-China relationship.
For the first time ever, the door was opened to Chinese investment in civil nuclear power.
Millions of pounds of Chinese investment in other British infrastructure projects were secured.
And new opportunities for British exports to China – already up 80% in 3 years – were secured as well.
And when the Prime Minister led a trade mission to China last December, the delegation struck £5.6 billion pounds worth of business deals between our two countries.
For this is a two-way relationship of equals. Gone are the days when the British finance minister was only interested in securing greater market access to China.
That’s still important, but just as important now is Chinese investment and access to the UK.
Nowhere is that more apparent than in the development of the use of China’s currency, the Renminbi.
Hong Kong knows that well – you are the largest offshore centre for RMB in the world.
London’s position as the Western centre of RMB trading has been greatly strengthened as a result of this collaboration with Hong Kong.
Now almost two thirds of all RMB payments outside of China and Hong Kong take place in London.
Now London firms are able to invest directly in Chinese stocks and shares in RMB – something that’s just not currently possible anywhere else in the West – thanks to our agreement with the Chinese Government last year.
Now Chinese banks are going to be able to apply to set up wholesale branches in the UK, for the first time.
And we are now the first country in the G7 to agree an RMB swap line with the People’s Bank of China, giving London investors the confidence to expand their RMB activities.
Ultimately what we all want to see is RMB being used more and more as a currency of choice in the world.
And that’s why today I want to go further.
So I can tell you today that the UK and Chinese Governments are in active discussions about the appointment of a Renminbi clearing bank in London.
Recognising London’s role as the Western centre of offshore RMB trading, I am also announcing today that we will be hosting the first International RMB Conference in London this summer – and it will be sponsored by an array of British, Chinese and International Banks from HSBC to ICBC, from Standard Chartered, RBS and Barclays to Bank of China and the China Construction Bank, from Citi, JP Morgan and ANZ to the Agricultural Bank of China and the Bank of Communications and others.
In the Economic and Financial Dialogue last October we said we wanted to see greater collaboration between financial services firms in the UK and China.
Well, today I am very pleased to see exactly that, with the announcement that the Chinese firm, E Fund Management - who I believe are here with us today – will be partnering with a London firm, ETF Securities, to launch a new investment product on the London Stock Exchange. That product will allow people in the West to invest directly in Renminbi in Chinese companies. It’s just one example of the growing links between our financial sectors.
These steps will bring the UK and China closer together, and promote trade and commerce.
But I also want to promote the exchange of ideas and better understanding between both our countries.
That’s why I want to make the UK the prime destination for tourists from this part of the world. Almost three hundred thousand Chinese tourists come to the UK each year, and that number is growing by 40% a year.
I want to make it easier for tourists from the mainland to visit. So I am pleased to announce today that even more British retailers, such as John Lewis, are going to start accepting payments in Renminbi.
I also want to strengthen our relationship by encouraging more students from China and Hong Kong to come to our world-class universities. We already have over 100,000 Chinese students studying in the UK each year.
Today I can announce a new collaborative programme between leading universities in China and the Russell Group of UK universities on the key challenges we all face. We’re going to work together, with leading businesses to find answers to the problems of urban development, public health, energy and transport, the digital economy and financial reform.
And I want students in Britain to understand Asia better as well. Which is why today I am also announcing a new grant for Chinese language teacher training in 50 London schools. My ten year old daughter is already learning Mandarin – I want thousands more children in Britain to learn this language of the future world economy.
These are just a few small steps forward in a relationship between Britain, Hong Kong and China that gets deeper and richer every year.
For me the relationship is about more than economics and the bottom line. It’s about how we view our world and the extraordinary change it is going through.
For some see the rise of China, the success of Hong Kong, the growth of Asia as a threat to the West. They call it a ‘race to the bottom’ and they want Western countries like mine to pull up the drawbridge and close the shutters.
I think that would be a tragedy for us all – and leave us all impoverished.
This is not a race to the bottom.
We should not see growth in China and Hong Kong as a threat to us or something to be afraid of.
We should see it as a huge opportunity. Get it right and it means jobs and investment in London and the whole of Britain. Economic success in Asia can bring economic security at home. An opportunity for us as well as for you.
But only if we work through our long term economic plan.
Of course, as we’ve seen over these recent years, closer global integration also brings global risks. And if we get it wrong – if we don’t tackle those risks head on – then those risks will threaten our economic security.
Today I am on my way to the first G20 Finance Ministers and Central Bank Governors meeting of the year, in Sydney.
We might have hoped that this would be the first time in five years that the G20 has met outside of a global crisis.
The risk of a eurozone collapse has greatly receded, and the prospect of a destabilising standoff over the US fiscal position now looks much less likely.
But as well as reasons to be cheerful, there are also reasons to be careful.
Many economies in Europe remain very weak.
Problems in the Middle East abound.
And in recent months we have seen volatility in several emerging markets, with currencies weakening by up to 19%, bond yields spiking by up to 11%, and sudden falls in equities markets across Latin America and Asia.
Most emerging markets are more robust than they were in the late 1990s, and in many cases flexible exchange rates are functioning correctly as shock absorbers.
But if we have learnt anything from the recent Great Recession, it is that in this interconnected global economy one country’s problem can very quickly become everyone else’s problem.
And acting early when risks emerge can head off much greater damage later on.
My message here in Hong Kong is this:
The risks to economic recovery have not gone away.
Together we need to act now to ensure that emerging market problems don’t contribute to a new crisis.
How do we do that?
By each one of us putting our own houses in order.
And by using the G20 to make sure we all confront our problems instead of running away from them.
As we meet in Australia, the G20 is more than capable of doing that; provided we focus on the important issues.
But there is a danger that in Sydney and other such meetings we find ourselves distracted by a pointless debate about US and UK monetary policy…
…that the G20 descends into a blame-game…
…and we miss the opportunity to drive through, together, the reforms that are necessary to safe-guard the global recovery.
To avoid that happening we need to understand better what the last six years have taught us about how global coordination works.
In particular we need to understand that international coordination can work and has worked when it holds governments to account for domestic reforms, but not when it tries to impose global macroeconomic policies that are against countries’ own self interests.
Fostering domestic resilience from the bottom up is the best way to build global resilience at the top.
For example, many people have identified global macroeconomic imbalances between surplus and deficit countries as a major contributing factor to the Great Recession a few years ago.
With some exceptions, those macro imbalances have now dramatically reduced – China’s current surplus came down from over 10% in 2007 to 2.3% in 2012, and the US current account deficit fell from 4.7% in 2007 to 2.7% in 2013.
Has this therefore been a triumph of external pressure against US and Chinese self-interest?
That would obviously be a misunderstanding of the real forces at work.
China has not reduced its current account surplus because of external pressure by international bodies like the IMF or G20– they’ve done it because the Chinese understand it is in their self interest to move away from an investment and export led model of growth towards something more sustainable.
In fact it is hard to find examples in history of a surplus economy taking action to rebalance demand in response to external pressure.
Equally the US has not reduced its current account deficit because of international pressure – it has been a product in large part of the shale revolution and improved US competitiveness. Indeed we can go further – the initial macro imbalances were not in themselves the major cause of the crisis.
Capital flows from East to West and from surplus countries to deficit countries did indeed reduce global interest rates.
But those low interest rates did not induce financial crises in countries with robust domestic frameworks. Canada did not have a banking crisis or a fiscal crisis. Nor did Sweden. It was not the overall net flows from East to West that turned out to be the problem.
It was poor domestic regulation in the US and much of Europe of some specific capital flows – particularly into housing and commercial real estate assets – and poor domestic regulation of the banks who held many of those assets.
Equally it was poor economic and fiscal management in many of those same countries which left their economies so vulnerable to the ensuing banking crisis.
None more so than the UK. We went into the crisis with the biggest structural deficit in the G7 and with the most leveraged households and banks of any major economy and we paid a heavy price for that failure of policy.
And of course it was the underlying flaws in the institutions of European monetary union that made the impact so catastrophic and long lasting in the eurozone.
So in fact it was a lack of resilience at a national level in several important economies that created a lack of resilience at a global level.
Exactly the same is true now when we look at the risks in emerging markets.
I can see that it is tempting for some to blame Western monetary policy for economic problems in some emerging markets, but this is neither accurate nor useful.
Not accurate because, while tapering of US monetary policy in response to a strengthening domestic recovery may have been the trigger for instability it is not the real cause.
The underlying causes are domestic fragility in those countries, often built up over a long period of time – and that is why some emerging markets have been much more affected than others.
And blaming Western monetary policy is not useful because it doesn’t lead us to any sensible solutions.
The Fed does not and indeed should not set monetary policy to be appropriate for emerging markets – the Fed has a legal and democratic requirement to set monetary policy to be appropriate for the US economy.
The fact that it is currently tapering its programme of quantitative easing is a sign of success.
Equally I know that UK citizens would be rightly outraged if Mark Carney and the Bank of England set UK monetary policy decisions on the basis of what was best for other economies. So at this G20 we should avoid finger pointing and distractions.
There is an alternative.
The alternative is to focus on building domestic resilience – not just in emerging markets, but also in developed economies.
The alternative is to use the G20 to hold governments accountable for these domestic reforms, rather than allowing them to escape accountability by blaming their problems on others.
And that alternative is exactly the plan put forward by my colleague Finance Minister Joe Hockey and the Australian presidency.
Under that plan, the G20 members will sign up to comprehensive and ambitious national reform agendas – and then hold each other to account for delivering them.
That is exactly the right approach because it tackles the underlying problems head-on. I’m ready for the UK to play its part and I hope this approach is adopted by the G20 later this year. We all need to get our houses in order.
We all have to put in place the four fundamentals necessary for economic security: responsible fiscal policy; credible institutions; effective financial regulation; and crucially, the long term structural reforms that will deliver lasting prosperity.
It is a lack of these foundations that caused the financial crisis in developed economies, and the recent troubles in some emerging markets.
Just look at those developed economies who had these foundations for economic security in place, and how much better they performed in the financial crisis.
Look at Australia, where I’m heading tomorrow. Thanks to robust financial regulation and the reforms of the John Howard government many years ago they grew through the crisis when many others were shrinking.
Or look at Canada, who were also in control of the risks in their financial system. They bounced back from the 2009 crisis extremely quickly – by 2010 they were growing by 3.4%!
The same is true of Sweden, who grew by an astonishing 6.6% in 2010 and then 2.9% the year after that.
Unsurprisingly we see the same pattern with emerging markets now - those who had the fundamentals in place, who have taken the difficult decisions to reform, have avoided the worst of the volatility.
Compare the relative calm we’ve seen in countries like Mexico and Peru with the experience of some of their neighbours.
Look at Malaysia, now growing at 5.4%.
And we have also seen other economies taking up these reforms, to head off future threats.
Last October, for example, I was speaking to the Vice Premier of China, Ma Kai, about China’s comprehensive economic reform plan.
The plan that the Chinese leadership went on to set out at the Third Plenum tackles exactly the fundamentals I’ve talked about - by allowing markets to play a greater role; strengthening financial sector regulation, including around shadow banking; and establishing the next generation of free trade pilot zones to boost trade and investment.
And as a result, I am confident that when these reforms are implemented they will not just make China more resilient, but make the whole global economy more resilient.
This is where global coordination can be really effective.
We’ve already seen that the G20 works when it focuses on the painstaking process of coordinating reforms, and holding governments to account for delivering them.
The G20 has played a crucial role in reforming financial regulation – setting deadlines for agreement and tasking the Financial Stability Board and Basel committees to meet those deadlines.
Now Basel three is being implemented; so too, new global rules on derivatives; and as Mark Carney has said, this year we must secure an international solution to the too big to fail problem in banking. The G20 can resist moves to global protectionism - as it has done remarkably well in these recent years – and promote new trade agreements.
The G20 and the IMF have important roles in coordinating balanced and responsible fiscal consolidation plans, though there is still more to do.
And because the British Prime Minister, David Cameron, put international tax evasion and tax avoidance at the centre of our G8 Presidency, the Australian Presidency of the G20 has been able to pick up the baton and for the first time we have the real prospect of new, tough and fair global tax rules.
This kind of international cooperation works.
And so the Australians are completely right to take this to the next level, and ensure we have comprehensive plans to make our countries more resilient. Not just emerging markets, but countries like the UK as well.
And so I want to end by talking about what the UK has to do.
The UK went into the crisis with the largest structural deficit in the G7, the highest household debt and the most leveraged banks of any major economy.
By the time I came into Government, we had experienced one of the greatest falls in GDP of any major economy, and our deficit was forecast to be larger than any other in the G20.
So we set out in 2010 a long term economic plan to restore economic security and prosperity. And we have worked through that plan ever since.
Stuck to it when critics told us to abandon it and come forward with a Plan B – we held our nerve.
Now, four years on…
we have brought the deficit down by a third, and set out credible fiscal plans that will eliminate the deficit within four years.
We’ve overhauled our regulatory system, and we’ve given the Bank of England cutting-edge macroprudential powers.
We’re ending too big to fail in our banking system - we’ve gone further and faster than anyone else, and the rest of the world is following our lead.
And we have sought to make Britain aggressively competitive.
I have cut corporation tax again and again - from next year it will be the lowest in the G20 and one of the lowest in the world.
We’ve made the UK the location of choice for multinational company head quarters. The City of London has become stronger and bigger.
We have reformed university funding and spent on science, so that British universities can remain world-leading.
We’ve invested in infrastructure – the largest infrastructure project in Europe is being tunnelled under London as we speak.
Far from shying away from difficult issues like Nuclear energy and fracking – my government is leading the way in Europe.
And we are attracting more investment from China than any other European economy.
Indeed, more investment from the rest of the world than any other country in the European Union.
As a result of this long term economic plan, we are growing.
In fact, the UK is now growing faster than any other major European economy.
We’ve had the strongest growth in employment in our history.
Unemployment has come down sharply.
And it’s encouraging to see growth that’s not fuelled by debt, and not just concentrated in services but in manufacturing and construction too.
Some in Britain might be tempted to say: job done, let’s avoid more hard decisions.
That would be a huge mistake.
Abandon the plan and we abandon the progress we’ve made and go back to square one.
I have never been a Chancellor who has run away from confronting our problems.
I’ve never been afraid to level with people about the hard truths.
I said that we have to go on dealing with our debt and our deficit – and we have no choice but to do so.
I said recovery was not enough, we needed to avoid the mistakes of the past.
So I’m now the first to say that the recovery is not yet secure and our economy is still too unbalanced.
We cannot rely on consumers alone for our economic growth, as we did in previous decades.
And we cannot put all our chips on the success of the City of London, as my predecessors did.
Britain is not investing enough.
Britain is not exporting enough.
There are encouraging signs. Both business investment and exports are forecast to grow.
But we can’t be passive observers of the forecasts.
We need to roll up our sleeves, get to work and make it happen.
I am delivering my Budget in four weeks time.
This is not a budget where we can rest on our laurels and say “job done”.
It is a budget where we must confront our problems and deal with some hard truths.
A Budget that safeguards our recovery in the face of ever present global threats.
But more than that:
I want to deliver a Budget that supports a Britain that invests and that exports.
A Budget that lays the foundations for our long term economic security.
And a Budget which ensures that around the world, wherever you are, you can’t help but see “Made in Britain”. That’s the budget I’m going to deliver.
For ultimately what is the goal of all this?
Of global coordination, of domestic reforms, of sticking to our plans?
It is a future where the global economy is resilient in the face of economic storms.
It is a future of jobs, and prosperity, and peace of mind.
It is economic security, for all our citizens.
Here in Hong Kong, and in Britain and around the World.