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China

In an America that has rarely been more divided, one area of solid bipartisan consensus remains — on the need to “do something” about the threat China poses to the US-led global order. Even those who despise Donald Trump have mostly cheered the president on as he upends more than four decades of US policy on China. The most important underlying reason for this support is the fact that Mr Trump was not the one who changed the terms of engagement. China’s President Xi Jinping did that first. Under his predecessor, Hu Jintao, the mandarins in Beijing worried that using the slogan “peaceful rise” to describe the country’s ascent to superpower status was too presumptuous. They opted for “peaceful development” instead. But in Mr Xi’s very first speech as leader of the ruling Communist party in 2012, he abandoned all such modesty with his promise to make China great again and bring about the “great rejuvenation of the Chinese nation”. Virtually every action taken by the Xi administration at home and abroad since then has been far more assertive and repressive than anything we have seen in China since the days of Mao Zedong. In the west, there has been much hand-wringing about how the establishment got China wrong — that they arrogantly believed the country would become more “like us” by joining the existing global order and eventually morphing into something resembling a liberal democracy. But the people who argued that were right at the time. What changed was Mr Xi’s decision to turn the country in an authoritarian direction. Refracted through China’s hyper-censored state media, Mr Xi appears to be the antithesis of the bumbling US president. But his is an uncannily Trumpian style of nationalism that has managed to alienate the one group that had always been Beijing’s best lobbyists in Washington — American multinationals and Wall Street. Recommended FT Podcast Podcast: Gideon Rachman explores the dawn of the Chinese century Faced with worsening barriers to entry and pressure to hand over their prized technology in exchange for market access, western companies operating in China have become Mr Trump’s biggest cheerleaders in the trade war. A speech last week in Singapore by former Goldman Sachs chief executive and the US Treasury Secretary Henry Paulson gives a sense of just how few American friends China has left. “The American business community has turned from advocate to sceptic and even opponent of past US policies toward China,” Mr Paulson said. “How can it be that those who know China best . . . and have advocated for productive relations in the past, are among those now arguing for confrontation?” Mr Paulson used to be one of the most ardent “old friends of China” — a group that includes people such as Henry Kissinger and Blackstone’s Stephen Schwarzman who see themselves as a bridge between Beijing and Washington. His uncharacteristically harsh words should serve as a wake-up call for Mr Xi. Some people who know Mr Paulson believe his criticism was actually encouraged by senior members of Mr Xi’s own administration, who feel the Chinese president has over-reached but are too scared to say it to his face. These remnants of the Communist party’s liberal, reform-minded faction are concerned that China’s teetering economy will not be able to withstand a full-blown trade war. For all the hype surrounding companies like Alibaba and Tencent, China remains predominantly a low-margin, mass production economy that relies on imports for most high-tech components. Despite decades of effort and billions of dollars invested in developing homegrown semi-conductors, China still imports more than 95 per cent of the high-end chips used in computers and servers. As a result, the world’s biggest energy importer spends more on buying foreign-made microchips than it does on imports of crude oil. Recommended The FT View The editorial board Conflict between the US and China is not inevitable For security reasons and in the interest of retaining America’s crown as the world’s technological superpower, Mr Trump and the hawks who surround him are intent on “decoupling” much of the US supply chain from China. If they manage to tip China into economic and political crisis in the process, then so much the better in their opinion. As Mr Paulson warned, there is a risk that America could isolate itself as an “economic iron curtain” falls across Asia. That is because China is currently the biggest trading partner for virtually every country in the region and its economy is still growing rapidly. Given Mr Trump’s obvious disdain for allies, it is unclear how many would opt for America over China if forced by Washington to make a choice right now. But if he makes one of his trademark reversals and starts working closely with other countries to isolate China, then Mr Xi will be in a lot more trouble.



In one sense, Boris Johnson is right. The Brexit process has indeed felt like a national humiliation. How many Brits have felt our innards shrivel at key moments of the negotiations? And I am not talking about the incidents of diplomatic bumbling, of unwarranted second world war references and Dad’s Army condescension. I am talking about the parts of this process that have gone as predicted. Perhaps we should step back from the bloviated rhetoric. Humiliation is too strong; a national humbling is more accurate. The philosophy of Brexit was that, freed of EU constraints, the UK would take its rightful place in the world. This is indeed what is happening, but alas that place is not as the great power of their imagination. The UK’s place in the world is hardly terrible but, as Mr Johnson learnt during his brief but undistinguished term as foreign secretary, our emissaries no longer bestride summits like Castlereagh. For far too long British politicians, journalists and voters have enjoyed a patently distorted vision of the nation as indispensable world player. Now the nation is facing the painful truth that the UK is not as pre-eminent as it has liked to believe.  For proof, look at the negotiations over the Irish border. One need not get into the rights and wrongs to see that the UK has essentially been pushed around by Ireland, because the EU has thrown its weight behind the demands of its continuing member. The hard fact is that the power imbalance has meant the UK is being forced to choose between the chaos of a no-deal Brexit or undermining the constitutional integrity of one of its four sovereign parts and signing up to a significant amount of rule-taking. This is what happens when a single country that is not America or China negotiates with a global trading bloc. From the sequencing of the negotiations to the empty scorecard of British wins, the entire process has been a lesson in power politics. Few who saw the TV programme on America’s London embassy will forget the smirks as an US official described the British Brexit delusions: “They sort of see it as a negotiation between two equal parties.”  One should not overstate this. Britain is not Latvia. It still carries heft. It is a top 10 global economy (fifth, sixth or ninth depending on the market and your choice of methodology). It remains a military power, with a nuclear deterrent and a seat on the UN Security Council. It is the only European nation with access to US intelligence through the “five eyes” programme. Its pre-eminence as a financial centre will not immediately be dissipated by Brexit. The UK will still get its call, but after France and Germany and just before Canada. Life in the top 10 is different to life in the top three. Much of the UK’s global clout derived from its being one of the big nations of the EU. Margaret Thatcher used that very platform to help create the single market, drive forward global trade and entrench democracy in eastern Europe. The 1970s champions of Britain’s membership were right in arguing that the alternative to pooled sovereignty was not more influence but less. Now Britain is about to taste life as one of the loudest of the next level of voices. In this tier, maintaining influence beyond military matters, requires the painstaking unbombastic alliance-building that saw its existing political and diplomatic practitioners so derided as sell-outs by our chauvinistic MPs and media. It might, for example, mean expediting entry permits for Moldovan trade representatives so they do not delay the UK’s ambitions at the World Trade Organization. And how will the UK’s status be reflected in its new trade deals? One has only to look at Donald Trump’s treatment of Canada to see that his negotiators will offer no special favours to the UK. Mr Trump is pro-Brexit because he wants to see a weakened EU, not to play benefactor to the UK. EU nations will be similarly cut-throat. Nor will sentimental attachments affect Commonwealth nations. Too many Brits fail to grasp that former colonies do not look back to the empire with unalloyed affection.  While this has all been understood by serious figures in government, too much of Britain’s politics, culture and its self-image have been driven by its colonial past and the national myths built up around the last war. It is why the Brexiters cling so desperately to the theory that Theresa May has betrayed Brexit. The alternative is to accept that it is their own reckless chauvinism that has reduced the UK to the role of supplicant with its former partners. Adjusting to a reduced status will require a reality check in our media and our politics and a touch of humility. If Brexit helps the UK come to a more accurate realisation of its global significance, some good may yet come out of this wretched business. Still, it seems an expensive way to learn a lesson.

Bankers why so much


In the libel suit he brought in 1878 against John Ruskin, the Victorian painter James McNeill Whistler was asked under cross-examination how he justified charging 200 guineas for a painting of a London firework display that took him two days to finish. “I ask it for the knowledge of a lifetime,” Whistler declared. Investment bankers explain their bonuses in the same manner, although the rewards for mergers and acquisitions advisers are rather greater than for most painters. Goldman Sachs will be paid $58m by 21st Century Fox for its advice on Fox’s planned $71bn asset sale to Walt Disney (and the bank stands to gain another $47m for financing the remainder of Fox). They are remarkable paydays — today’s dealmaking boom is the most rewarding time in history to be a global M&A banker. It is especially lucrative for those in the top league of advisers who run many auctions. An individual with the ability to shepherd nervous boards of directors past the pitfalls and a reputation for squeezing the best prices can name his or her fee. But what exactly do they do for the money? When asked this question, they turn sheepish and talk vaguely about the art of persuasion rather than the science of valuation. The secret to a bulging “success fee” is less to obtain the best possible deal than to make the chief executive and the board believe they got it. That is not the same thing, particularly in the long term. The M&A adviser’s job has three qualities that put its practitioners in a powerful bargaining position over their own pay. First, the stakes are very high. One former banker compares it to a surgeon explaining his or her charges as a patient is being wheeled into the operating theatre. The latter needs to have the best possible professional and is in no position to quibble. Recommended Mergers & Acquisitions Goldman Sachs tops $100m in fees from Fox-Disney deal Going through an M&A auction can feel like being operated upon for directors who have not experienced it before. Shareholders and the media lurk, ready to condemn any slip-up (the latter risk is why public relations consultants get paid so much as well). There is plenty of subterfuge and bargaining over details, any of which could unexpectedly prove fatal to the outcome. Second, advisers are paid with other people’s money. That is especially true when a company is being sold — the overall price including the fees is going to be picked up by the acquirer, so what difference does a few million make? Even when the client is an acquirer, boards of directors whose personal reputations are at stake are not digging into their own pockets to pay. Through one end of the telescope, the fees even look small. The average fee for selling a company worth between $10bn and $25bn is about 0.3 per cent, and can cover years of unpaid work. Bankers claim they are cheap compared with property brokers, who may charge several percentage points for selling a house. As ever, the best way to make money is to be around a lot of it. Third, M&A advice is a black box. There is plenty of technical skill in structuring a transaction such as using acquisitions to change tax domiciles. That is bundled with access to the bank’s contacts with potential bidders in various countries and presented as a whole by one adviser to the board. The senior banker’s tone of voice conveys a mixture of financial advice, human judgment and comfort. The last is the most valuable. In theory, M&A advice could be unbundled into different tasks, and more of the technical work done by machines, but boardrooms only have space for a few people. They are crowded enough by companies’ baffling habit of hiring several banks to advise on big deals and paying them $20m each, which one adviser calls “ludicrous”. The fee rises exponentially for an adviser in the room where a deal happens. This accounts for the prosperity of advisory boutiques such as Centerview Partners and Evercore, founded by corporate financiers who built their reputations at banks including UBS and Lehman Brothers. The power of a global advisory elite is exemplified by tiny and highly rewarded banking “kiosks” such as Robey Warshaw. Global investment banks sniff at the ability of a few experienced individuals to charge similar fees to them, without bearing the same costs. “The boutiques are full of guys cashing in at the end of their careers and they get a bit of a free ride,” says one adviser at a big bank. In the M&A business, relationships have enduring value. But hiring the best cosmetic surgeon in the world does not make cosmetic surgery a good idea. Deals can be brilliantly executed at the time without adding to a company’s long-term value and many are unwound — often with the help of the same advisers — when a chief executive leaves. “Companies pay far too much to advisers. It’s really not worth it,” says Peter Zink Secher, co-author of The M&A Formula. The success fees of advisers should be more closely tied to whether the deal succeeds long after it has closed and they have moved on to the next one. Whistler won his libel suit against Ruskin for having accused him of “flinging a pot of paint in the public’s face”, but was only awarded damages of a farthing. Even artists can push their luck.