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WILL HUTTON INTERVIEW - Wednesday 23rd May, 2007

GEORGE NEGUS: Will, thanks very much for your time. One of the things that struck me from your book is you think that the biggest problem facing the world is not Islamic terrorism, but China. That's a big statement.

WILL HUTTON, AUTHOR: Well, China is one-fifth of the world's population and it's really the world's fourth biggest economy. It's got foreign exchange reserves of $1.2 trillion and growing at $500 billion a year. It's got the world's second biggest army. It's the world's second biggest importer of oil. I mean, there may be 5,000 terrorists with al-Qaeda, and the figure could be lower than than. I simply don't buy the idea that they're the main story and that China has got a kind of walk-on part.

GEORGE NEGUS: So despite the fact that China is probably going to be the word's largest economy by the middle of this century, you don't regard it as stable?

WILL HUTTON: It is structurally unstable. And I think the way this is going to come through is through inflation. It was a hyperinflation in 1948 that brought the Communists in, it was inflation in double digits in 1988 that led to Tiananmen. If we see inflation rise very strongly in the next two or three years, which I expect, I think you'll see a lot of social turbulence in China. The difficulty is that you can get so far in developing an economy as complicated as China through a one-party state. If you want to slow down the Indian economy or the South Korean economy or the Japanese economy, everyone knows how you do it - you put up interest rates and you put up taxes. You try putting up interest rates and trying putting up taxes in China and you start to see how very vulnerable the situation is.

GEORGE NEGUS: To quote Will Hutton to Will Hutton, "The West is unforgivably ignorant about China's shortcomings and weaknesses which leads it to vastly overestimate the extent of the Chinese threat."

WILL HUTTON: I think China as a threat is vastly exaggerated. We have to stay open to it, we have to understand the vulnerabilities and the dangers for us in there being this instability inside China. We need to help the Chinese move to a different kind of political system both for their interests and for our interests. But it isn't going to be an easy ride, it's going to be a very volatile ride. And that's why I say it's more important than Islamic terrorism.

GEORGE NEGUS: So while we see China as a threat militarily and economically, it would be worse if we don't help it through its problems?

WILL HUTTON: Well, look at the moment, I mean, at the moment, you've got this build-up of foreign exchange reserves is financing the Americans' trade deficit. That permits America to carry on buying goods, not just from China but the rest of the Pacific Rim and from Europe. It keeps the world economy on the move. If China finds it can't do that and it goes into reverse, it's going to bring down the world economy. But look at your own... look at Australia. Look how well you've done from the resource boom over the last three years. Look at the ships queuing outside your ports to take iron ore, coal back to China. I mean, it's actually blisteringly obvious that for you as for many other economies. Look at the way China is financing large parts of Africa, stepping into the kind of gap that Europeans and Americans have left there. Wherever you look you see Chinese money, you see Chinese demand. It's the biggest thing the world has ever witnessed, this.

GEORGE NEGUS: Will, is it the case that we're so mesmerised by China's development that we're missing the point?

WILL HUTTON: We're missing the point. The growth is completely out of hand, it's a kind of runaway train.

GEORGE NEGUS: Will, how much of the problem is this mad mix between having a Communist political system on the one hand and a part capitalist economy on the other?

WILL HUTTON: I call it a Leninist-Corporatism. It's neither capitalism nor communism and it's got in some respects, the kind of worst features of both. Everything in China is run by the party - the police, obviously, army, media, companies. So everything in China dances to the party, but the party isn't any longer promoting communism. It's promoting what it calls a socialist market economy whilst trying to justify one-party rule. And everybody in China kind of knows the Communist rhetoric and the reality are very different. That's why there's corruption, that's why there's low productivity, that's why there's environmental degradation, that's why you can't control the money supply, that's why you can't control the growth of foreign exchange reserves. And ultimately this system is going to crack.

GEORGE NEGUS: You've actually suggested that China's relationship with the US could be the world's next big flashpoint in fact.

WILL HUTTON: My point is simply, if there is ever any kind of war between the great powers in the future, it will have China on the one side and will have America on the other and it will be bloody dangerous. If we are too aggressive in demanding that it raises its exchange rate, if we're too aggressive in saying it limits its exports, if we're too aggressive in how we think it should behave economically - and there's a lot of aggression against China economically from the Americans - it could reply by saying, "OK, wanna play that game? We're gonna play political aggression, maybe even military aggression, see how you like that."

GEORGE NEGUS: So you say we must embrace China or face it as an enemy, if you like?

WILL HUTTON: That is my basic line. I think there's a lot of fear around in the West, there's a lot fear around in America, a lot fear around in Europe that actually China's a tsunami - a great wave of cheap exports that's going to overwhelm us, overwhelm our jobs, mean our welfare states are no longer affordable. My position is that China is much more vulnerable than that and that if you talk that kind of language, we talk ourselves into putting up trade barriers against the Chinese or forcing them to raise the renminbi by 30% overnight. If we do that, they will consider that an act of economic warfare.

GEORGE NEGUS: Will, on an issue closer to us here in Australia, at the moment the Prime Minister and Leader of the Opposition are dancing around each other over an upcoming visit of the Dalai Lama. They can't seem to make up their mind whether they can see him or not because they're afraid that it will offend China if they do. What's your gratuitous advice to them?

WILL HUTTON: I think that the Australian Government have to send a signal that what is going on that some of the stuff that is potentially going on in Tibet is unacceptable, and the Dalai Lama should be welcomed to Australia. And the signal has got to be absolutely clear to Beijing. And you've got to be courageous. You've got to be courageous about that. Actually you have a responsibility to be courageous about it. There's people inside Beijing who perfectly understand the kind of colonising approach that Beijing has is unacceptable both within inner Asia and outside it, and you'll help them, you'll strengthen their hand inside Beijing.

GEORGE NEGUS: Thanks very much, Will. And by the way, 'The Writing on the Wall' is a title screaming out for a book and you've done it, well done.

WILL HUTTON: I don't know about that. But thank you very much for your interview.