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China has a very clear historically based perception of itself. Whether one agrees or disagrees with it, it is understandable within the framework of the way in which constitutional arrangements have evolved in the East. They may be expressed in terms of international law, which is, after all, a western European concept but, underneath that, there are slightly different eastern ideas. For example, I do not think that the Chinese treatment of Tibet and the Tibetans is in any way proper or justified, and I am no apologist for it, but I can see how, from a Chinese perspective, the Chinese have reached their justification for what they have done. We are not doing the Tibetans any favour by not being clear about that. Indeed, the Dalai Lama's attitude towards the independence of Tibet suggests that he shares that view.

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Against the background of a "one China" policy, combined with a "one country, several systems" approach, we can see how the approach is being allowed to evolve to the People's Republic's advantage. It has the potential to provide considerable benefits, and may well do so in future, especially in respect of Taiwan, Tibet and even bits of what are now integrally part of what is more generally considered to be single China-say, Shanghai or Shenzhen. That constitutional approach may seem somewhat perverse to those of the European Union-especially, I suspect, to some in this country-but there is nevertheless a clear logic to what is going on which we ignore at our peril.

We need to be equally clear about the destructive character of the previous century in China which has, from its point of view, been more or less one continuous civil war. In particular, the Cultural Revolution will have had a considerable impact on the Chinese leadership. Understanding their economic policies must be based on an appreciation that they are trying to pursue the antithesis of the destructive chaos that swept that land over most of the past century. In particular, they are looking for stability and good fortune. I suppose that we would describe good fortune as getting richer. After all, in the 19th and 20th centuries, China in its historic context was politically at a very low ebb and was a demoralised great power. The wealth in the world was being created in the West and the Chinese, understandably, wanted to engage with that and participate.

Under the administration of a one-party system speaking the liturgy of Marxism with Chinese characteristics, we have seen a Chinese attempt in the World Trade Organisation, for example, and in how it has been behaving in the international monetary markets, to try to return to its rightful position as a great power. That will not necessarily be to our advantage in the immediate or the longer term, but from a Chinese perspective, I can see precisely what they are trying to do. It is also interesting to see our reaction in the West to what has been going on in this context. It has put into stark perspective the issues that are thrown up by how Europe should retain its economic competitiveness. This has been a subject of considerable debate, not least in this Chamber, and it will, no doubt, continue to be one.

How is China looking at the wider world? Is it striving for a tripolar world of the US, China and the EU, a bipolar world or what? Indeed, it is not clear to me what the European Union wants, and it is certainly not obvious what the evidence of the EU's external policy may be saying to the Chinese. As was pointed out in the report, Chinese puzzlement seems to be entirely justified. It is arguable that it is we who are in a muddle about this.

One of the most important things emerging from this report is that it highlights a couple of issues that arise from looking at the EU/China relationship. They are some of the biggest issues facing western Europe and the European Union. How do we deal with questions of competitiveness and in what way does the European Union's diplomatic mission and approach go forward? There is a difference between many in this country and the European Union of which we are part. The same

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disagreement is to be found among some other members of the European Union. Since those disagreements are not necessarily about the same things, it seems to me that we have to focus very hard to work out what we collectively want in these circumstances.

5.25 pm

Lord Clement-Jones: My Lords, I declare an interest as vice-chairman of the All-Party China Group and as a partner of the law firm DLA Piper with responsibility for international business relations in China, Korea and the Middle East. As a very regular visitor to China, I think that this is an extremely welcome and thought-provoking report. I congratulate my noble friend Lord Teverson on his opening speech and him and his colleagues on an extremely well put-together report.

The report quotes Vice-Minister Zhang Zhijun and Dr Kerry Brown and, as China watchers will know, that means that the report is balanced and authoritative and gives two interesting sides of the equation. The report is right to treat China as a major EU priority in foreign and trade policy. China has swiftly returned to double-digit growth and will overtake Japan later this year to become the world's second-largest economy. Essentially, this is seen from the Chinese perspective as a rightful re-establishment of China's position in the world, as I am sure many noble Lords will know. In terms of bilateral relations, the report rightly concentrates more on what the EU should do than on what China should do. There is nothing worse than preaching at China, as a number of noble Lords have said.

Seen from the Chinese perspective, China faces many major issues, which are inherently difficult and full of paradox. They include: keeping the value of the renminbi competitive in the face of a massive surplus and rising costs, because the future of the Chinese export economy is at stake; the recent suicides at the major supplier Foxconn; and the Honda strike in China, which will have an impact on labour costs. Many other factors may lead to higher costs, particularly in the east of China. There is a desire in the Chinese Government to move from an export-led economy to a more consumer-based economy, while controlling domestic inflation after the success of the economic stimulus package, but that will not be easy with double-digit growth.

There is a need to grow and create a massive number of jobs each year just to cope with new graduates, while improving the protection of the environment and moving to a low-carbon economy at the same time. How can the Chinese extend local autonomy at county and provincial level, as they wish to do, and satisfy demands for more human rights generally-and in Xinjiang and Tibet in particular-while maintaining political stability, one of the cardinal objectives of Chinese policy? In the education system, how can China deal with the dilemma of encouraging greater creativity in the face of a traditionally prescriptive teaching method at all levels? How can it ensure proper intellectual property protection without, as it sees it, overpricing legitimate consumer expectations? How can it ensure Chinese influence over natural resources, particularly in Africa, without being accused of employment malpractice?

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In many of these areas, we want China to do more to satisfy western government expectations, but China rarely responds to external pressure. It is much more sensitive nowadays to domestic public opinion, particularly as it is expressed through the internet. Much will depend on the relationship that we manage to build over time and on whether any move meets the essential criterion, which I repeat, of retaining and delivering the cardinal virtue of political stability.

The relationship will have its ups and downs and, in the past year in particular, there have been quite a number of downs. What do the Chinese Government seek to derive from their relationship with the EU? Of course they want trade, technology transfer and investment. These are a cornerstone, as is the education link, but crucial to real progress, in China's view, is support for market economy status for China and lifting the arms embargo.

On the market economy status, China still thinks that the West is not playing by the rules and is adopting double standards. Why should Russia have market economy status but not China? Why have some 97 countries given market economy status to China, while major economies such as the EU, the US and India have not? China also considers that it has been subject to an unjustified barrage of anti-dumping cases. Above all it believes-the report makes this quite clear-that the EU speaks with different voices. Chinese leaders express genuine frustration at the multiheaded European leadership structure and the lack of a single voice. This, I believe, is genuine and, like the committee, I do not accept the Fox/Godement thesis mentioned in the report that China is intent on playing one EU country off against another or, indeed, that there really has been a practice of unconditional engagement on the part of the EU.

China sees the US/China interface as much preferable, because it can get answers and decisions that stick. Unless we are to play second fiddle in every case to the US, the EU needs, as my noble friend's committee's report points out so eloquently, to get its act together. One of the questions is whether Europe takes a lead or simply follows the US. This is particularly acute in respect of both the arms embargo and the MES. I shall be interested to hear what my noble friend has to say on this subject at the end of the debate.

There is much to be done, but the Lisbon treaty has improved matters somewhat. I have great respect for the EU's High Representative for Foreign Affairs and Security Policy, our colleague the noble Baroness, Lady Ashton, whose trip to China earlier this year was well received and made the Chinese Government feel that progress was possible with the EU. I am therefore optimistic that we can make progress.

At the end of the day, there is the question of what we can expect from China as a superpower. The former ambassador, Madam Fu Ying, was fond of talking about how the Chinese see China from the inside as a mouse, whereas we on the outside see it as an elephant. Of course there is a big gulf between the way in which China is perceived from the inside and the way in which it is perceived from the outside. There is growing evidence of a more actively interventionist approach, but China still lacks the confidence that it really is the superpower that we think it is. There was greater

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engagement at Copenhagen, even if it was not seen as satisfactory from an EU point of view. As the noble Lord, Lord Anderson, mentioned, the agreement over Iran sanctions could prove extremely important. Above all, I believe that the role played by China at the G20 last year was extremely constructive. In the EU we should not be afraid to bargain. If that is done coherently, we can exploit our technologies, our creativity, our education and our research quality. In key areas such as trade policy and climate change, we need to agree strategies within the EU and to speak with one voice, which is the welcome message of this report.

What of Britain's role? As my noble and learned friend Lord Howe pointed out, there is a long history between us, which is still regarded as important by the Chinese. Our ambassador is one of only five vice-ministerial ambassador posts. Ambassador Liu Xiaoming continues this pattern. I recognise the achievements of the previous Labour Government in having established relationships with China on a firm footing. I believe that the successful Hong Kong handover had a major impact and was beneficial for our relationship. I also welcome the desire of the coalition to have closer relations with China, as set out in the coalition agreement.

However, both our parties are a relatively unknown quantity to the Chinese Government. I hope that a high-level visit by the Prime Minister or the Deputy Prime Minister will take place soon, perhaps coinciding with the close of Shanghai Expo. The Chinese have many matters in common with Britain. Belief in free trade above all is the link, as well as an admiration for our higher education system. None the less, Britain is still underperforming in trade and investment flows. France and Germany in particular outperform us in energetic trade promotion. However, perhaps our salesmanship is entering a new era. Out cultural diplomacy seems to be improving by leaps and bounds. The Shanghai Expo pavilion is evidence of that. The Chinese are taking genuine pleasure in the success of the pavilion designed by Thomas Heatherwick and have taken very much to heart what they call the "Dandelion". UKTI deserves huge credit for having the imagination to deliver a strikingly original symbol of British creativity at Expo. I hope that we will celebrate the way in which Britain can help the EU's objectives in its relationship with China.

5.37 pm

Lord Crickhowell: My Lords, our sub-committee was well chaired by my noble friend Lord Teverson, who introduced the report clearly. First, I should like to express my thanks to Kathryn Colvin, our admirable clerk, and all those who helped us to prepare that report. It was a very big job, which was well done. I was one of the sub-committee members fortunate enough to go to China. We went 25 years after my last visit, during which I had watched on Chinese television the signing of the Hong Kong agreement. The fact that my noble and learned friend Lord Howe of Aberavon, present at that ceremony and playing a central role, has been able to contribute to this debate, and give a very personal account of involvement with a changing China over more than half a century, has been very welcome and is a good example of the unique quality of this House.

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The transformation of China during the 25 years since I was there has been remarkable. On my previous visit, we travelled to the old city of Beijing from a very simple government guest house along a bumpy, unlit road, which was hardly wide enough for two vehicles to pass, to a city where there were few cars but thousands of bicycles. Beijing, Guangzhou and, I believe, the even more spectacular Shanghai, which we did not visit on this occasion, have taken their places among the world's great modern cities. The bicycles have given way to a vast number of motor vehicles which choke the huge highways that have obliterated the old buildings. Perhaps even more significant than the construction programmes is that people's lives are better than they were. They have improved in terms of disposable income and economic and job choices, and with those improvements have come greater freedoms.

It was not just the scale of the development taking place that struck me so forcefully on this visit, but the changing character of the political leaders of modern China. We had meetings with men I can best describe as old fashioned commissars. They were not very productive meetings because our attempts to intervene with questions seldom generated helpful responses. On the other hand, we had meetings with two senior vice-Ministers, Liu Jieyi and Zhang Zhijun, who were the kind of men one would expect to find holding with great distinction senior positions in government, business or academia around the world: informed, perceptive and intellectually of the highest calibre. They were prepared to give us shrewd personal judgments and observations while they also clearly set out their Government's official position. We met a number of people from the universities and think tanks who impressed us in a similar way. With men and women of this kind increasingly taking leading roles in China, I find it hard to believe that the country will not undergo fundamental changes quite quickly.

Having said that, there are some issues about which even the most creative and flexibly minded Chinese are unbending. In the report we describe them as China's "lines in the sand". First, China will not accept any questioning of its territorial integrity, whether over Tibet, Hong Kong or Taiwan. There are signs that both Taiwan and China are feeling their way towards better relations within the One China concept, and my noble friend Lord Inglewood had some wise words to say on that topic and how it might, in the future, be the way through for Tibet as well.

The second immovable line in the sand is China's need for development and economic growth. The Chinese Communist Party depends for its legitimacy on guaranteeing prosperity for its citizens. No other policy area will take precedence over the need for continual growth and all EU policy has to recognise this immovable fact. Because of China's need for the natural resources that it does not possess, it will continue to extend its supply contracts and involvement in Africa and other places where its needs can be met. That will have implications for Europe.

Chinese attitudes to government and democracy have a good deal more in common with imperial administration developed over the millennia than to

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communism as it has been generally practised. As one witness, Dr Steve Tsang, put it, the party,

Despite the achievement of amazing levels of growth and the prosperity of the coastal areas, we were repeatedly reminded that China sees itself as a developing nation with a high proportion of its vast population still with some of the lowest incomes per head in the world.

The EU is China's largest trading partner. That fact provides a central reason for each wanting to understand and have good relations with the other. The noble Lord, Lord Mandelson, told us that the EU has huge leverage because Europe provides the market destination for a vast quantity of Chinese exports, and keeping Europe's markets open to those exports is fundamental to China's economic and political strategy. It was, however, pretty clear from his evidence that, as my noble friend Lord Teverson pointed out, the leverage has not been exercised very effectively. While the UK and the other European nations will have their own policies and compete strongly with each other commercially, it is entirely in the interests of all that the EU should act as one on trade conflicts covered by the WTO, and on the need for China to open its markets more widely and to respond positively to European concerns about intellectual property rights and commercial law. To speak with one voice and to be mutually supportive is equally desirable over human rights, international development, climate change, and in sensitive areas such as the treatment of the Dalai Lama.

It is equally true that strong European backing for British efforts in Hong Kong is important if the promised implementation of the Basic Law and moves to wider democracy there are to be achieved. Hong Kong is a hugely important conduit for foreign investment into China and the EU needs to reinforce its diplomatic efforts in the Hong Kong SAR.

Events have moved on since we prepared our report. The euro is under threat, which must alarm the Chinese, and the economic recovery from the banking crisis is far from secure. If some have had doubts about the ability of China to maintain its phenomenal rates of growth in these conditions, events have proved them wrong. While the Chinese authorities are finding it necessary to contain inflationary pressures, the chief executive of HSBC in China says that the financial crisis has only made the country stronger, with its exporters becoming leaner and more efficient. There has been huge investment in new plants and infrastructure and manufacturing is being moved inland to where housing and wage costs are much lower than in the coastal belt. This ability to move to these huge regions where wages are low means that China is likely to maintain its competitive edge for many years to come.

There has been an unfortunate tendency by some in the EU to lecture China. We are much more likely to make progress, even on sensitive issues such as human rights, by finding those areas in our relations where it will be in China's national interest to change. Nowhere is this truer than on climate change. On re-reading our conclusions on this topic, I doubt that we got the

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balance quite right. Certainly we must enter the next round of negotiations as a player but I do not believe it is wise to set an example on cuts in isolation. While I differ with quite a lot of the analysis made by my noble friend Lord Lawson of Blaby, I share his view that to impose huge burdens on our own industry which none of our competitors will follow is not the sensible way to proceed. Like my noble friend Lord Jenkin of Roding in speaking on the gracious Speech, I think we need to find a way forward that is politically more attractive and, I would add, economically less masochistic.

In the Chinese context, that means tough negotiations in which our contribution is realistic and is made as others make theirs and not in advance in the vague hope that they will follow. We need to exploit the fact that while China needs to continue growing, it faces grave threats from climate change. It is threatened with acute shortages of water in some regions and the threat of floods in others. Pollution from its coal-fired power plants is smothering Guangzhou and Hong Kong. Natural disasters when they occur in China tend to be even more devastating than in other countries.

Those are some of the reasons why China may choose to move further than the pessimists believe, and there are positive reasons as well. China, I am sure, wishes to be a massive player in the developing industry in low-carbon technology. There is real scope for Europe and China to co-operate in this vital area, despite fears about transferring technology without better licensing. The successful development of carbon capture technology is hugely important for both Europe and China, and particularly important for this country. The lack of urgency or drive in taking forward the joint carbon capture and storage project represents a shocking failure of EU policy.

I shall make three other brief points. First, as already referred to by my noble friend Lord Teverson, the formal exchanges on human rights are more ritualistic than effective, but we found that real progress was being made in different parts of China, with lower profile rule-of-law and civil-society projects. Here we are working with the grain in areas which are entirely in China's own interests.

Secondly, I draw attention to paragraphs 146 and 147 of our report about the caution that needs to be exercised in sharing some technologies with China and the need for close co-operation with the United States and NATO on the subject of cyber technology, in particular, and the possible need to take strong countermeasures if our interests are threatened.

Thirdly, it is important that we continue to encourage far more of our own citizens to obtain real knowledge of all aspects of modern China, including, of course, its language. My noble friend Lord Sassoon, in a notable maiden speech winding up yesterday's debate on UK competitiveness, commented that it is easy to be complacent about the language question. I am sure that he was right. Those vice-Ministers to whom I referred knew and understood our culture and institutions so much better than most European politicians know or understand theirs; perhaps that was one reason why I found them so impressive.

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5.50 pm

Lord Alton of Liverpool: My Lords, Stars and Dragons: The EU and China deserves to be widely read. It is a comprehensive and engaging report to which the noble Lord, Lord Teverson, did great justice in his introductory remarks.

Paragraph 43 of the report rightly states:

"It is unrealistic and undesirable that a single EU-China relationship will replace relations between China and individual Member States. The two will rightly continue in parallel".

There is a great deal that is unique in the extraordinarily rich and historic relationship between our two countries, a point touched on by the noble and learned Lord, Lord Howe of Aberavon, in his wise and penetrating speech. There is also much in our contemporary relations that remains unique. We must not sublimate those interests in the desire always to hunt as a pack. I shall talk about China and her relationship with the United Kingdom and China's domestic challenges.

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