Beijing’s view on Brexit

Last October China’s leader Xi Jinping enjoyed an amicable evening with his British counterpart David Cameron, supping ale in the prime minister’s local pub.

For Xi those efforts to build a stronger personal bond will now look somewhat redundant, given Cameron’s shock decision to step down as prime minister – a move precipitated by last Thursday’s referendum which saw the UK vote narrowly to leave the European Union, sparking political and market chaos.

Cameron will remain as prime minister until his party selects a successor – which the Financial Times reports will be on September 2. That means Xi won’t see him at the G20 meeting of world leaders that he’ll be hosting in Hangzhou on September 4. Whether the drinking buddies will ever meet again is debatable, of course. But if they ever do get together, WiC suspects Xi might end their Brexit conversation with the valediction: “David, that’s why we don’t do democracy here”.

Indeed, during his 2015 visit to the UK the Chinese leader made plain his preferred outcome on the Brexit vote. “China hopes to see a prosperous Europe and a united EU, and hopes Britain, as an important member of the EU, can play an even more positive and constructive role in promoting the deepening development of China-EU ties,” the Chinese Foreign Ministry quoted Xi as saying.

Now China is facing up to a very different outcome.

What has been the reaction in China to the vote to leave?

The official response has been diplomatic. A foreign office spokesperson merely said that China “respects the choice made by the British people”.

However, the Global Times – a sometimes outspoken state media organ – took a more exasperated line and emphasised that the decision had diminished the UK’s standing. “Great Britain, after 300 years of conquest, had colonies all over the world and was labelled ‘the empire on which the sun never sets’. Today, it has returned to its starting point, and perhaps all that will remain in the end is that small bit that is England,” it warned.

The latter point refers to the possibility that Scotland will now vote for independence and split from the UK. This led Sina News to describe the Brexit referendum as Britain’s “curtain call performance” on the global stage. And given the wider fallout in the UK and beyond, Sina also questioned why a vote occurred at all, describing it as the “tyranny of the majority” and saying this “passionate process” was “inconsistent with the conservative and prudent political character of the UK”.

Evidently not a fan of direct democracy, Sina News added: “Cameron was irresponsible when he called a referendum to make such an important decision”.

Some of China’s netizens took a scathing view of Cameron’s judgement too. WiC saw numerous postings that drew analogies between the current resident of 10 Downing Street and former Soviet president Mikhail Gorbachev. In Chinese political circles this is not a flattering comparison, as Gorbachev is associated with self-inflicted national decline.

The Wall Street Journal agreed the UK now looked weaker: “In Chinese eyes, Britain is now diminished… Britain’s ‘Leave’ vote creates uncertainty over the future of the [Sino-UK] relationship. The country’s position as a gateway to Europe is clearly compromised.”

Cameron and his Chancellor of the Exchequer George Osborne had gone to great lengths to position Britain as China’s best pal in the EU. The so-called ‘golden era’ of Sino-UK relations hailed last year was in large part predicated on Britain’s ability to interact with the EU in ways that might benefit Chinese businesses. One example is that Beijing had high hopes of Britain being a keen advocate for a China-EU free trade agreement. That’s less likely with London’s voice excluded from EU decisionmaking.

That’s led Wang Shuo, a researcher at the China Institutes of Contemporary International Relations, to describe Brexit as “bad for China”. He believes that the EU minus Britain will become “more protectionist” and less open to Chinese trade and investment. He also thinks it likelier that a post-Brexit EU will block Chinese efforts to win market economy status with the WTO.

The political fallout from last week’s referendum will still have upset Beijing’s calculations in other ways too.

For example, it is going to lead to key personnel changes at the top of the British government. To Beijing’s dismay Brexit has proven politically ruinous for George Osborne, a politician who has been called the cheerleader-in-chief for closer commercial ties between the two nations and willing to make bold policy moves to forge better ties (including breaking with the US to join the new Chinese policy bank, the Asian Infrastructure Investment Bank).

Until last Friday the Chinese probably thought he was the likeliest to succeed Cameron as prime minister – thus ensuring the prospect of healthy relations with London over the coming five years. But in the wake of Brexit Osborne’s now ruled himself out of the leadership contest. If a less predictable Tory becomes prime minister in October, Xi and his colleagues may fear that the UK could become a less reliable partner.

Of course, a more hopeful view is that Brexit opens up new opportunities in Britain for the Chinese, as post-Brexit the UK will need Chinese trade and investment even more. Deng Haiqing, global chief economist with JZ Securities, made this point: “After exiting the EU, the UK will have to find new markets. Thus it needs to strengthen cooperation with countries like China.”

More colourfully, commentator Yang Liu wrote on weibo that the British would have a greater incentive to cooperate more closely with the Chinese on one of Beijing’s grandest policy initiatives. “Since Miss UK is divorcing the EU, instead she can come and have a baby with our One Belt and One Road!” Yang urged.

Taking the long view, Bloomberg’s Michael Schuman declared that the one big winner of the UK referendum would be China, because of the damage it will do to the EU. “Brexit is almost certainly in China’s economic and political interests,” he wrote. “Even a fully united Europe has had a tough time competing and contending with China. Now fractured, the EU can’t help but pose less of a counterweight to China’s rise on the political stage.”

A nationalistic Chinese netizen concurred with this point, even saying that as the EU bloc weakens “we can rope in its members one-by-one”.

The economic consequences?

China’s finance minister addressed the potential impact himself lastweekend. “The Brexit decision will cast a shadow over the global economy,” Lou Jiwei warned, adding that “the repercussions and fallout will emerge in the next five to 10 years.”

The shorter term outcome? “It’s difficult to predict now,” he said. “The knee-jerk reaction from the market is probably a bit excessive and needs to calm down and take an objective view.”

One of the concerns is whether the political and economic turbulence will spread from Britain into the rest of Europe, slowing its economy. The EU represents China’s largest export market – the UK and the rest of the EU accounted for 2.6% and 13.7% of Chinese exports in the first five months of the year. Local investment bank CICC outlines a base case scenario in which a slowing Europe sees China’s EU exports drop 6%, “dragging down” China’s GDP growth by 0.2%. Its riskier scenario sees exports hit harder and the growth rate declining 0.4%.

CICC also predicts that Brexit will dampen investment flows between China and the UK/EU.

Xu Shaoshi, chairman of the National Development and Reform Commission, told the World Economic Forum on Sunday that the “Brexit incident” would delay potential M&A deals: “For Chinese firms that are going to invest or carry out mergers, entrepreneurs are smarter than me, and they will definitely wait and see.”

Britain is China’s top investment destination in the EU, with the China Daily calculating that the UK has received $13 billion of Chinese capital. One of the biggest Chinese investors in the UK and Europe is Li Ka-shing, the Hong Kong-based tycoon. He has been unequivocal about Brexit, describing it as “detrimental to the UK” and predicting that it will have “a negative impact on the whole of Europe”.

Another contender for the title of China’s richest man is Wanda’s Wang Jianlin, who has also been buying assets in the UK (and elsewhere in Europe). Wang has threatened to move his firm’s European headquarters away from London post-Brexit. Chinese banks will also have to consider whether to shift some of their operations if the UK loses its ‘financial passport’ – a status that allows London-based banks to provide services in the other 27 EU countries, but which will likely expire with Brexit.

Any positives?

At least Brexit takes the Chinese economy out of the media spotlight for a few weeks, after months of speculation about the threat of a banking crisis and a ‘hard landing’. The renminbi fell after news of the vote but the People’s Bank of China has pledged to keep the renminbi “basically stable” and avoid any repeat of last summer’s currency instability and capital flight. Paradoxically Brexit may assist it in doing so, since the global turmoil may have persuaded Fed governor Janet Yellen not to raise US interest rates, possibly for the rest of this year.

“Investors say the best-case scenario for China and most Asian markets is that the Federal Reserve further delays raising interest rates this year,” the Wall Street Journal agrees.

Liu Dongliang, a senior analyst in the asset management department of China Merchants Bank thought such delays would “help reduce the renminbi’s medium-term devaluation and capital flight pressures”.

Of course, the condition of another currency – the pound – will also be interesting for Chinese investors. A survey by JMedia found that of the 411 real estate agents it polled before the referendum, 51% had seen clients delay a UK property purchase prior to the vote. But with sterling’s Brexit-inspired depreciation, Chinese buyer interest is returning, reports the Wall Street Journal, as UK real estate gets cheaper in renminbi terms. The China Daily also points out that the plunging pound is set to prompt a surge in Chinese visitors to the UK this year, mostly to take advantage of cheaper shopping. The same newspaper points out that China provided the biggest proportion of the UK’s overseas students last year (15%) and that a weaker pound will reduce their tuition fees, perhaps freeing up more cash to spend at home.

A bigger threat ahead?

Others in China are more concerned by the political mood that drove the Brexit camp to victory. “If [Brexit] is an important landmark in terms of a reversal of globalisation, I think that’s very bad for the world and it’s very bad for China,” warned Huang Yiping, a professor at Peking University and a member of the central bank’s monetary policy committee.

Reuters concurred, noting that “China has much to lose from Western turmoil… the growing backlash against globalisation in the developed world is a serious threat to the People’s Republic.”

Reuters is probably referring to someone who has been talking loudly about “reversing” globalisation: Donald Trump. “Globalisation…wipes out our middle class and our jobs,” he said in another speech last week. “Our country will be better off when we start making our own products again, bringing our once great manufacturing capabilities back to our shores.”

Similar to the Brexiteers, Trump has also made claims about controlling immigration. And if the same anti-establishment anger that bolstered Brexit carries through to the US presidential elections in November, we could even have a President Trump next January.

Should that occur, the world’s most important bilateral relationship could be headed for a period of severe disruption – particularly if Trump follows through on his rhetoric about a trade war with China.

---

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.