After Brexit, Can Chinese Trade Save The UK?

If Britain makes good on its post-Brexit intention to leave the EU, it could suffer serious financial losses. But some have claimed that trade with China might make up for that loss

A worker adjusts British and Chinese flags in September, 2015. — REUTERS
Jul 05, 2016 at 6:00 AM ET

For six years, David Cameron’s center-right Conservative government has been cultivating improved trade relations with China. In the years after the Conservatives were elected, the number of official visits and trade delegations multiplied. Speaking at a reception for Chinese Premier Li Keqiang during a state visit to the UK in 2014, Cameron, the British prime minister, championed the relationship between the two countries as one of “growth, reform and innovation.”

Two years and one Brexit vote later, that relationship could be in serious jeopardy. 

The decision by British voters in late June to leave the European Union is a major headache for Beijing. China, which has come to see the UK as a gateway to the lucrative European single market, is already suggesting that it is concerned about the support it will receive from London in the future.

Estimates published this week suggest that the Chinese economy could lose 0.2 percent of its predicted growth this year as a result of Brexit, while the drop in Hong Kong is as much as 1 percent. The National Bureau of Statistics of China had earlier, pre-Brexit, suggested that the Chinese economy would grow by a little more than 6 percent this year. 

Chinese growth was already slowing before the Brexit vote. Most economists agree that the British decision will only exacerbate this slowdown, putting more pressure on China to keep up the pace. The resulting drop in demand from China may also further dampen global growth and risks sending some of the world’s more fragile economies into recession. 

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On the diplomatic level, Beijing has made soothing and reassuring noises, saying that of course the government in Beijing respects the UK’s right to decide its own future. But many in the Chinese communist party leadership are worried. They think that maybe their bet on the UK is going to prove a losing one.

Editorials in China’s state controlled media outlets hinted strongly that China might be inclined to pull out of major investments in the UK . “Needless to say, Brexit is a bombshell,” wrote the author of one editorial published in Caixin, a leading Chinese media outlet.

“Economically, China needs to re-evaluate the role of the UK, which has been viewed as the most open economy, the most desirable hub, and the most friendly investment trade partner in Europe. Brexit might prompt Chinese firms to put on hold certain investment projects in the UK as important questions are addressed: Will London remain the most important global financial center in the world, or even in Europe?” 

If the cost of Brexit to China is high, then it could well be even higher to the UK. 

The Brexit result came just as Cameron’s government was starting to see a serious uptick in Chinese investment in the UK. During the latest state visit by the Chinese president, Xi Jinping, just eight months ago, deals worth more than $53.6 billion real estate, finance, energy, media and sport were signed between the two countries. Queen Elizabeth, during a state banquet thrown in honor of Mr Xi, described his visit as a “defining moment” for relations between the two countries.

British supporters of the campaign to leave the EU claimed during the pre-referendum campaign that there wouldn’t be any economic repercussions. They insisted that the UK was so important to Europe, it would rush to include Britain in a free trade deal. By extension, Britain’s economic relationship with China would remain unaffected 

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They also said that the City of London—the capital of the world’s financial industry—was so important to Europe as a whole, that the EU would be forced to bend to Britain’s will in any trade negotiations.

But that is not quite the way things are turning out: The UK now appears unlikely to maintain its place in the European single market—the biggest free trade zone in the world. Already, European leaders have begun to move.

Speaking at a summit in Brussels last Tuesday evening, French President François Hollande was reported by the Financial Times to have suggested that the clearing process—a function of the trade in various financial instruments—should be removed from the City. “The City, which thanks to the EU was able to handle clearing operations for the eurozone, will not be able to do them,” he said. “It can serve as an example for those who seek the end of Europe… It can serve as a lesson.” 

For the UK’s relationship with China, this matters. The City allows the easy transfer of capital; it offers the biggest insurance and commercial legal market in Europe; and it allows Chinese firms to raise finance for projects it has committed to in the UK and beyond. With the City’s status diminished—coupled with worries about the UK’s membership of the single market—what incentive is left for investors like the Chinese to maintain such a heavy presence in Britain?

One of the biggest drivers behind the UK and China’s new burgeoning relationship has been the Chancellor of the Exchequer and the man largely responsible for the UK’s economy, George Osborne. A key member of the campaign to stay in the EU, Mr. Osborne views the relationship with China to be so important that he was accused recently of blocking increased tariffs on cheap Chinese steel imports, even at a time when tens of thousands of jobs in the UK steel industry were endangered by the collapse of steel plants in South Wales.

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Over the next two decades, China is expected to overtake the US and become the world’s biggest economy and Osborne knows this. Last Friday morning, while the pound sank and the FTSE 100 nosedived, the UK briefly slipped from having the fifth biggest economy on the planet, to having the sixth.

Still, there are those who believe that despite the uncertainty and occasional turmoil we’ve seen since in Anglo-Sino relations over the past week, Brexit presents opportunities.

“One of the benefits China can gain from Brexit is a stronger and closer economic relationship with the UK and even with the EU,” said Zhang Lihua, director of the Center for China Europe Relations at Tsinghua University in Beijing. “Both the UK and the EU need that kind of co-operation with China under the current circumstances.” 

Perhaps counter-intuitively, the two countries might also benefit from the declining value of the British pound. It has been volatile since the Brexit vote, touching lows not seen for more than 30 years.

A cheaper pound will make British goods and services more attractive to overseas investors. The property market in particular has attracted Chinese investors in recent years, helped to drive the UK real estate sector, and a falling pound will only serve to attract more buyers.

The Chinese spent $5.8 billion in London’s commercial real estate market in the two years before 2016, while according to the Wall Street Journal, inquiries about London homes from potential Chinese house buyers doubled in the week after the Brexit vote from the week prior.

But China’s main interest in the UK is not for bilateral trade opportunities. It is because it offers proximity to the European single market. With this link cut, predict many expert analysts, Beijing is likely to shift its financial clout from Britain to other EU states. 

When President Obama visited the UK earlier this year, he made it clear that, while the special relationship will remain intact even if Britain leaves the European Union, it might not be quite so special as it used to be. The same applies to China. The partnership built between the two countries will remain, but with time it will probably become more distant.

 On Wednesday, David Cameron, who has announced that he will resign after campaigning to stay in the European Union, faced his weekly 40-minute sparring session with fellow Members of Parliament. Repeatedly he was asked about the consequences of Brexit, not only for the whole UK, but also for MPs’ own constituencies. And repeatedly he told them that the answers will come only after months and perhaps years of painstaking talks with the EU. 

This is the uncertainty that investors, the public and trading partners do not like. It might also prove to be the end of what was developing into a significant relationship between the UK and China.