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End of the Golden Age? What Brexit means for China

Image credit: S Pakhrin (Flickr: Creative Commons)

The recent years of strong relationship-building between China and the United Kingdom (UK) has been referred to by both countries’ leaders as the ‘Golden Age’ for ties. However, with the shocking result of Brexit and the subsequent resignation of former British Prime Minister David Cameron, is this era already coming to an end?

It’s natural to wonder what the impact from Brexit will be on the world’s second largest economy, as well as the relationship between China and Britain, and China and the EU. The answers are not yet clear and indeed will not be until the negotiations between the UK and the EU are finalised in years to come. However, there is no doubt that, like many other nations, China is watching the proceedings very closely.

Examining the immediate effects of the announcement of Brexit suggests China was initially negatively impacted by Brexit. Perhaps the most significant adverse reaction was the dropping of the Chinese RMB to its lowest value since its depreciation in August 2015 against the US Dollar. Naturally, China’s ongoing discussions with the EU in negotiating a historical free trade agreement, the strongest advocate of which was the UK, have slowed.

At first glance, the translation of this short term consequence to some parties suggest ‘Brexit is terrible news for China’. However, the predicted long-term outcomes by the World Economic Forum’s (WEF) forecasts imply that there will be very few direct effects on the Chinese economy. This supports the more realistic contention that Brexit is ‘a shock but not a crisis’ for China.

The core reason for this is that the UK only comprises a total of 2.6% (US$62.7 billion) of China’s global export trade, positioning the UK as China’s second biggest EU trading partner. Examining 2015 data—only 16% of China’s exports to the EU were destined to the UK (no figures exist of the proportion of these transiting via the UK into the European continent), compared to 20% to Germany and 19% to the Netherlands. In terms of China’s imports, 15% originated from the UK compared to 42% from Germany and 11% from France. Forecasts also contend that there will be no direct impact on the current trend of more than 50% of Chinese international students studying in the EU being in the UK.

The indirect effects of Brexit are more of a concern for China, particularly in what it symbolises. Chinese Premier Li Keqiang commented to the WEF that Brexit demonstrates ‘increased uncertainties in the global economy’. This perception is reiterated in Chinese state-run tabloids, such as the Global Times, in which democracy scepticism is strong, and financial and political instability is framed as a consequence of the British people's rejection of globalisation—a key part of China’s economic strategy.

The possible negative implications of Brexit are evidently more applicable to the UK's economy than to China's—Beijing being the nation’s second largest non-EU import partner (close behind the USA) and sixth largest export market. Concerns include predictions of London losing its appeal as an investment and financial hub for Chinese investors, including as an RMB clearing hub, suggesting the Chinese may look to leading European cities in which to establish a stronger investment relationship. Further predictions include a reduction in Chinese investments in the UK, and anxieties that China will trade directly with the EU in contrast to previously going through Britain. Adding to that is the long process—predicted to take five to ten years—in negotiating a free trade agreement from scratch between China and the UK.

If anything, Brexit is an opportunity for China to further strengthen its ties with the EU, particularly its biggest EU trade partner Germany. Although many of China’s trade and diplomacy strategies will need to be adapted for this significant change, optimistic analysis contends that the potential, particularly for Chinese companies in shifting to a forward-looking approach in contrast to the current short-term profit tactic, will drive Chinese outbound investment and global trade.

Jane Kerr is the China Fellow for Young Australians in International Affairs.

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