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UK trade deals at stake but little impact seen on Chinese growth

Monday, June 27, 2016 - 05:50
38054636.1 (38202642) - 27_04_2016 - CHINA-ECONOMY-TRADE.jpg
The exit of the United Kingdom from the European Union could put in peril existing trade deals between China and the UK and make it harder for Chinese companies there to enter the European Union, but it could give China leverage over the exiting country which now appears more vulnerable and isolated.

Beijing

THE exit of the United Kingdom from the European Union could put in peril existing trade deals between China and the UK and make it harder for Chinese companies there to enter the European Union, but it could give China leverage over the exiting country which now appears more vulnerable and isolated.

In the short term though, analysts say that effects on the real Chinese economy could be minimal as the divorce will take some time to become effective. Much also depends on how the UK renegotiates trade deals with other EU countries. The UK is China's second biggest trading partner in the European Union. As such, the Brexit vote has not been welcomed by China which sees its entry gate into the EU closed and its special relationship redefined.

"China prefers continued stronger and stable growth. The UK will see weaker growth, more uncertainty. It will become harder for China to sign long-term deals with the EU," said Ian Bremmer, president of Eurasia Group, during the ongoing World Economic Forum held in Tianjin.

"Partners such as China, with whom Britain is currently enjoying a 'golden age', must be wondering what comes next," said an editorial in the China Daily, a state-owned newspaper, strongly condemning the result of the vote.

China and the UK have benefited from a privileged relationship that has allowed China to internationalise its currency and use the City of London as a stepping stone to the EU market.

London has been one of the most important offshore markets and trading hubs for the renminbi. Britain was the first western country to issue yuan-denominated sovereign debt and China's central bank issued its first offshore yuan denominated note in London in 2015.

President Xi Jinping's visit to the UK last fall saw the signing of US$60 billion in trade deals.

But now those deals with the UK look much less appealing to China as the Brexit vote closes the UK to much of the vast open European market.

"It will take years, if not decades, to work out the implications of the victory for Leave on June 23. The UK will figure as a far less important partner than it has been hitherto. Beijing will certainly place Britain in a far lower rank in its partnership list," said Kerry Brown, professor of Chinese Studies and director of the Lau China Institute at King's College in London.

China and the UK are engaged in a number of joint projects as part of the China-UK Economic and Financial Dialogue (EFD) programme which aims to deepen economic ties between the two countries, based largely on the UK's membership of the EU.

These could now be compromised as the two countries will have to redefine their relationship, not necessarily to the advantage of the UK.

"Brexit will challenge London's position as a premier global financial centre, which may encumber the pace of the renminbi's internationalisation," state new agency Xinhua said after the referendum vote.

During a news briefing in Beijing on Friday, Chinese Foreign Ministry spokeswoman Hua Chunying said: "I think the relevant countries and their departments need time to have a conscientious study of this new situation.''

Looking forward, the new geopolitical status between China and the EU now puts the "market economy status" that China is lobbying for on the back seat. The UK was one of the strong members of the EU supporting the status, which would allow China to flood Europe with cheap products without anti-dumping fees.

"One estimate currently doing the rounds is that it will take 500 British officials and 10 years to negotiate a fresh trade deal with China,'' the China Daily editorial added.

However, on the ground, the real Chinese economy may feel very little impact from Brexit. Exports from China actually represent very little of the country's total global trade and it could take up to two years for Brexit to become effective.

"The direct economic implications for China from the UK's decision to leave the EU are small. Exports to the UK are equivalent to just 0.5 per cent of China's GDP, so even a sharp slowdown in the UK economy would have a very small impact on Chinese growth," said Julian Evans-Pritchard, economist with Capital Economics.

What could be more of a concern are consequences on the renminbi which has been under pressure for close to a year.

China's yuan fell to its weakest level against the US dollar in more than five years on Friday, after news of the Brexit. Pressure will continue to mount as the dollar strengthens and the Federal Reserve raises interest rates going forward, analysts say.

For more coverage of the EU referendum, visit bt.sg/BrexiT

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