Pacific Money

Asia Warns Britain: Don’t Quit EU

Breaking up is hard to do, especially when it rocks global financial markets.

Asia Warns Britain: Don’t Quit EU
Credit: Brexit via

Asia’s leaders have warned Britain against contemplating a split from the European Union in its June 23 referendum, fearing the consequences for the global economy. With financial markets already showing the ill effects of nervousness over the risk of “Brexit,” global growth forecasts dropping and analysts warning of further fallout, the downside risk to Asia has rapidly escalated.

Australian stocks posted their fifth straight loss on Wednesday as traders pondered the “largest macroeconomic risk to the markets this year,” although Chinese, Hong Kong and Japanese stocks posted modest gains after the previous day’s declines. In contrast, gold and bond prices have rallied as investors seek “safe haven” investments in the event of a Brexit vote.

According to Reuters, China has backed Britain remaining in the EU by calling for a strong and united Europe, a message recently repeated by Chinese Foreign Minister Wang Yi. State-run media have also publicized the economic and financial consequences of a Brexit, questioning why Britain, the world’s fifth-largest economy, would contemplate the risks involved.

“If you are investing in Britain as a way into the European market, using Britain as a bridge into the EU’s 27 other nations, then once Britain leaves the EU, that bridgehead will be curtailed,” Yao Ling, deputy director of a Chinese Commerce Ministry research center, said in a ministry-run newspaper.

Asia’s second-largest economy, Japan has publically urged British voters to back British Prime Minister David Cameron’s push for the nation to stay in the EU. At a recent meeting with Cameron in London, Japanese Prime Minister Shinzo Abe said, “A vote to leave would make Britain a less attractive destination for Japanese investment,” which currently exceeds 38 billion British pounds ($54 billion).

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Japanese Finance Minister Taro Aso has also warned against Brexit’s potential to disrupt financial markets, saying Tokyo would be watchful for a spike in the Japanese yen.

“We must keep close watch with a sense of urgency in order to prevent speculative moves from persisting,” Aso said Monday.

“If necessary we will firmly respond [to market moves] in accordance with the G7 and G20 agreement,” he added.

Japanese automakers with operations in Britain, including Nissan and Toyota Motor, have declined to state their investment intentions in the wake of a Brexit vote, although Toyota has said British membership of the EU “is best for our operations and their long-term competitiveness.”

India has also warned against the prospects of a Brexit vote, which could have a significant impact given its current position as the third-largest source of foreign direct investment in Britain. There are more than 800 Indian-owned businesses in Britain employing an estimated 110,000 employees, including Tata Motors, owner of carmaker Jaguar Land Rover.

The Federation of Indian Chambers of Commerce and Industry (FICCI) has stated the potential for Brexit to damage economic ties.

“While deciding on membership of the EU is a sovereign matter for Britain and its people, Indian industry is of the view that foreign businesses cannot remain isolated from such decisions. The UK is a valued economic partner for India and we firmly believe that leaving the EU would create considerable uncertainty for Indian businesses engaged with the UK and would possibly have an adverse impact on investment and movement of professionals to the UK,” FICCI secretary general Alwyn Didar Singh said.

Australian Prime Minister Malcolm Turnbull has also cautioned British voters against quitting the world’s largest economic bloc, saying a Brexit vote “will cause a degree of uncertainty in global markets, and the anticipation of that is already doing that.”

At Japan’s recent G7 summit, leaders warned against “potential shocks of a non-economic origin,” including Brexit, with the official statement declaring that “a UK exit from the EU would reverse the trend toward greater global trade and investment, and the jobs they create, and is a further serious risk to growth.”

Analysts at investment bank Morgan Stanley have warned of a potential 20 percent fall in European stocks in the three months following a Brexit, although a positive vote to stay could spark a mild “relief rally.”

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Global bond manager PIMCO has reportedly warned that a vote to leave could spark a 10 devaluation of the British pound against the dollar, with British banks, utilities and non-food retailers facing the biggest risk of market losses.

According to Nikko Asset Management analyst Roger Bridges, global bond yields have fallen due to uncertainties over both the U.S. Federal Reserve’s policy as well as Brexit and its broader implications.

“The market is concerned not just about the possible impact on the UK but the consequences for the rest of Europe, particularly given the increasing popularity of right-wing, anti-European parties throughout the region,” he said. He noted Hungary‘s upcoming vote on refugees as well as increased Euro skepticism, even in France.

“Whether correct or not, the bond market has been concerned about Brexit for some time, while the US equity market has been rallying, even outstripping other equity markets. It is only over the past few days that the US equity market has begun to react to the increased likelihood of a vote for the UK to leave the EU, with sharp falls and an accompanying increase in volatility,” he said.

Asian Impact

According to Britain’s Financial Times newspaper, the direct trade impacts on Asia of a Brexit would be modest, given that exports to Britain account for only 0.7 percent of regional gross domestic product, although Cambodia, Hong Kong and Vietnam would be the most exposed.

However, the picture is not quite as benign for Asian currencies, particularly for the Indonesian rupiah and Malaysian ringgit.

“A short-lived period of volatility in regional currency markets is certainly possible. The ringgit and rupiah have in the past proved the most vulnerable to periods [of] ‘risk off’, and I would expect these two currencies to be hit the hardest,” Capital Economics analyst Gareth Leather told the financial daily.

Central banks and finance ministers might also have to weigh the consequences of a Brexit, with suggestions that the region might be forced into taking even stronger stimulatory measures to ward off a Brexit growth shock.

“Expect the British pound to be sold, government bonds to be snapped up and shares to be ditched,” warned the Australian Financial Review’s Philip Baker.

Currency traders have been quick to react to recent polls, with the British pound plunging to a two-month low against the dollar on a phone survey showing 50 percent support for the “Leave” side against 45 percent for “Remain.” Front-page backing for Brexit by Britain’s top-selling Sun newspaper has also added to market nervousness.

Yet not all remains lost for Britain’s continued EU membership. According to website “Number Cruncher Politics” (NCP), which successfully forecast the last British election result, the Remain camp remained in front at 67 percent versus 33 percent as of Monday.

Asia’s leaders will be hoping the site proves accurate yet again next week, while financial markets and businesses hold their collective breath.