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How China Can Benefit From Brexit

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China Power

How China Can Benefit From Brexit

China could actually come out the winner from the U.K. vote to leave the EU.

How China Can Benefit From Brexit
Credit: Brexit concept image via

Although President Xi Jinping explicitly supported Britain remaining in the EU, the post-Brexit European political and economic landscapes are not necessarily against China’s interests. In fact, in the long term, China may well emerge as a big winner from the market turmoil and political uncertainties in Europe.

Certainly, in the short term China’s economy, like other major economies, will be troubled with the financial disarray centered in Europe. Immediately after the vote for Britain to leave the EU was announced, the yuan plunged to a five-year low. A weakened European economy will also harm Chinese exports to the region and inevitably plague Chinese investments.

Investors hate uncertainties; so do the Chinese leaders. A “remain” vote in the historic referendum would have allowed China to avoid these blows. It is thus not difficult to conceive why Xi was unusually vocal about his views, hoping Britain would not surprise him.

What’s more bothersome, as various experts argue, is the loss of an associate who has a say in the EU. Last October, during his visit to the U.K., Xi signed trade deals worth some $60 billion with Prime Minister David Cameron, confirmed London as the first international financial center to launch renminbi-dominated sovereign bonds, and marked a significant advancement of the economic ties between the two countries. Having had high hopes of Britain being a keen advocate within the EU for a China-EU free trade agreement, China now seems to have suffered a major setback in furthering its economic ties with the EU.

However, the profoundness of this consequence should not be overrated. When observers make such a prediction, they more or less assume that the EU will continue to be formidable politically and economically, despite Britain’s departure. But the somewhat surprising outcome of the historic referendum has unveiled the sweeping prevalence of populism, which has gained grounds faster in Britain and across Europe than many reckoned. The outcome of the vote has emboldened the far-right parties to demand exit votes in other EU member states. As domestic voices become more pronounced, the near future could see a disunited, weakened, if not cracked-up, European Union. And that will be a time when China can “divide and conquer.”

From cold-shouldering China over the free trade agreement to criticizing the non-democracy’s disregard of human rights, the EU member states could do so because together they had sufficient bargaining power. As the EU becomes more disunited, the European states will have to count more on their own, with far fewer bargaining chips in each of their hands.

Having pegged China as a daunting competitor for years, the EU states have allowed protectionist sentiments to prevail and opted to turn their backs on China. But Brexit will change the chessboard fundamentally. Not only will it force the EU states to rely more on their own bargaining power, it will also thwart each of them economically, constricting their “right” to be picky in search of foreign investments and trading partners.

In the coming decade, exclusive bilateral negotiations between China and each EU member state will gain more significance. Certainty, for China this will be politically more complicated, compared to dealing with one single entity. But in bilateral talks, China will definitely have the upper hand.

Another arena where China will benefit from Brexit is currency. As the U.K. has served as a major offshore renminbi clearing center, there is no doubt that Britain’s departure from the EU will represent a setback to the internationalization of renminbi. But in the greater picture, the market of international currency is a zero-sum game. Brexit has notably undermined the pound sterling’s standing as an international currency — just as the renminbi is set to be added in to IMF’s SDR basket in October. It’s unrealistic to imagine the renminbi capturing all of the ground lost by the pound; the  Japanese yen especially emerged as a sturdy alternative in the turbulent days right after the Brexit vote. However, over the next decade, the renminbi will be capable of seizing part of the vacuum.

Finally, the last benefit China will be able to reap from Brexit concerns the question that all investors will ask themselves: Where should I put my money right now? Recent months have seen the stabilization of the Chinese economy from last year’s stock market turbulence. Despite common fears of a Chinese debt crisis, various banks and businesses, such as Goldman Sachs and McKinsey, have abandoned their bearish tones on China. Instead, a growing number of experts have averred that the Chinese economy is heading in the right direction in the long term by shifting its focus from manufacturing to services, which is the key to tackling China’s decade-long problems of over-reliance on export of goods and truncated domestic consumption.

In all likelihood, the bleak prospect across the continent will drive capital to flee. In terms of less flexible, long-term investments, such as REITs and long-term funds, China, which is now regarded as an economy heading in the right direction, will appear a more preferable alternative.

Sitting thousands miles away from the source of the Brexit seismic waves, China is now watching the European fortress crumbling. Some sharp fragments from the collapse may scratch China’s face, but in due course, it will emerge as a big winner from the game — without any deliberate efforts.

Wy Cheng is a researcher and writer on politics and economics.