Will Brexit Push China Over The Edge?

By Gordon G. Chang

Markets reacted violently on Friday to “Brexit,” so Britain’s historic vote Thursday to leave the European Union is already claiming casualties. Perhaps the most important of them will not be in Europe. It could be China.

China’s leadership thought it had a stake in the outcome of the historic referendum. During his state visit to London last October, China’s Xi Jinping made clear how he felt the vote should go. “China hopes to see a prosperous Europe and a united EU, and hopes Britain, as an important member of the EU, can play an even more positive and constructive role in promoting the deepening development of China-EU ties,” Xisaid, according to a paraphrase provided by the Chinese Foreign Ministry.

The expert view is that China will be just fine. “But out of all of the market turmoil and uncertainty will emerge at least one big winner: China,”writesMichael Schuman on the Bloomberg site. A headline in ValueWalk went even further:“Brexit: China Could Be the Biggest Winner of All.”

That is not an unreasonable view. China, after all, will have far greater bargaining power now that Europe is broken into one more piece—and that will be especially true if the process of division continues, as it very well may.

Yet Brexit is not a total win for Beijing. For one thing, Beijing’s Europe strategy is now in disarray. In large part, that strategy rested on Britain’s central role in the 28-member bloc. From its British “bridgehead,”Chinese companies could enjoy both the relatively liberal rules of Britain and access to the larger continental economy. At the same time, Chinese banks could trade renminbi in the EU’s most important financial center and have access to the rest of the bloc.

Xi, therefore, will have to think up something new because his country’s “best friend in Europe” soon will not be in “Europe.” Beijing cannot be happy that Prime Minister David Cameron will no longer be there to soften the EU’s response to China’s questionable trade practices or push for the grant of “market economy status” to China. This means Cameron’s “golden era” of Sino-British relations—others spoke of the “golden age” and “golden decade”—is surely over just months after it began.

Yet Brexit’s primary effect on China has nothing to do with Beijing’s relations with London or Brussels. The primary effect looks like a devastating blow to the struggling Chinese economy.

Reactions on Friday in China’s financial markets were mild. The Shanghai Composite fell 1.30%, while the Shenzhen Composite lost 0.76%. The ChiNext held steady, off 0.47%.

Courtesy: Forbes

 

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