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Brexit may contain blessings in disguise for China

Author  :  Wang Huiyao     Source  :    Chinese Social Sciences Today     2016-07-13

On June 24, it was announced that the citizens of the United Kingdom voted to leave the European Union. This outcome will surely impact international politics and economics, especially in European countries. China will also see some negative effects in the short term, but in the long run, the move will benefit China.

The United Kingdom has served as a foothold for China on the continent. Many Chinese enterprises selected the United Kingdom as the location for their headquarters because of its advantages in talent, its status in the European Union, and because English is commonly used in international business. Now, in the wake of Brexit, relations between the United Kingdom and other EU members are expected to cool. The value of the pound has declined greatly and could continue to fall, which will inevitably impact economic and trade relations between China and the United Kingdom.

However, there are also positive effects. For one thing, because the United Kingdom is losing some its allure, Chinese enterprises will increasingly look to other European countries, diversifying the investment structure. Also, Brexit might push the two countries closer together. As its ties to the rest of Europe weaken, the United Kingdom may seek to offset its losses by working with China and other emerging countries, like India and Brazil, in addition to the United States and Canada. It may take a more active role in China-led multilateral initiatives like the “Belt and Road” and the Asian Infrastructure Investment Bank.

Though the United Kingdom’s appeal to China has decreased, its demand for Chinese goods will increase. Brexit may bring about a new round of global cooperation, reducing the negative effect it produces.

Brexit to some extent is a reaction of the British people against globalization. Resistance to immigration shaped the outcome of the referendum. However, in the long run, it is likely that the British government or the elite class will realize that Brexit will enable them to engage in broader globalization by establishing more extensive relations with other countries rather than limiting the scope of cooperation to the European Union, so to the world as a whole, Brexit may prove a blessing in disguise.

It is still uncertain whether London will remain Europe’s financial center, and the United Kingdom’s position as an offshore RMB market center will also be affected. Last year, RMB-denominated foreign investment was vigorous and this year it is even stronger. With the US economy recovering, the dollar remains strong, and the euro will retain its advantage. Then if the pound depreciates, China’s investment in the United Kingdom will increase.

In the long run, if the RMB is to become stronger, it needs to be more useful as a currency for trade and service settlement. The currency’s role in the International Monetary Fund’s Special Drawing Rights basket needs to be enhanced, and it must become the key currency. Therefore, in terms of international trade settlement, the depreciation of the pound will raise the status of the RMB.

In some ways, Brexit is a challenge to the traditional model of democracy as well as a rebellion of the common people against the elite class. Under this circumstance, China should firmly promote and engage more in globalization, because in the past three decades or so, the country’s development has greatly benefited from globalization.

 

Wang Huiyao is director-general of the Center for China and Globalization.

Editor: Yu Hui

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