Jeffrey Mountevans, the Lord Mayor of the City of London, talks about the commercial ties between the United Kingdom and China after the June Brexit referendum in Shanghai during his visit in China on Sept. 12, 2016.

LONDON—Looking to strengthen the commercial ties between the United Kingdom and China after the referendum in June on Britain’s exit from the European Union, Jeffrey Mountevans, the Lord Mayor of the City of London, led a business delegation to China from Sept. 7 to 14. 

While things will not change much in the short term, the United Kingdom’s access to the European common market hangs in the balance and will be a focal point of future negotiations.

Until Britain actually leaves the European Union, nothing will change in the formal trade and investment relationship. However, because traders and investors are uncertain how much or when these arrangements will change, bilateral investment and trading projects might be delayed, said Jim Rollo, deputy director of the UK Trade Policy Observatory at the University of Sussex.

In the short term, Chinese and other investors will probably wait and see before starting new ventures in the United Kingdom, said John Van Reenen, director of Centre for Economic Performance at the London School of Economics and Political Science (LSE). In the long-term, however, Chinese investment will decrease once the United Kingdom loses rights in the common market, he said. 

The amount of the decline will depend on the future relationship between the United Kingdom and the European Union. The negative effect will be relatively small if the country has nearly full access to the common market—like Norway. Things will be much worse if it leaves completely, he added.

In the worst-case scenario—one in which the United Kingdom loses all access to the common market—the economic relationship between the United Kingdom and the rest of the European Union could be reduced to a simple free trade area for goods. The ideal scenario in which the United Kingdom maintains market access is unlikely if the British refuse to accept free movement of labor, Rollo said. 

The United Kingdom seeks a comprehensive bilateral trade deal with China rather than an agreement to set tariffs at WTO-prescribed levels. Seeing China as a very important future market, the United Kingdom would like to negotiate something as soon as possible, said Steve Coulter, the LSE fellow in Political Economy of Europe.

The greatest potential threat to London’s financial center comes from the loss of “passporting rights” which allow foreign banks based in London to do business anywhere in the European Union. These rights are likely to be curtailed after Brexit, and UK banks can be expected to incur losses, Coulter said. On the bright side, it might free up the City of London from a lot of burdensome regulations and present new opportunities, he said. 

Van Reenen said Brexit might put UK-China financial ties at risk because the United Kingdom will no longer have such good access to EU financial markets and will lose “passporting rights.”

Following Brexit, China might want to establish a new RMB market in another European Union city, said Alessio Terzi, an affiliate fellow at the Brussels-based think tank Bruegel. Many EU members will push for at least a partial relocation of banking activities within the European Union for stronger oversight, which will impact London’s status as a financial center, he added.