What Brexit means for relations with China

UK-Chinese trade has been described as entering a ‘Golden Age'. However, now that the UK has voted to leave the EU, will Chinese businesses still see the country as an attractive destination for inward investment? Get the inside track from Mark Pinner, our MD in China.

Following the result of the British referendum to leave the EU, many people are wondering what this means for the UK’s relations with China, especially the so-called ‘Golden Age’ of trade famously heralded by former Prime Minister David Cameron and Chinese President Xi Jinping in 2015 over a pint of beer in an English pub.

A short term spending boost?

In the short term, the 10% drop in the value of the pound (about £1 : $1.34 at time of writing) will raise interest from a number of UK-oriented Chinese businesses.

Online shoppers and retailers are likely to be big winners, including ‘dai gou’ or ‘on behalf shopping’ where people in the UK buy goods and then dispatch them onwards for resale in or delivery to China.

Travel and tourism to the UK is likely to benefit, with one major Chinese travel agency reporting a 40% increase in bookings for July and August compared to the same period last year. 

Similarly, there is likely to be increased interest in real estate investors from China, who suddenly see Britain as a much more attractive destination for snapping up assets cheaply.

The 100,000+ Chinese students studying in the UK may also see the dropping pound a benefit, with their cost of tuition and living costs having reduced at a stroke. However, many Chinese students choose to study with the aim of getting a job in Europe and, with the UK out of the EU, this may become much harder. Furthermore, following Brexit, EU citizens may also need to apply for work visas in the UK. This may disadvantage Chinese and other Asian applicants over Europeans who tend to have better English than their Asian counterparts.

Chinese investment in the UK or EU?

Chinese businesses considering investing in the UK will certainly think twice about whether they should site their regional headquarters or factory in a UK that is no longer in the EU or the Single Market, especially if there is any possibility of tariffs for exports to the EU.

The lack of clarity on whether these issues would impact potential investment while trade talks are underway will be a major issue for any potential investor, and are highly likely to result in Chinese investment projects in the UK being put on hold or simply going elsewhere until the situation is clarified.

Still a long term UK-China ‘Golden Age’?

At a strategic level, the UK-China axis is based on two main ‘pillars’.

The first pillar is the UK services sector, undoubtedly the strongest in Europe. China is moving from a low-medium end product driven economy to a higher-end one with an increased role for consumer spending and services. China’s previous ‘best friend’ in Europe used to be Germany, but with this new shift in Chinese economic priorities the UK has become a more natural partner, as it has the stronger services industry that China now needs.

As long as the UK retains a healthy services sector, this pillar is likely to remain. This is very unlikely to change, although the City of London financial district could be damaged by loss of ‘passporting rights’ to sell into European markets.

The other ‘pillar’ is the ability of the UK to influence Europe in the direction that China wants, and to a lesser extent, other major international organisations such as the IMF and World Bank. With the UK leaving the EU under a cloud, this ‘pillar’ is largely smashed away. It remains to be seen how much the UK’s influence on other international organisations will be affected, but the UK will certainly lose some of its importance to China.

There are two major views on how seriously this would impact UK-China relations.

The first suggests that UK-China relations are now in serious trouble. Those making this argument cite: the decline in the UK’s ability to influence the EU; the personal commitment of the former Chancellor, George Osborne, to building UK-China relations; how Brexit could damage London’s position as the source of overseas RMB-denominated bonds; how Chinese business’ investment in the UK may dry up due to the unclear regulatory environment; and how the UK may turn back to cooperation with the US instead of the EU.

The second view holds that the Chinese leadership is pragmatic enough to overlook the impact of Britain’s changing status with the EU in the long-term interest of cooperation with a mutually compatible economy. This argument notes that having damaged relations with the EU, the UK will need all the support it can get, and therefore China’s influence over the UK is likely to rise.

‘Business as normal’ for China?

On the surface, the latter view appears the more likely to prevail. Statements following the referendum from the Chinese Ambassador to London Liu Xiaoming, and Chinese Premier Li Keqiang regarding China-EU relations, both state clearly that China remains committed to its current relationships with both the EU and the UK following the Brexit referendum.

Furthermore, China tends to pursue long-term relationships. A post-Brexit Britain will remain an influential power and, with China having made a major diplomatic effort to court Britain, it is very unlikely to give up so quickly.

A new British China policy?

Following the resignation of Prime Minister David Cameron, Theresa May, the new Conservative Party leader and Prime Minister, now has the difficult position of steering the UK into calmer waters.

As the former Home Secretary, May has taken a relatively conservative view towards opening up visas to more Chinese students and tourists, arguing against the (then) Chancellor George Osborne’s open approach to China, which could be seen as having put commercial interests with China ahead of other concerns.

That said, as the Home Secretary, she was always likely to take a firm position on immigration.  This does not mean that she would not also actively pursue relations with China. With the UK leaving the EU, the importance of building strong trade relations with a major power like China will be very high on her agenda.

However, the composition of the new Cabinet also suggests possible ‘hiccups’ in the UK-China relationship.

Beijing will not be pleased that the ‘architect’ of the new UK-China relationship, George Osborne, is now out of the government, and neither are they likely to be particularly enamoured about the appointment of former Mayor of London Boris Johnson as Foreign Secretary. Although the former Mayor has been popular in the UK, his lackadaisical style contrasts poorly with that of the Chinese leadership which values external formality and a serious approach. It is also safe to say that he did not create a favourable impression when representing London concerning the Olympic Games. That said, Beijing is likely to understand that Johnson’s external image may not be the same as his approach in private, and will be looking to see how this develops in coming discussions.  

Furthermore, Liam Fox, as the new International Trade Secretary, is known as somewhat of a right-wing atlanticist ‘neo-Con’. Beijing will be watching his approach to UK-Chinese trade policy closely for signs of whether a more politically-driven agenda, e.g. criticisms of Human Rights, will interfere.

Looking ahead

Whatever the impact on the relationship, China does not want to see ‘instability’ and a weakened EU or UK, both of which bring inward investment to China. This is much needed  to support economic development and to some extent, balance the US’s global economic and political influence.

This means that in the short term, the Chinese government is unlikely to change its ‘Golden Age’ policy, and may even come to Britain’s aid if necessary to prevent any precipitous economic chaos. In the medium to long term, the complementarity of the UK & Chinese economies and lack of any serious geo-strategic issues is a powerful pull.

From the British perspective, with the UK’s likely exit from the EU, China will undoubtedly become an even more important long-term partner. However, in the short term, it remains to be seen how the new Prime Minister and her administration will manage their relationships with China and whether the Golden Era will remain quite as ‘harmonious’ as before.

Find out more

Mark Pinner, our MD in China would be happy to provide on-the-ground insight and advice on Chinese reactions to Brexit or on any other issues related to public affairs or doing business in China. Contact him direct on mark.pinner@interelgroup.com

Author

Mark Pinner

Managing Partner, China

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