Brexit uncertainty hurts Hong Kong in medium term, but may pay off in long run
Saturday marked 100 days since Britons voted to leave the European Union, but the continued uncertainty has been making life difficult for companies doing business in Hong Kong.
However, some Asian analysts are optimistic that in the longer term a divorce between the EU and its second largest economy might drive businesses from both eastwards, with Hong Kong well placed to benefit.
“Brexit means Brexit” has been the mantra of the UK’s new prime minister Theresa May, who on Sunday at least cleared up the question of timing, telling the BBC that she will trigger the process to leave the EU by the end of March 2017, but gave few details beyond the timing.
“In the longer term, the uncertainly as to Britain’s relationship with EU will cause problems for Hong Kong companies invested in the UK,” said Daniel Poon, the Hong Kong Trade Development Council’s principal economist for global research.
“A number of Hong Kong companies have already indicated they would move some of their investments out of the UK if it were not to have good access to the EU [after Britain leaves].”
Not only might these companies’ new destinations be less attractive, the move would entail significant costs.
From a human resources standpoint the vote is already having an effect. “There is a lot of uncertainty among companies I talk to who do business in Hong Kong specifically, and Asia Pacific – both those headquartered in Europe and in the region. Many are putting their recruitment on hold until the situation becomes a little clearer,” said Nick Marsh, Asia Pacific managing director for executive search at Harvey Nash.
At present, the UK remains a member of the European Union and formal negotiations on its relationship with the EU won’t begin until after the UK invokes article 50 of the European Union next March.
It is also uncertain at this stage whether this will take the form of a so-called “soft-Brexit” in which the UK retains some access to the EU’s single market or customs union, or a “hard Brexit”, where it does not.
“I don’t think anyone, not even the UK negotiators, knows at the moment what sort of arrangement we will finish up with,” said Paul Irwin-Crookes, a lecturer in international China relations at the University of Oxford, who has just written a book on EU-China relations.
While Britain remains in the EU any impact on companies is more a result of market sentiment, and that’s especially true in the currency markets where the pound has dropped 12.6 per cent against the Hong Kong dollar since the referendum.
However, despite the fact that this has made Hong Kong imports to the UK more expensive, 83 per cent of Hong Kong exporters said they had not felt any impact of the UK’s vote to leave the EU, according to a poll by the Hong Kong Trade Development Council.
So far, UK economic figures have held up better than doomsayers had predicted. Part of the reason for this is because the UK government has taken action to stimulate the economy by cutting interest rates, and last week launched a programme to buy corporate bonds from a list of companies that “make a material contribution to the UK economy”. The list includes Hong Kong’s Hutchison Whampoa.
One area where there is particular uncertainty is in the UK’s financial services sector, a key contributor to British GDP. Under the current so-called passporting system, UK banks, or international banks with their regional headquarters in the UK, have access to the EU’s single market. It is unlikely that this would remain the case in a “hard Brexit”.
“I think the UK will have to manage things carefully to make sure that the financial services industry emerges from Brexit without significant damage,” said ICAP chief executive Michael Spencer.
However, Spencer believes that even if London should lose out, Hong Kong is unlikely to pick up much of the lost work.
“There is a logic to having financial hubs in different time zones, so post-Brexit, London is unlikely to lose ground to Hong Kong,” he said.
From a talent stand point though, Hong Kong may be benefitting from the uncertainty in both Europe and the UK following the referendum.
“We are seeing large numbers of Europeans looking for work in Hong Kong, and Asia more broadly,” said Nash. “The rate picked up this Spring, when the uncertainty with Brexit really started, so there could be a relationship.” The same is likely to apply to companies.
“After the UK leaves the EU, we can expect to see more British and even European companies looking to Asia. Hong Kong is well placed to play a large role in this,” said Poon.
However, the politics of British companies looking abroad may not be easy to handle.
“The UK will look to build on its economic relationships with new friends, like China, and also old friends like the United States,” said Irwin-Crookes. “If the situation in the South or East China Sea were to deteriorate, that could leave the UK caught in the headlights.”
This article has been amended to correct the name of Hong Kong Trade Development Council Research’s principal economist to Daniel Poon.