Does Brexit also mean an exit for renminbi trading from London?
Leung Kin Pong says Britain’s vote to leave the European Union casts uncertainty on Chinese investment into the UK and EU, and the continued operation of London as an offshore renminbi centre
Last month’s referendum result in the United Kingdom to leave the European Union is likely to have significant implications for China’s foreign policy towards Europe.
The relationship between Beijing and the UK reached its peak in 2015, supposedly ushering in a “golden era” of Sino-British relations during the visit of Chinese President Xi Jinping ( 習近平 ) last October. Then, the UK could claim to be the most important ally of China in the West. However, the resignation of prime minister David Cameron has left the relationship in uncharted waters. Will new prime minister Theresa May adopt a pro-China foreign policy approach as Cameron did?
In the past, Britain’s presence in the EU has helped strengthen China’s hand in negotiations with the EU in a number of cases. For example, during the European Commission’s investigation of the anti-dumping and anti-subsidy case against Chinese solar panels in 2013, the UK endorsed a more lenient tariff rate on Chinese photovoltaic cells. Similarly, in the current discussion of whether the EU should grant “market economy status” to China, the UK is also positively in favour. With the UK leaving the EU, therefore, China’s leverage towards the EU will be affected. As a result, China may be motivated to cultivate stronger ties with other European nations, such as Germany and France, in order to maintain its bargaining power in European affairs.
In terms of investment, the UK, styling itself as the Chinese gateway to Europe, has been the most popular destination for Chinese investment in the EU, with 15 billion euros (HK$128 billion) invested from 2000 to 2015, according to Rhodium Group data. However, the UK’s appeal to Chinese investors may dwindle significantly after Brexit because Chinese companies in Britain may not have the same level of access to other European markets.
The UK is also the favourite investment destination in the EU for Hong Kong entrepreneurs, including Li Ka-shing; 37 per cent of CK Hutchison profits originate from the UK. During a press briefing in March this year, Li said he would scale back investment in the UK if it exits the EU. As a gateway of Chinese investment to the world, Hong Kong also needs to reconsider its geographical strategy of investment in Europe.
It has been argued that the UK could negotiate a bilateral free trade agreement with China, a view echoed by EU commissioner for trade Cecilia Malmström a day before the EU-China summit this month. But that is not likely to happen any time soon. The UK is not in as good a bargaining position as it was as an EU member. In 2014, China only accounted for 3.6 per cent of UK exports and 7 per cent of imports, much lower than the figure for EU-China trade. Far more attractive to China remains an EU-China FTA. The prospect of such an agreement, however, will be even more distant now because the UK was the main driver behind the EU’s FTA negotiations. Brexit therefore may crucially weaken China’s position.
In addition, there is uncertainty over whether London can continue to play its current role as the most important offshore renminbi centre outside Asia. London today is the second-largest offshore renminbi centre in the world after Hong Kong. Brexit casts serious doubt on this position. Future negotiations between the UK and the EU over financial services will have an impact on London’s role in the renminbi business. The outcome is not yet clear, but Beijing may well consider jumping ship and shifting such operations to Frankfurt, Luxembourg or Paris to ensure its continued location within the EU and the euro zone.
Leung Kin Pong is a research associate at the European Union Academic Programme Hong Kong