As the United Kingdom moves ahead with its plans to exit the European Union, Chinese companies doing business in the country must be wary of the risks of restructuring.
Up to now, Chinese firms and investors have viewed Brexit as both a constraint and a potential opportunity. And while it could be a chance to take advantage of “bargains” created by the UK’s weakened economy, there are three things Chinese companies should also consider during this uncertain time.
UK-EU trade status
For the next two years, the UK will be negotiating Brexit with the EU. Not only are trade talks between the UK and other nations prohibited during this period, but the outcome of its deal with the EU will determine the UK’s bargaining point with other countries.
For example, Alicia Garcia-Herrero and Jianwei Xu note that the UK’s trade relationship with Europe will lay the groundwork for its relationship with China, as access to the EU single market carries implications for trade with other nations. So if the UK retains full access to the EU market, the UK could become a back door for Chinese exporters to enter the EU market. Without determining the UK-EU trade status, uncertainty will remain in the UK-China trade relationship until the UK leaves the EU trade bloc in March 2019.
RMB-pound exchange rate
Next, the RMB-pound exchange rate has already become a cause for concern, as the pound has fallen in value with relation to the RMB by over 12% since last July. Oddly enough, Chinese exports to the UK increased despite the lower purchasing power of the pound sterling, but this trend is unsustainable as long as the exchange rate remains unfavorable to British consumers. It is more likely that, over time, the UK will export more to China and China will export less to the UK.
London could be replaced
There is also concern that London may lose its status as one of the most important global financial centers. Before Brexit, China viewed London as a future offshore RMB hub. China’s leadership had made several important moves to boost the status of the RMB in London, including setting up the city as an offshore RMB clearing center and selling RMB-denominated and dual currency bonds. With the possibility that major global banks may move operations out on London, China may be better off focusing its offshore RMB business on other major cities, Including New York, Singapore, Paris and Frankfurt.
Already, ten major banks–including the Bank of China–are in talks to leave London for Dublin as Ireland remains in the EU and hence has a “passport” to the continent.
Despite all of this, China has expressed confidence that its good relations with the UK will remain intact. President Xi Jinping has dubbed this period the “Golden Era” of UK-China relations.
It is possible that China may be able to negotiate a better trade deal with the UK, since the EU has remained somewhat protectionist toward China, applying anti dumping duties where possible. The UK has generally favored freer trade and less protectionism.
There is also opportunity for Chinese firms to purchase assets in the UK at a “discount,” as the exchange rate remains favorable in this regard toward the RMB. Despite a drop-off in purchases of London’s commercial property through 2016 by many foreign investors, Chinese investors continued to snap up assets, although admittedly at a somewhat slower pace than in the previous year. Depreciation pressures on the RMB and lack of investment outlets have made the UK even more attractive to Chinese investors seeking yield.
Which forces will prevail in China’s investment and trading activity with Britain remain to be seen. The biggest threat right now appears to be uncertainty.
Brexit poses some serious potential challenges to UK-Chinese economic ties, and the resolution of these challenges can fall into a wide range of possibilities. Still, as China’s ambassador to Britain Liu Xiaoming has noted, “views on the future of Brexit negotiation have been across the spectrum, [but] I believe when there is a problem, there is always a solution.”
This article was written by Sara Hsu from Forbes and was legally licensed through the NewsCred publisher network.