Chinese economy faces little immediate fallout from Brexit vote

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/26

China’s currency markets seem to have been most affected by the outcome of June 23 UK referendum on the EU. Unlike the world’s major stock exchanges, stock market reaction to the vote was quite modest in China. The largest immediate impact of the vote has been a general increase in uncertainty in global markets. Last Friday (June 24), the People’s Bank of China issued a short statement noting that it had measures in place to deal with a possible Brexit shock to the markets. It is expected that the short-term negative effects of Brexit to China will be smaller than for other large economies. In coming months, Chinese consumers and investors could even benefit from the weak pound as the costs of travel to Britain and prices of British investment assets may fall.

Over the longer term, the biggest impacts on the Chinese economy will likely relate to how Brexit affects economic growth and export demand in Europe. The EU is China’s most important trading partner, accounting for nearly 15 % of the value of Chinese goods trade. The UK accounts for about 16 % of Chinese goods exports to the EU and about 3 % of China’s total exports.

China’s relations with the UK are generally regarded to be stronger than its relations with most EU countries. The UK has provided a channel for Chinese firms seeking to penetrate European markets. Chinese firms have also invested heavily in the UK. Chinese figures show that a fifth of all FDI flows to Europe in 2010–2014 went to the UK. London is Europe’s yuan-trading centre and has played an important role in promoting international acceptance of the yuan. The impacts of the possible split with the EU on the UK’s position has yet to be seen. 

In a big picture, China has unquestionably been a net beneficiary of globalisation trends. Some observers have expressed worries that the referendum outcome may reverse the globalisation trend and cause countries to turn inward and increase the use of protectionist measures.

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