Professor John Ryan
UK Prime Minister Boris Johnson has spoken of his vision for a Global Britain and of his intention to strike post-Brexit trade and business deals around the world, including with China. The UK, with the City of London, is well-positioned with regards to financial services, but opening the door for more imports from China may hurt domestic manufacturing. Increased foreign investment from China may draw criticism at home, and it may also impact relations with other trading partners, particularly the US. Johnson’s decision in late January 2020 to give Huawei a role in Britain’s 5G mobile network came under heavy criticism from the US administration.
When the UK Treasury became the first developed nation to issue sovereign bonds denominated in RMB (Renminbi) on 14 October 2014, it was a milestone event. Oversubscription by investors led to a final issuance of more than RMB 3 billion (US$490 million) with a tightened yield of 2.7 percent. The majority of investors were from Asia, followed by European investors. This issuance marked another step in the maturation of the modest RMB 500 billion (US$81.6 billion) offshore RMB bond market, with these bonds also known as “dim sum bonds”. The UK Treasury’s issuance of RMB-denoted sovereign debt was a substantial move in the global integration of China’s financial markets and a movement toward liberalizing China’s exchange rate. The UK has also been a major gateway for Chinese investment in the EU. The UK and China are enjoying a mutually proclaimed “golden era ” of bilateral relations, after they announced a partnership to increase trade and investment during Chinese President Xi Jinping’s state visit to the UK in 2015.
London will continue to be attractive for China as an offshore RMB centre in Europe for the time being, since the City is the second largest RMB offshore market after Hong Kong and has the largest RMB pool in Europe. However, China may have to adjust its global RMB strategy if there is a No Deal Brexit.
London still dominates RMB clearing. It has the world’s largest foreign exchange (FX) market, handling a daily average of 37 percent of all global FX deals in 2016. Plentiful expertise and financial infrastructure enable it to incorporate RMB trading into the mix. The UK’s exit from the European Union has increased efforts elsewhere on the continent to do more business in RMB. While the effects of Brexit on London’s future role in RMB internationalization are still difficult to assess, China’s January 2020 suspension of the new London-Shanghai Stock Connect mechanism has demonstrated how politicized the space of financial cooperation with China still is. According to sources quoted in the media, tensions over Britain’s stance on the protests in Hong Kong caused China to temporarily block the stock connect scheme which had just been launched in 2019 with the aim of attracting more RMB business to the UK.
The UK will continue to be a useful partner for the next stages of development of the Chinese economy: a shift to a service-based economy, the move to currency convertibility via RMB trading in the City of London and absorbing and welcoming Chinese investment. The urgent question for any British government is how the UK should attract and manage Chinese trade and investment after Brexit, at a time when both the US, the EU and Japan are hardening their attitudes against what they see as China’s predatory trade practices and COVID-19.
If the UK opts for No Deal Brexit it will affect the approaches from the EU and China. A No Deal Brexit would create new challenges for EU–China relations particularly in areas where the UK is stronger than the rest of the EU, such as financial services. Divergent policy approaches in areas such as the regulation of investment or trade agreements could also create friction between the EU and UK in dealing with China, and offer China some leverage, which would strengthen its hand in negotiations with both the EU and the UK – though attempting to use this leverage could also damage China’s relations with the EU (and the UK).
UNCTAD research in 2019 showed that the UK and its future trading partners need to think fast about signing new bilateral deals if they are to avoid the costs of the UK exiting the EU without a deal. According to the UNCTAD research, the UK market accounts for about 3.5% of global trade. In 2018, the UK was the fifth-largest importer inside the EU, letting in almost $680 billion (€600 billion) worth of goods from the rest of the world, about $360 billion of which came from other EU countries. Once the UK has left its 27 EU partners behind, it will alter the ability of non-EU countries to export to the UK market. The biggest beneficiaries of a No Deal Brexit would be countries, which now face higher tariffs, the research found.
China, in all likelihood, would be the big winner, should the UK leave the European Union without a deal. It could gain an additional $10.2 billion in exports to the UK, with the second-ranked US adding $5.3 billion to its exports to the UK. Japan could expect to gain $4.9 billion, the report found. The UNCTAD research estimated that the biggest losses would be for EU countries, as they were the most economically integrated with the UK. In a No Deal Brexit scenario, EU preferential trade agreements with third countries will just cease to apply to the UK, and imports to the UK could end up taking place on most-favoured-nation (MFN) terms, a WTO principle that the same tariffs must apply to any trading partner, unless there is an exception set out in an actual trade agreement.
From China’s perspective, the scale of the UK’s interactions with China means that the relative standing of the EU – and with it its status as a ‘major power’ in the current Chinese diplomatic approach – is likely to diminish with Brexit. The EU27 as a trade and investment partner for China will be weaker. Regardless of how EU and Chinese leaders choose to answer the questions posed by Brexit, the instability and uncertainty will not end anytime soon, especially with the negative impacts of COVID-19 on the global economy and political discourse.
Professor John Ryan is a Visiting Fellow at LSE IDEAS -London School of Economics and Political Science and a Network Research Fellow at CESifo, Munich, Germany. He was previously a Fellow at St Edmund’s College, University of Cambridge and the German Institute for International and Security Affairs, Berlin, Germany.