China fears economic fallout of Britain’s vote to leave EU

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Last year, British Chancellor of the Exchequer George Osborne promised the U.K. would be "China's best partner in the West."

London has instead become Beijing's nightmare, with a vote to leave the European Union, whose financial reverberations stand to create acute pain for a Chinese economy already struggling to maintain growth.

"Exports are now going to shrink even further. Investors are going to become even more hesitant to invest. Consumers will be more cautious on spending everywhere," said Ken Courtis, the chairman of Starfort Investment Holdings, and former vice-chairman of Goldman Sachs Asia.

He sketched a scenario where rising populism in Europe disrupts the political order, while the falling pound sterling pushes the European Central Bank to devalue the euro, even as a strong U.S. dollar tips that economy into recession.

For debt-laden China, it will add to demands for new stimulus spending.

"There's already huge pressure on their shoulders to maintain this very complex domestic transition. Now they're going to have this additional weight of the world on their shoulders," Mr. Courtis said.

"This is a huge, huge challenge for zhongnanhai – to keep China alive," he added, referring to the Chinese leadership compound in Beijing.

By Chinese standards, opposition to the Brexit vote had come loudly and persistently, including an unusually direct appeal from President Xi Jinping to the U.K. not to leave.

"China hopes to see a prosperous Europe and a united EU, and hopes Britain, as an important member of the EU, can play an even more positive and constructive role in promoting the deepening development of China-EU ties," Mr. Xi said late last year.

Wang Jianlin, the Chinese billionaire who founded the Dalian Wanda real estate and entertainment group – and who owns a London hotel and $114-million mansion – was even more blunt. "Many Chinese companies would consider moving their European headquarters to other countries," he warned. Brexit "would not be a smart choice for the U.K."

On Friday, Chinese foreign ministry spokesperson Hua Chunying said "the impact will be on all levels, not only on relations between China and Britain." She called on the U.K. to "reach a negotiated settlement at an early date" with the EU, saying "a prosperous and stable Europe is in all sides' interests."

Unlike other Asian economies, China felt a more limited immediate blow from the Brexit vote, whose results were broadcast during the trading day on Friday. After an initial shock, markets in Shanghai and Shenzhen recovered to declines of just over 1 per cent and 0.5 per cent respectively – a far cry from the 8 per cent rout in Japan.

The yuan eased slightly, hitting a five-year low, but showed more stability than other global currencies.

But in that stability lies a problem. Chinese policy makers have spent heavily to keep the yuan strong against the U.S. dollar – and a flight to safety that propels the dollar higher could make that tough.

"The worst thing that could happen for China from an economic-management standpoint is for the dollar to strengthen a lot," said Arthur Kroeber, managing director of economic research firm Gavekal Dragonomics. "That just makes it much, much harder for China to manage its own exchange rate and protect its own financial system."

The EU is China's largest export market, and any political ruptures that hit euro zone growth "obviously create a problem for China, because they're pretty exposed," he said – although such an eventuality remains long-term and speculative.

Chinese intellectuals, however, are worried. In comments to state media Friday, Cui Hongjian, the director of European Studies at the China Institute of International Studies, warned that the Brexit vote will erode the U.K.'s function as a bridge to Europe, and could also prompt the erection of more protectionist barriers around the EU.

China will also be hurt if the exit vote dims London's role as a global financial centre, which will "have some impact on the internationalization of the renminbi" – the Chinese yuan – "and the 'going-out' of Chinese capital," Prof. Cui wrote in a separate commentary with Wang Shuo, deputy director of European studies at the China Institutes of Contemporary International Relations.

Ultimately, however, the British vote could provide grounds for an expansion in Sino-U.K. trade, argued Li Daokui, director of the Centre for China in the World Economy at Tsinghua University.

"After one or two years, this will be either unimportant or slightly positive," he said, pointing to the ways the two countries can meet each other's needs.

"The U.K. and China will actually do better trade without the constraint of the EU," he said.

Brexit also stands to help China's ambitions to enhance its currency as a global standard, particularly if turbulence in Europe hurts the euro.

"My argument is that the demand for the RMB to be a balancing currency against the dollar will be stronger," Prof. Li said.

He acknowledged, however, that the immediate outlook is less rosy.

"Of course," he said, "in the short run there will be chaos."