The impact of Brexit on China

China has expressed serious concerns on the effect Brexit may have on global markets.

The referendum in which British voters opted to leave the European Union, “will cast a shadow over the global economy … The repercussions and fallout will emerge in the next five to 10 years," China’s finance minister Lou Jiwei said at the first meeting of the Asian Infrastructure Investment Bank (AIIB) in Beijing. 

A weakened yuan

With all major currencies except the dollar and the yen plunging in the wake of the British vote, pressure grows on the People’s Bank of China to also let the Chinese yuan weaken. But if the gap with the dollar becomes too big, capital outflows speed up again.

The ‘Brexit’ decision has heightened uncertainty for markets and “will cast a shadow over the global economy,” China’s Finance Minister Lou Jiwei said Sunday. “It’s difficult to predict now. The knee-jerk reaction from the market is probably a bit excessive and needs to calm down and take an objective view," Mr Lou said.  The impact will take months if not years to play out. In the near term, the most immediate impact on China will be in financial markets.

A hopeful face

On the day after the UK vote to leave the European Union, China’s central bank issued a brief statement, saying it has plans in place to withstand any shock from the ‘Brexit’ vote.

International Monetary Fund Managing Director Christine Largarde called the statement “very helpful and very reassuring.” Speaking at the IMF headquarters in Washington on Friday, Zhou Xiaochuan, governor of the People’s Bank of China, also said China is in talks with the IMF, global central banks and other authorities to “safeguard financial market stability.”

UK/China relationship

The Brexit vote also threatens to redefine Britain's growing financial services relationship with China, which has agreed to a number of joint projects as part of the China-UK Economic and Financial Dialogue (EFD) program to deepen economic ties between the two counties, based largely on the UK's membership of the EU.

Last year, the British government and China's Vice Premier Ma Kai announced plans to launch a London-Shanghai equity trading link, a mutual recognition scheme for distributing funds products, cooperation on cross-listing exchange products, measures to "cement" London as a yuan clearing hub, and a commitment on the part of several Chinese financial firms to set up bases in London - in addition to strategic Chinese infrastructure investments.

The UK Treasury said last year's agreement ushered in a "golden era" for relations between the two countries. But these projects are now in doubt amid uncertainty over the UK's future access to the EU single financial market, said sources and consultants.

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Sources:  Reuters, The National, The Wall Street Journal