Brexit has little direct effect on the Chinese economy although it does increase the risk of financial volatility. In the long term, it’s hard to see this as anything but a plus for China as the West continues to decline and China continues to grow.
In the aftermath of the Brexit vote, stock markets around the world crashed. The interesting exception was China: the Shanghai market fell 1% on Friday, then more than recovered on Monday. In the short term, Brexit is slightly negative as Europe’s gross domestic product (GDP) and trade are expected to grow less rapidly, and the EU is China’s largest trading partner. But the Chinese economy is simply not so export-oriented anymore. In the aftermath of the global financial crisis, the contribution of net exports to China’s GDP growth averaged around zero. China first made up for lost external demand with a massive investment-driven stimulus program. This has now led to excess capacity in real estate, manufacturing and infrastructure. As a result, investment growth is slowing down (see chart below). But China’s GDP growth has held up well as consumption is now the main source of demand. It regularly generates more than 4 percentage points of GDP growth and its contribution has followed an upward trend.
China has developed a virtuous circle in which wages are growing at a healthy pace (more than 10% over the past year), consumption is growing, consumption is mostly services, so service sectors are growing, and they are more labor intensive than industry. enough jobs are created to keep the labor market tight. There are many things that could go wrong, but sustaining consumption is the big challenge for China, not for the external sector.
Another feature of China’s new growth pattern is that there is a steady outflow of capital as investment opportunities dwindle in the country. The UK was one of the favored destinations for Chinese overseas investment, seen as a welcoming place that could be used as a starting point for the rest of Europe. Chinese companies will now have to rethink this strategy, but it shouldn’t be too difficult an adjustment. The United States has been the destination for the largest share of Chinese outward investment and this trend is likely to strengthen following Brexit.
Brexit complicates China’s monetary policy. The dollar and the yen strengthened while the pound and the euro retreated. In past global crises, China has been a source of stability, but the yuan’s fixation on Monday suggests the central bank doesn’t want to follow the dollar if it wants to keep rising. Ideally, they would like relative stability against a basket. There is still a risk that this policy will lead to an acceleration of capital outflows, so in this sense the financial risks have increased somewhat. But the central bank will likely be able to manage capital outflows so that the trade-weighted exchange rate is stable.
A UK that is no longer part of the European Union will likely be keen to strengthen its ties with China, so it may well be willing to compromise on market economy status and trade agreements. investment that a unified Europe would not have made.
Finally, from a broader geostrategic point of view, it would seem that China is the big winner of Brexit. Europe is likely to be a less influential player on the world stage and will be absorbed in the internal issues of negotiating the British exit, controlling immigration and keeping the periphery inside the eurozone. The United States also risks being distracted by these European challenges. This gives China more leeway to continue its reclamation activities in the South China Sea and play divide and conquer with European states on various issues. For example, China wants to be recognized as a market economy, which is both symbolic and practical for adjudicating anti-dumping cases. It is also negotiating investment treaties with the US and EU, although China’s offers so far have not been very attractive in that they exempt many important sectors from investment. open. A UK that is no longer part of the European Union will likely be keen to strengthen its ties with China, so it may well be willing to compromise on market economy status and trade agreements. investment that a unified Europe would not have made. Brexit itself may not be that important, but it may turn out to be a good signal of Europe’s decline and China’s rise.