Photographer: Qilai Shen/Bloomberg

For China Economy, Brexit Seen as a Negative, or an Opportunity

  • UBS sees opportunity to strengthen the U.K.-China relationship
  • Pimco: ‘China should see this as a chance to enhance its role’

After Britain’s vote to leave the European Union roiled global markets, economists are grappling with how best to gauge the potential impact on China. Views range from downbeat scenarios such as Brexit contagion weakening the yuan or undermining exports, to optimistic ones where China emerges as a safe haven amid the storm.

Beyond the currency impact, economists are trying to untangle other issues such as whether China benefits from a likely delay of U.S. interest rate hikes, how it will respond to market turbulence, and whether the domestic economy and capital flows will suffer.

Here’s what some China watchers are saying:

‘Bad News’

David Dollar, a senior fellow at the Washington-based Brookings Institution who previously was the U.S. Treasury attache in Beijing and World Bank country director for China:

"Brexit is bad news for China, but I would not exaggerate the impact. It ushers in a period of more uncertainty in the global economy and probably slower growth, and that will affect China through trade. In addition, China had bet on the U.K. as the best entry point into the European market, and that no longer looks like a good bet. But China’s economy is primarily driven by domestic consumption now, so the effects will not be that great."

"Probably China will use a bit more stimulus, especially credit for real estate and other investment, to maintain its growth. I would expect the trade-weighted yuan to rise as other parts of the world face more headwinds than China faces. China’s large capital outflow is likely to continue."

’Capital Outflows’

Arthur Kroeber, the founding partner and managing director at research firm Gavekal Dragonomics.

"The only major impact that we can identify is on the currency. To the extent that Brexit triggers a broad-based dollar rally that’s sustained, that makes management of the exchange rate harder. If the dollar goes up a lot then Chinese corporations have a lot more incentive to hold dollars rather than renminbi. They would start to shift money one way or another from renminbi into dollars, and that gets recorded as a capital outflow. Then in order to maintain the exchange rate the People’s Bank has to spend reserves."

"If you are spending them at a $100 billion a month as they were at the peak in January and February they probably have about six months of spendable reserves before they get to a point where they say it’s not worth it any more. Based on what we’ve seen so far it doesn’t seem like the Brexit outcome is large enough to make that a high risk in the next month or so but who knows?"

‘Dramatic Moves’

Luke Spajic, head of portfolio management for emerging Asia at Pimco in Singapore:

"The more worrying factor is global demand, especially with export demand falling off so dramatically over the last year. The currency has weakened notably in the last few months. We expect currency weakening to continue. Chinese policy makers are very keen on suppressing volatility, so dramatic moves in global markets will be met with a response to dampen the moves."

"China should see this as a chance to enhance its role as a global team player, looking to coordinate with other policy making peers in terms of liquidity provision and elevated dialogue."

‘New Pressure’

Kenneth Courtis, former Asia vice chairman at Goldman Sachs Group Inc. and now chairman of Starfort Holdings:

"Exports are going to weaken, because all the rest of the world, major markets, are going to weaken. That’s going to put huge new pressure on China’s broad economy, the manufacturing sector. The People’s Bank of China is going to have to adopt even easier monetary policy. If Japan devalues, what will Korea do? Will they sit on their hands? What will Taiwan do? Will they sit on their hands? We’re facing a radioactive economic and political chain reaction."

‘Black Swans’

Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance:

"The value of China’s foreign-exchange reserves just dropped significantly. If the euro devalues along with the pound, the renminbi will also be under pressure. Brexit also shows that it’s hard to anticipate black swans as China’s technocrats try to do. They had been preparing for a Fed rate hike, but a somewhat different shock hit which may require a different response."

‘Safe Haven’

Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist:

"The People’s Bank of China ought to let the renminbi depreciate with the dollar. That was the whole point about adopting such a basket reference regime, to cope with situations like this one. I’m personally unconvinced that global trade or growth would be undermined by Brexit. Asset prices might come under pressure, but central banks might take coordinated actions to counter this. I actually think China could be the safe haven."

‘Contagion Hurts’

Geoffrey Yu, a London-based currency strategist at UBS Group AG:

For China, the U.K vote will have "a lot of downside if market contagion hurts emerging markets further, through FX transmission or other channels."

Brexit creates an opportunity to strengthen the U.K.-China relationship, "and Britain will be keen on securing favorable trade deals post-exit."

‘More Protectionist’

Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA in Hong Kong:

"China’s growing strategic relation with the U.K. was mainly to enter the rest of EU." Now that’s no longer possible, and even counterproductive. "This is the first and most immediate impact for China. The most lasting and important one though is that Europe will become much more protectionist without the U.K., especially versus China."

‘Some Hiccups’

Raymond Yeung, a senior economist with Australia & New Zealand Banking Group Ltd. in Hong Kong:

The vote won’t "affect China’s economic outlook immediately. However, as corporates in the U.K. and Europe start to re-engineer their business models, the economic impact will start to bite, resulting in some hiccups to the global supply chains."

‘Breathing Room’

Wei Hou, an analyst with Sanford C. Bernstein in Hong Kong, wrote in a research note:

"Financial market turmoil created by Brexit will slow (or possibly even reverse) the interest rate hike cycle in the U.S. Over the next few quarters, this will reduce the liquidity drain pressure on China from an renminbi devaluation perspective. If this is the case, then the Chinese government can focus more on domestic issues and on pushing reforms as they have promised."

— With assistance by Kevin Hamlin

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