The Brexit vote has spooked financial markets across the world.
Investors are stunned by the outcome, but there is nothing much they can do except keeping an eye on the unfolding developments.
Many people made a mistake in thinking that public opinion elsewhere in the UK would be similar to that in London. The answer is definitely no.
The older generation of Brits believes their country will be better off on its own, rather than in a partnership with the EU. They still look down upon other parts of Europe, especially the southern European nations.
The UK will kick off negotiations with EU over the next two years on issues related to its withdrawal.
Amid the uncertainty, capital is fleeing from the UK and flooding into safe-haven assets such as the US dollar, Japanese yen and gold.
Emerging markets will also be affected, in particular the local currencies. China’s yuan will be among the units that will face some short-term pressure.
Brexit may encourage some other European nations to follow suit, giving rise to the risk of the EU falling apart.
The sterling currency is likely to experience sustained volatility in the long run.
The UK will no longer serve as the gateway or springboard for accessing European markets, and global companies and investors may rethink where they should put their money.
The Hong Kong market may see more aftershocks as many local firms have direct exposure to the UK.
China’s A-share market will be less affected, though it will face some pressure along with the rest of the global bourses.
In fact, the direct implication of Brexit on the real economy in Asia is fairly limited, apart from pressure on local currencies. Investors might dump the British pound and withdraw capital from Asia, feeding the volatility in the currency market.
The UK is in much better shape in terms of economic strength than it was a few years ago. Brexit is aimed at removing the burden of various restrictions imposed by EU.
Britain has outperformed many EU nations in economic growth. However, it has to pay massive fees to the EU each year, and faces various constraints in economic and financial policies.
Against this backdrop, leaving the EU was seen as a quick solution by a majority of the voters.
Brexit will help the UK get rid of financial restrictions from EU, and can even help the nation enhance financial cooperation with China.
The UK has already become the second most popular destination for Chinese investors after Italy.
Chinese President Xi Jinping signed deals worth over 40 billion pounds during a trip to the UK last October. It remains to be seen how these projects will fare in the wake of the Brexit vote.
Britain and China have had good economic and trading ties in recent years. The UK is China’s second largest trading partner within the EU, and China is also Britain’s second largest trading partner.
The UK has been playing an active role in hi-tech cooperation sought by Chinese companies. In the future, the companies may have to negotiate directly with EU members.
In that sense, the UK’s role as the gateway to Europe might diminish as it leaves the EU. However, the country might need China more after Brexit and could offer even better terms for Chinese companies.
This will benefit China’s strategy of using London as a key center to internationalize the renminbi.
Meanwhile, it remains to be seen how global investors will view A-shares after Brexit.
As of now, the US dollar, Japanese yen and gold are being seen as safe havens, rather than China’s currency or A-shares.
This article appeared in the Hong Kong Economic Journal on June 27.
Translation by Julie Zhu
[Chinese version 中文版]
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