Date
30 March 2017
Southbound trading on Shanghai-Hong Kong Stock Connect attracted 5.7 billion yuan (US$857.3 million) on June 24, a day after the Brexit vote. Photo: Internet
Southbound trading on Shanghai-Hong Kong Stock Connect attracted 5.7 billion yuan (US$857.3 million) on June 24, a day after the Brexit vote. Photo: Internet

Here’s why China is untouched by Brexit — for now

China’s A shares defied a sell-off in global stock markets after Britain’s vote to leave the European Union.

The Shanghai Composite Index, the Shenzhen Composite Index and the Growth Enterprise Market rose 1.45 percent, 2.27 percent and 3.03 percent, respectively, after the referendum.

Also, money keeps flowing to the Hong Kong market.

Southbound trading on Shanghai-Hong Kong Stock Connect attracted 5.7 billion yuan (US$857.3 million) on June 24, a day after the Brexit vote, and 4 billion yuan on June 27.

Mainland investors have been little affected by the result.

Interestingly, June 24 is the first anniversary of the Greek debt crisis.

This time last year, investors were nervously watching negotiations on a new bailout package and many thought it was the beginning of the end after Greek voters rejected it in a referendum.

A year on, investors have largely forgotten it. They have seen a number of “black swan events”, or periods of extreme uncertainty, in the past 12 months, including China’s market crash, yuan devaluation, the oil price collapse and, finally, Brexit.

There is an increasing number of unexpected shocks in the market as the world economy becomes more integrated and the financial structure gets more complex.

But investors have learned to keep calm in the face of uncertainty.

In fact, some believe Brexit might play into the hands of China, as happened in the Sept. 11 terrorist attack in the US in 2001.

Firstly, Brexit would benefit China’s external trade.

The UK has been moving in the opposite direction against other EU countries on trade. It is keen to cooperate with China while the rest of Europe watches from the sidelines.

Meanwhile, the unexpected Brexit would cause great turbulence in the UK and continental Europe. Neither would want to risk losing a trading partner like China.

If China manages to cement its economic and trade ties with Europe, it would gain more bargaining power with the US.

Secondly, the US is unlikely to hike interest rates anytime soon in light of market turmoil after the Brexit.

The surging US dollar may weaken over the short term, easing pressure on Chinese yuan.

Also, the status of the euro as a major currency may be hurt by Brexit, which would indirectly result in a bigger role for the yuan.

On the flip side, Chinese exports might suffer if Europe’s economy faces more uncertainty going forward.

The biggest “black swan” for China is itself.

For example, the country faces various risks including a faltering economic reform, a deepening debt crisis, prolonged industrial overcapacity and social unrest.

Any one of these factors could have a more severe impact than Brexit.

This article appeared in the Hong Kong Economic Journal on June 28.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

JZ/DY/RA

Hong Kong Economic Journal columnist

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