How Will Brexit Impact China's Growth?

| About: iShares China (FXI)

By Rupert Hargreaves

There has been plenty of talk about how Brexit will impact the European economy, the US economy, and the British economy going forward but one angle that hasn't been discussed in depth is the impact Brexit will have on China's economy.

The UK has made a special effort to increase trade with China over the past decade, and the two nations have some world-leading trade links. The UK has also seen a substantial influx of Chinese capital as Chinese businesses buy into the country's economic growth story (or brought into).

In monetary terms, however, it's unlikely China will face any serious direct economic headwinds from Britain's decision to leave the European Union. UK exports only account for 3% of China's total exports. The European Union, excluding the UK, accounts for 13% and the US accounts for 18% of the country's exports - that's according to a flash research note from China's CIMB.

How Will Brexit Impact China How Will Brexit Impact China's Growth?

The direct impact of Brexit on China's growth is expected to be restrained, although the country may feel the economic effects of Brexit indirectly.

How Will Brexit Impact China's Growth?

One of the key themes Chinese economic policymakers may now become concerned about is the increasing trend of de-globalisation and nationalism. Further moves by other countries to cut themselves off from the outside world will hurt large exporters like China.

It's possible the increasing desire for de-globalisation hurts not only trade but also investment, politics, currencies and relations. Chinese investments in the UK may be impaired due to the loss of the UK's Europe entry point status. Moreover, there is a chance China-EU relations could face pressure as China has a relatively closer relationship with the UK. Unless there is a sudden switch by Chinese policymakers and desire to quickly foster even closer relations with Europe, it's highly likely the China-UK relationship will remain stronger than the China-Europe relationship for some time to come.

The fourth and possibly most concerning impact Brexit could have on China is its impact on the Chinese yuan. A strong dollar - a direct result of haven flows following the Brexit vote - is already placing increasing pressure in the RMB.

Weak yuan

The offshore yuan slumped by the most in five months directly after the outcome of the referendum was published on Friday last week, and yesterday, the People's Bank of China set the midpoint around which its currency can trade at the lowest level since December 2010.

The weakening of the RMB is possibly a story of equal gravity to that of Brexit. When the PBoC devalued the renminbi against the dollar, it sent financial markets around the world into a tailspin and hedge fund managers around world claimed that the next financial crisis was just around the corner. The PBoC initially defended attacks against the currency with a massive liquidity injection and hike in the rate on overnight yuan loans.

Disclosure: None