Article / 15 June 2016 at 15:00 GMT

Brexit: China is a UK friend, but only with an EU 'benefit'

Managing Director / Asia-analytica Research
  • For China, Britain is a friend with benefits – EU benefits

  • Brexit would end London’s ability to mobilise support for China in the bloc.

  • Beijing might consider re-carving the renminbi pie in the event of a “leave” vote


London has been wooing China for some time as this handshake between chancellor George Osborne and ex-Chinese vice premier Wang Qishan in 2011 shows. Photo: WikiCommonsMedia

By Pauline Loong

London almost had it in the bag. After months of assiduous wooing by the Cameron administration, China finally chose London’s fledgling renminbi market to debut its first ever offshore Chinese currency sovereign bond.

But a Britain outside the EU would upend this new cosiness – possibly leading Beijing to recalibrate its strategy of giving London a head start in the scramble for pole position for China’s offshore renminbi business and redefining the much-vaunted “golden decade” in bilateral relations.

Not that Beijing would want a change.

It has invested heavily (literally and metaphorically) in its new British strategy. The decision to use the City for China’s modest RMB 3 billion ($457m) test-drive issue last month is more than just a commercial decision on London’s importance as a global financial centre.

London is now a friend with benefits – EU benefits.

Britain’s apparent willingness and ability to push Beijing’s goals on trade and promote international use of the Chinese currency in the 28-member bloc are major considerations for China in giving London a head start in the scramble for offshore renminbi business.

It helps that the Cameron administration has been toning down its criticism of China’s human rights records and distancing itself from the Dalai Lama whom Beijing deems a separatist.

But all that is secondary to its ability to be an effective partner for China in the EU.

Crucial to the new “special” relationship is a London that is firmly rooted in the European Union. Chinese president Xi Jinping said so in as many words in his high-profile visit to Britain last October – that he “hopes Britain, as an important member of the EU, can play an even more positive and constructive role in promoting the deepening development of China-EU ties."


What China wants from its UK relationship is a spearhead for making its case throughout the European Union and specifically Brussels for market-economy status. Photo: iStock

How do I love thee? Let me count the ways

Let’s start with trade. Britain has been a prominent supporter of Beijing’s push for market economy status in the EU.

Classification as a market economy is important to China. It affects how Chinese firms are penalised in anti-dumping cases. China has the most anti-dumping complaints brought against it by the US, the European Union and, collectively, worldwide.

Market economy status would make it more cumbersome to bring anti-dumping complaints effectively lowering barriers to China’s EU exports.

The current mood in the EU is to maintain the status quo. Just last month, the European parliament passed by an overwhelming majority a non-binding vote against recognising China as a market economy. A formal proposal on the issue by the European Commission, the EU’s executive arm, is expected later in the year but must be approved by the European Parliament and EU governments.

Brexit would end London’s ability to mobilise support for China.

Last year, the EU imported twice as much from China as it exported – pushing the bilateral deficit up to €178 billion or more than $200 billion.  The EU is a key market for China. The $17 trillion economy is often neck and neck with the US as the biggest buyers of Chinese goods. Last year, it accounted 16% of China’s overseas sales compared with the US at 18%.

Saying it with loads of renminbi

Then there is renminbi globalisation. And Britain has again proved itself most enthusiastic.

Britain took the lead in 2014 in being the first foreign sovereign issuer of debt denominated in the Chinese currency. Last year, it helped deliver a diplomatic coup for Beijing by breaking ranks with its EU allies to join the China-led Asian Infrastructure Investment Bank. That move arguably started a scramble by other once-reluctant European nations to follow suit.
And the British have been highly vocal in supporting China’s bid for reserve currency status for the renminbi in the IMF, which ended well.

Last month, China reciprocated by choosing London for the launch of its first offshore renminbi-denominated sovereign bond outside of Hong Kong. (Hong Kong operates under the One-Country-Two-Systems arrangement which allows its markets and financial institutions to claim offshore status.

But as Brexit voting nears and British public sentiment remains divided on the issue, the headache for Beijing is not just the loss of London’s ability to mobilise support for China in the EU should it leave the bloc but the longer-term impact on the City’s position as a major financial centre in terms of effectiveness in promoting the renminbi.

Renouncing membership would mean that British banks, brokerages and financial markets would become foreign financial institutions and treated as such under EU laws and regulations. London could lose its current quasi-monopoly role as the financial centre through which EU forex transactions are generally routed.

It is far from certain that Beijing could mobilise enough German speakers in its ranks to make a smooth transfer of its financial business to Frankfurt. Nor is it likely that German Chancellor Angela Merkel, who grew up in the communist-ruled state of East Germany, would be as easy to woo as British Premier David Cameron.

China can only hope that latest polls putting Brexit supporters in the lead are wrong.

The UK wants Chinese money and investment but if it turns its back on the EU,
China may well turn its back on London. Photo: Martin O'Rourke

— Edited by Martin O'Rourke

Pauline Loong is managing director of Asia-analytica Research

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