China: Supporting the UK after Brexit

Published on June 27, 2016

Key Takeaways:

China will maintain RMB stability in the near term wake of the Brexit aftershocks, and coordinate any G20 response;

The PBoC has been authorized to buy an undisclosed amount of pound sterling after it dropped below $1.40 to the pound;

Beijing will maintain if not enhance its presence and commitment to the City as well as to investments and a potential bilateral FTA with the UK.

Early Sunday morning, before Premier Li Keqiang headed to Tianjin for an inspection tour and a speech at the Summer Davos Forum, President Xi Jinping chaired a 40-minute Central Financial Leading Group meeting in Zhongnanhai to review China’s response to the stunning Brexit election results.

The leaders stressed that the result of Brexit is a “lose-lose” situation for all involved, but they believe Brexit will weaken the EU more than Britain in most fields, especially in the economic and political spheres. They believe Brexit has no direct impact on China, but its indirect impact could appear gradually.

*** As Chair of the G20, Beijing will look to play a strong and constructive role in coordinating G20 member states’ response to “Brexit” and financial markets, including at the G20 Finance Ministers and Central Bank Governors meeting in Chengdu on July 23-24. From a domestic perspective, the leadership sees no need to loosen monetary policy immediately to counter Brexit risks, and the PBoC will keep existing monetary policy unchanged. However, China will take all necessary measures to prevent its financial market from plunging if the contagion becomes worse. ***

*** In the long run they expect China has more to gain than to lose on Brexit, and the leaders pledged to keep the commitment that was made between Xi and Prime Minister David Cameron last October where Cameron claimed the UK could be China’s best partner in the West, and the leaders heralded the entry of Sino-UK relations into a “golden decade.” And Beijing has confidence it will maintain equally good relations with the next UK government, whether led by London’s ex-Mayor Boris Johnson or others as Cameron’s successor. ***

Indeed, while markets are anxious over the City of London’s status as a financial center with the likely eventual loss of its “passport” rights with the EU post-Brexit, Beijing will maintain if not enhance its presence and commitment to the City as well as to investments and a potential bilateral FTA with the UK.

Eight Points from the CFLG Meeting

The meeting endorsed the following specific measures to be taken as suggested by the State Council:

1 – As a responsible major country and host of the G20 2016, China will maintain the stability of its own currency. The PBoC should take all necessary measures to ensure the RMB remains relatively stable in the spot market.

2 – The PBoC is authorized to exchange an undisclosed amount of USD for Pound Sterling with GBP trading below $1.40.

3 – China will continue to encourage its financial institutions to expand business in London and will continue supporting London as one of two most important global financial centers, and especially as the largest market for foreign exchange trading in the world.

4 – China will continue supporting London as the West’s largest offshore RMB centre. The Ministry of Finance (MOF) will continue issuing RMB sovereign debt in London after its first 3-billion-yuan government bonds was issued last month; and the PBoC will continue issuing offshore RMB bonds in London after its first offshore 5-billion-yuan bond issued was last October.

5 – China will still favor London over Luxembourg or Frankfurt as the Asian Infrastructure Investment Bank (AIIB) European branch office in the future.

6 – China will encourage domestic enterprises, especially SOEs, to take appropriate measures to fill in the vacancy in the UK, especially in London, if investors from Continental Europe and the US withdraw or shrink their business.

7 – China would be pleased to see Frankfurt, Luxembourg and Paris also expand and develop their RMB business, and will remain neutral on which one of these should be the largest offshore RMB centre in Continental Europe.

8 – The NDRC, the Ministry of Commerce, and the Ministry of Foreign Affairs should prepare to discuss the possibility of a Sino-UK free trade zone with the next British Government later this year. China will encourage and hold a positive view towards a bilateral Sino-UK FTA

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