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Dear friends and colleagues,
A strange weekend here in London…
Beijing and Brexit
Inherently conservative, China had voiced its opinion that Britain should stay in the European Union when Xi visited London last October. But now that Britain has decided to leave the EU the Chinese leadership will do everything they can to make the most of the new situation.
From an economic perspective, the first priority is making sure that the inevitable volatility in global markets does not spill over into China. Market reaction within China has so far been mild, with the Shanghai and Shenzhen stock exchanges losing little Friday, in stark comparison to the large sell off in American, European and Japanese markets. Finance Minister Lou Jiwei sounded unperturbed, and called the market reaction elsewhere “excessive”.
Of more concern will be the impact on the currency, but here I expect that, on balance, Brexit will be a welcome development. The reason is that it allows the authorities to let the currency weaken in the near term (the RMB hit a five-year low against the dollar Friday) without eliciting the attention (and panic) that we saw in August last year and again in January this year. But, even better for Beijing, in the medium term Brexit means that another Fed hike is now extremely unlikely this year, meaning depreciation pressure going forward will likely be mild.
A strategic gift
Strategically and diplomatically it is hard to see how Beijing would not view Brexit as a positive development. Some commentators have argued that Brexit hurts China’s Europe strategy, but this is doubtful. The Chinese were happy to leverage the UK’s desire in recent years to garner good relations with China, but they have always known that Germany is the key to Europe, and they have focused resources and strategy accordingly. It is true that the UK was more sympathetic than others in the EU to granting market economy status to China, but the UK’s absence will not be decisive in that decision.
It is more likely that Brexit helps to strengthen Beijing’s bargaining position with the UK and the EU as both focus on limiting the fall out at home; the last thing they want now is tension with Beijing.
Beijing also sees weakness in Europe as a gain for China in terms of relative power. As a top researcher at influential think tank CICIR said, “Brexit is a crack in the Western alliance… so it’s not necessarily a bad thing for China.” I expect many within Zhongnanhai feel the same.
Further proof that the CCP knows best
For the Party, the biggest gain from Brexit will be the way in which it helps to bolster the Chinese political system and the CCP’s legitimacy. Brexit will likely mean more economic hardship in Britain and the EU, and further political and societal tension. Beijing has already been doing a good job of using Trump and the rise of right-wing parties in Europe as examples of the deficiencies of Western capitalist democracy. Brexit will be used to reinforce this message.
China Politics Weekly aims to keep business leaders, investors, diplomats, scholars and other China hands up to date on important trends in China. It is produced by Trey McArver, a London-based consultant providing advice and intelligence to firms and investors engaged in China and the region. You can find out more about Trey and CPW in this interview.
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