What will Brexit mean for Chinese investment to the UK?
With the decision on whether the UK stays part of the European Union approaching fast, there is a lot of speculation surrounding the outcome of the referendum.
With politicians arguing between themselves, the majority of the population is mainly focussed on the benefits and consequences.
Foreign investors are also concerned with the effects this vote will have on their investments.
The UK is constantly competing for its share of the Chinese external investment flows from both the government and private sectors but the Brexit vote makes it look less attractive compared to other countries, in particular the USA.
With news outlets focussing on the core arguments of immigration control and sovereignty/nationalism, foreign investors will have to take a medium term committed view on their investment strategies.
However what is likely to happen is that there will be stagnation in investment decisions which could last for 3 months or more until clarity is reached on the Brexit outcome. The one thing markets hate more than uncertainty is perceived uncertainty.
Exchange rates are a factor
With the Chinese economy slowing down and an increased risk of devaluation of the Yuan, finding an appreciation currency is what investors want and the Brexit as the possibility of affecting the GBP rates.
After the 23rd June things will be clearer with currency markets stabilising with an “in” vote although we can only speculate about trends after a “leave” vote although increased volatility should be expected.
The use of financial instruments such as currency swaps would be a great solution to mitigate investment risk from a weakening GBP. This type of proposal was refused due to the fact that Chinese/foreign investors do not want to purchase complicated structures that require advisors to help explain, they prefer direct and simple products with a clear return on investment.
If needed the large international Chinese companies will adopt active management of the assets and liabilities however the small to mid-sized investors have yet to gain confidence in such products.
The UK depends immensely on the free-trade with EU countries. To prevent the disruption to the trade flows in Britain, the country must negotiate agreements with the EU and with non-EU countries including the US, India, China, Japan and Australia.
The UK needs to be able to trade with the rest of the world in the same affective way as it did with Europe, otherwise it will struggle to negotiate the same access for goods and services, causing foreign investors to restrain on investing in a fragile economy.
As previously flagged, the one thing the markets hate more than uncertainty is perceived uncertainty. A concern in global financial markets is the possibility of a sudden outflow of money from the UK, foreign investors could stop lending to Britain in the short term, choosing to wait and see at a time of upheaval.
This could make the country’s current account deficit of 5 per cent of national income difficult to finance.
For China, the lack of cultural and political ties with Britain makes it more prone to view it has as little more than part of a larger European trading bloc. It will be interesting to see once that connection is broken, if the UK will still be able to attract Chinese inventors to invest in the country.
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