Brexit would hit China's plans for yuan

Added 21st June 2016

China does not want Britain to leave the European Union for a variety of reasons, analysts said.

Brexit would hit China's plans for yuan

A Brexit would slow or derail the global adoption of the Chinese yuan, according to Conita Hung, director at Amicus Asset Management.

The China Foreign Exchange Trade System, a subsidiary of China’s central bank, recently announced plans to open a London branch as a means to expand its network offshore.

“London is a crucial part of China’s strategy for internationalising the yuan, as it is the second largest offshore centre for yuan trading after Hong Kong. This means if Britain departs from the European Union, its yuan trading hub in London would  have less impact in Europe,” Hung said.

The internationalisation of the yuan is a top priority set by the Chinese government. Wider global adoption would allow Beijing to issue debt in yuan outside China and could therefore significantly drive the usage of the currency, she said.

EU market access

Market access to the European Union is key to stimulating China's economic growth, according to Steven Leung, executive director at UOB Kay Hian. Many Chinese businesses have put their European headquarters in the UK, using London as the EU entry point.

“Britain gives China access to the significant but hard-to-penetrate European market,” 

If a Brexit occurs, it would disrupt those plans and perhaps force businesses to relocate to Europe and negotiate separate market access deals, Leung said.

Britain and China have been strengthening their bilateral partnership, which has resulted in strong growth in trade and investments. But the uncertainty over Britain’s continued membership of the European Union is casting a shadow over the relationship, he added.

The potential impact on investments going into China is relatively small, Leung said.

The concern is that other EU countries could follow the lead of the UK and opt to exit the union. “If the UK leaves the EU, and it proves to have less impact on the UK economy than expected, other major players in the union may follow the move. The EU would then collapse and this would have a very big impact on global investment sentiment.”

Brexit too close to call

Vontobel Asset Management chief economist Christophe Bernard said the outcome of the 23 June referendum is difficult to predict. Opinion polls fluctate often and the latest poll shows a significant swing in favour of “leave”.

Over the last couple weeks, the pound has weakened and global equity markets have lost between 3% and 8%, he said.

“It is fair to say that until recently, Brexit was considered highly unlikely. It would represent a nasty surprise to policymakers and investors, even taking into account recent market weakness,” Bernard said.

If it were not for Brexit risk, the macroeconomic backdrop would be more favourable toward risky assets, with a stabilisation of global growth, receding stress across emerging markets, accommodative monetary policies and, crucially, early evidence that corporate earnings are starting to stabilise, he said.

Conversely, safe government bonds are starting to discount the chance of an economic depression, which is highly unlikely, even in case of a Brexit, he added.

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