China’s Brexit Dilemma

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Container ship at sea
Teaser Image Caption
Chinese Container ship at Felixstowe, Great Britain

The UK’s divorce from the EU has diminished the hope of both the British and the Chinese in placing the UK as a spring board to the whole European market. Beijing is losing its newly acquired “best partner in the West”.

The debate over the recent Brexit vote has made history in international affairs. It is very rare for China, Japan and the United States to agree with one other on issues of international politics. However, all three countries share the view that Britain’s future is in the European Union. Notably, President Xi Jinping joined other major world leaders and openly voiced that he would prefer the UK to remain in the EU. Thus, on 24th June 2016, the results of the referendum stunned the Chinese as well as the rest of the world.

The UK’s divorce from the EU has posed a dilemma for Beijing on its newly acquired “best partner in the West”. Brexit sent a strong blow for the already tumbled Chinese economy and set an imminent test to Beijing’s foreign policy strategy. It has also generated a serious challenge for President Xi’s personal governing capacity as a steady leader.

Full market access

China has been very clear on what it wants from the EU and the UK - full market access is an essential part of the EU-China relations and the foundation of the “Golden Era of UK-China Relations”. A full market access to the European Union is crucial to sustain the “L” shape of China’s economic growth, as indicated in Beijing by the so-called “authoritative insiders” at the People’s Daily.

A Brexit has diminished the hope of both the British and the Chinese in placing the UK as a spring board to the whole European market. The UK is currently ranking as the second most popular investment destination for the Chinese (Greenfield investments and M&A activities among the 28 member states of the EU). Chinese enterprises, regardless of their ownerships, have favoured the open, well-regulated and robust UK market.

In recent years, the UK has gained a full taste of Chinese investments across various sectors: from everyday consumer goods to an avant-garde civil nuclear project. No matter if it’s eating one’s Weetbix cereals or drinking tap water, getting a cab or driving one’s MG Rover to work, Chinese investments have already quietly entered the everyday life of nearly every single British household. Without the EU membership, the UK would lose its attractiveness to some of these major Chinese corporations which have already invested in the UK and those companies that intend to invest in the near future.

By all means, the UK is a market of 65 million, whereas the EU is a market of over 500 million. For some sectors where the Chinese invested heavily, such as retail, a shrinking consumer market could prove to be difficult to continue its investments in the UK. But for service sectors, it is still too early to draw any conclusions.

The UK’s departure from the EU, would make it even more difficult for China to address trade disputes between Beijing and Brussels. China and the EU have long been at odds with each other over trade and Market Economy Status (MES) issues. In particular, the MES remains a permanent obstacle to further the EU-China “Comprehensive Strategic Partnership”.

Market economy status

In Beijing’s view, granting China the Market Economy status is not only a matter of political recognition by the EU. More importantly, it would certainly be a relief to China in dealing with its long-standing issue of excessive industrial capacity. In the long run, China would have to pay a hefty price, both economically and politically, for not addressing its industrial overcapacity in time. Laying-off a large number of workers in non-performing industries will surely be a source of social discontent, which in turn, could destabilise the ruling elites of the Chinese Communist Party.

The UK, as a services-oriented economy, under both Labour and Tory governments, has long been a strong advocate for China within the EU, especially when it comes to granting it the Market Economy Status. Given the recent rejection of China’s plea in this matter by the European Parliament in May, Beijing has now lost a strong proponent of its cause in Brussels in order to overcome this long-standing obstacle.

In the long run, it would have to depend on whether China could generate greater leverage over the EU 27 member states to obtain its eagerly-awaited MES. At the moment, it is too soon to tell.

China-UK partnership

A Brexit might cast a very unexpected and dark shadow over President Xi Jinping himself. The UK is traditionally viewed by the Chinese as a colonial empire and a great power. The historical humiliation of the Opium War is still very much in the mind of both ordinary Chinese and elites. President Xi considers the so-called golden-era of UK-China relations as one of his major diplomatic triumphs since he came to power. The Chinese state media have meticulously reported on how the UK rolled out the reddest of red carpets to welcome President Xi together with other exuberant royal treatments during his state visit last October. Such exposure certainly boosted his personal image as a strong leader back home.

However, the UK’s split with the EU might also undermine President Xi's authority back in Beijing. Some senior Communist Party members may start to criticise him given the current economic slowdown in China. He could also be accused of being too focused on ceremonial matters in foreign affairs, while not paying enough attention to the ever mounting economic challenges domestically.

Perhaps, there are two lessons China could learn from the chaos generated by Brexit. Firstly, the Chinese Communist Party could see the danger of externalising internal Party conflicts, like the UK Conservative Party has done. It would only be a recipe for disaster that could damage the country, as well as generate more political uncertainties, and undermine the country’s global influence.

Secondly, Beijing has only recently shifted from the periphery to the centre of the global stage. It lacks sufficient experience in articulating its foreign policy from meeting immediate economic needs to a more wide-ranging and forward-looking policy agenda. In the case of the China-UK bilateral partnership, simply relying on investments would not automatically translate into a fully-fledged strategic partnership with London. Against the background of a Brexit, Chinese investments, the very foundation of the partnership, cannot serve as solid political capital to advance the relations between Beijing and London in the future.

China has long been keen to use corporate direct investments as a vehicle to expand its international influence. This could be seen in the earlier “Going Out Strategy” and the latest “Belt and Road” initiative.

While it seems to be a viable strategic option, some Chinese enterprises have achieved success abroad. Yet, one cannot ignore the political risks generated from a “Black Swan” event such as Brexit. The British government will likely continue to welcome Chinese investments in the UK in order to help stabilise a post-Brexit economy.

However, part of reasoning for the UK’s interests in attracting investments from China is to create more local employments and job opportunities. This particular requirement will become even more imminent to the Chinese investors in the aftermath of Brexit. And if the Chinese investors will not deliver more employment opportunities as promised, it will certainly trigger greater backlash and hostilities from both the British political elites and ordinary citizens alike.

Overall, the UK’s painful divorce with the EU would bring tremendous economic and political uncertainties to China, putting its recent engagement efforts into doubt. In the eyes of Beijing, one must avoid that a Brexit turns “the Land of Hope and Glory” into “the Land of Gloom and Disaster”. China must do its best to turn the crisis into opportunities to resolve this unexpected dilemma.

This article is part of our special Europe's future after "Brexit".