China and the UK’s EU membership: questions beyond the referendum

Despite the increasingly important UK-China economic ties strong Chinese opposition to ‘Brexit’ has been ignored

N-Leveringhaus-100Whilst President Obama publicly weighed into the referendum debate in the UK, offering a strong defence of the UK staying in, we know little about what other states, including emerging powers like China and India, think. This is surprising – the ‘Leave’ campaign has made much of the potential to develop a more rewarding economic relationship with emerging markets especially China, but where is China’s voice in this debate?  The UK media, and both sides of the EU campaign have largely failed (with the odd notable exception) to provide much insight into China’s perspective.  This neglect is all the more surprising because China has, within its own media, been quite vocal, and unusually so, on this topic.

What does China think?

China’s position is clear: they are not happy about the prospect of the UK leaving the EU. In October 2015, President Xi Jinping personally stated that he is not keen on the UK voting to leave, and major Chinese business leaders have consistently supported this view into 2016.  Brexit would, from China’s view, not just reduce British global influence but also, in the short-term, directly hit Chinese profits and investment potential (China now owns a number of British brands like the London Taxi Cab and Thames Water, among others) and in the longer term, indirectly weaken China’s relationship with the EU.

Of the concerns above, the hit to Chinese business and indirectly weakening China’s relationship with the EU constitute the two key concerns that worry Beijing the most. Under the majority led-Cameron government since 2015, and prior to that the Coalition government, China has increasingly come to see the UK as a gateway or bridge in its economic relationship with the EU (excellent analysis of the Chinese position has been provided by Yu Jie here and here)  With the UK voting to leave, China might lose influence within the EU.

Sovereignty and migration are not issues that have come up in the Chinese view of ‘Brexit’. This is unlike the Scottish referendum in 2014, which China saw as a damaging event to UK sovereignty and unity.

What is the likely immediate short-term effect of Brexit for Sino-UK relations?

The UK, and the British Treasury in particular, have been working hard to secure a stronger economic relationship with China. For instance, China has made London its primary renminbi (RMB) offshore trading point.  More recently, in October 2015, Xi Jinping paid a state visit to the UK, leading to trade deals and the potential investment of £40 billion, including Chinese capital behind a new nuclear power plant at Hinkley Point.  The status of this nuclear energy project should Brexit occur is unclear (especially as the main construction company for the plant is French owned, and has already delayed its own involvement on the project).

Possible post-Brexit scenarios for Sino-UK relations might be:

  1. China pulls capital out of London, and transfers the RMB offshore trading point from London to Frankfurt.
  2. To prevent the first scenario occurring, the UK rushes through exemptions and generous incentives for Chinese student and business visas to the UK, as well as opening up attractive strategic industries for investment. These industries might include agriculture and incentivising China to continue to play a crucial role in building a ‘Northern Powerhouse’ in the UK.

What are the prospects of a ‘special deal’ with China post-Brexit?

This is uncertain as the UK does not have a trade deal with China, but China is currently negotiating a bilateral trade deal with the EU, and thus any future deal with the UK, might be (using Obama’s terms) pushed to the ‘back of the queue’.

Crucially, unlike the US, the UK does not have a ‘special relationship’ with China on which to fall back. The UK has a rather chequered and problematic trading history with China (two Opium Wars in the 19th Century, initiated by the UK against China, and the British occupation of trading ports in China, such as Hong Kong).

Today, the UK needs China far more than China needs the UK in economic terms. The Chinese are well aware of this. According to a recent UK Parliamentary report published in November 2015, China is the 7th largest export market for the UK, and 3rd largest import market and the UK has a £19.6 billion trade deficit with China.  Thus, the incentives for China to enter into an economic deal with the UK will be need to be extremely attractive not just in economic terms, but also possibly in political and strategic terms – perhaps relating to the movement of people (including easier and cheaper visas, more property rights in UK cities), and opening up strategic industries to China (agriculture is a likely sector of interest to the Chinese).

If the UK were to enter into such a deal, would the UK be comfortable with greater reliance on Chinese investment as an alternative to the EU common market? What would this greater reliance mean in terms of migration debates in the UK, the future of the British education sector and property development in London and other UK cities?

Why China’s view matters

The UK has developed important economic ties with China. A vote to leave the EU would put these ties at risk. Whilst China is adamant that the UK should remain in the EU the UK media and both sides of the referendum campaign have unfortunately pretty much ignored any serious analysis of the Chinese position.  This is a shame.  The referendum is a choice for the British public, yet the public haven’t been presented with the full views of powerful international countries. In a globalised world, any referendum, but especially this one, will have not just domestic, but international consequences.  With two days to go, perhaps it is time to listen to Beijing.