Gavin Devine and Grace Zhang chart the possible next steps for Brexit and examine its impact on Asia’s investment community
On 24 June Britons awoke in a strange new world. One in which they had decided after forty or more years to turn their backs on the warm embrace of the European Union. One in which they had agreed to strike out on their own, regaining a lost sense of identity and nationhood. And one in which they would be more open, more entrepreneurial, embracing a mercantilist attitude from the past.
Or was that actually what they had decided? The Leave campaign included liberals who believe in free trade and open migration, conservatives wanting to regain Britain’s sovereignty from Brussels, people from deprived communities concerned about immigration and its impact on public services, and at the fringes extremists and populists with unpalatable views. They all wanted different, and sometimes incompatible, things from Brexit. So the detail of what was decided in the referendum was not clear.
The Prime Minister, David Cameron, bought time by resigning immediately and saying that negotiations with Brussels should not start until a new Conservative leader and PM was in post. The race to succeed him began immediately. The early front runner, former London Mayor Boris Johnson, has already fallen foul of Leave’s lack of homogeneity: by saying the UK could stay in the Single Market and accept free movement of labour he offended his own side, and was pushed aside. For now it seems most likely that Home Secretary Theresa May will become Tory leader and Prime Minister in a few weeks’ time.
Political turmoil afflicted other institutions too. The Scottish Government, led by the SNP, argued that Scots had voted to Remain and should not be made to leave the EU against their will. There was talk of another referendum on Scottish independence, although with economic difficulties looming and no certainty of success, the SNP leader Nicola Sturgeon will tread very carefully. Labour MPs used the referendum result as a chance to turn on their leader, Jeremy Corbyn, who they revile despite him being loved by the rank-and-file of the Party. At the moment he is hanging on despite huge pressure to quit.
Ripples spread far
Brexit’s ripples have spread far beyond British shores and heightened market uncertainty in Asia. While Japan has been affected by worries that a stronger yen would negatively impact future earnings, China is seen as one of the least impacted economies given its relatively shallow bilateral trade and investment ties.
However, a closer look suggests that China is also exposed to the global economic and financial volatility that will emerge. During Xi’s visit last year, Beijing signed trade deals worth around $60 billion to use London as the first international financial center to launch RMB-dominated sovereign bonds, but it may now start to develop a contingency plan involving an alternative site, in case the mutterings from banks about moving certain operations out of the City onto continental Europe turn out to be true. Political implications of Brexit will also be significant to China. Since 2012 the UK has been a supportive voice within the EU for closer ties with China and has historically been one of the strongest advocates of free trade. Brexit could complicate China’s relationship with EU and create further complication on the chessboard.
No matter what the final long-term implications may be, potential investors from Asia will need to assess their commercial strategy in Europe very closely.
Future uncertain: but UK appealing
Once Article 50 of the Lisbon Treaty is triggered by the British Government talks will start between Brussels and London about the terms of the UK’s departure and its future relationship with the EU; these must be concluded within two years. The key issue will be to balance Britain’s access to the free trade bloc that is the Single Market with its desire to limit immigration and to retain control of its own affairs. How that debate is concluded will determine whether or not the UK is attractive to investors as a gateway to Europe.
That said, many facets of the UK remain appealing to investors from overseas. Despite recent political upheaval the political system in Britain is stable, as is the legal system. Corruption is rare. The labour market is relatively deregulated, and company taxation is low – with calls for it to be lowered even further gaining impetus. The economy is doing well, at least for now. And the decline in sterling in the past week means that many British assets, including property, seem very attractively priced to foreign purchasers.
So there are very good reasons still to consider the UK for investments. But many will hold back until it is clear, first, who is in charge of Britain, and second, what the country’s relationship will be with the EU. Uncertainty is the enemy of investment decisions, and on 24 June the UK awoke to a more uncertain world.
Gavin Devine is Global Head of Public Affairs at Newgate Communications, based in London and Graze Zhang is a Partner in Hong Kong
This column is sponsored by Newgate Communications. For more information on Newgate contact Richard Barton, Managing Partner Greater China, via Richard.firstname.lastname@example.org or +852 3758 2686