The UK has officially declared that it wants out of the EU and thus out of the European market, but what does this mean for its Asian trading partners?
Once the British Prime Minister signs Article 50, Britain will have two years of negotiations before it is becomes solely independent from the EU. Whether this PM is David Cameron or Boris Johnson, the bottom line is that Britain’s trading partners will need to seriously consider how they will adjust to Britain’s historic decision. As a country that imports more than it exports, trade with the UK has always been important to many economies, but just what does this decision mean for Asia?
Some Chinese may benefit on the short term. As the pound devalues, Chinese tourists will find it more enticing to book holidays to visit the UK. However, general uncertainty about the global economic effects from Brexit has also had a negative impact on the value of the yuan. At the World Economic Forum meeting in Tianjin, the BBC reports that the general feeling was that the “world is lurching from an internationalist outlook towards more of a closed, fearful perspective”.However, Jing Ulrich, Asia Pacific vice chairman for JP Morgan said that this was only a temporary setback,
“In the near term, an event like this sometimes surprises the market. Some people think this is a setback for globalisation. Actually it’s just a sentiment.”
Calvin Chin, chief executive of tech start-up company Transit Shanghai, is less optimistic. He believes that the UK’s decision will have a detrimental effect on companies wishing to expand internationally. He told the BBC,
“I think part of that impact – at least in the short term – might be concentrated in Chinese companies that have been going global so a lot of Chinese companies are looking at investments overseas, have been setting up offices overseas, and have been doing trade and investment in economies – mature and emerging. A Chinese company thinking about an EU platform for that new market opportunity might not think about setting up in London or in the UK and rather might maybe focus on France and Germany.”
Wang Chuanfu, chairman of Chinese automaker Byd, which has formed a joint venture with Scottish manufacturer Alexander Dennis to produce electric busses, told the BBC that his company will continue to increase investment in the UK,
“Our government has said that bilateral relations with Britain will not change after Brexit and the same can be said for Byd.”
Premier Li Keqiang said that Brexit was “adding to uncertainty in the world economy” but calls for unity and stability within the UK and Europe. At the moment, Brexit doesn’t seem like a deal breaker for Chinese companies. Some may find less incentive into investing in the UK, but those wishing to expand internationally on the whole will not be deterred to do so as a result of Brexit.
London is a major competitor to Hong Kong as a gateway for Europe and is the second largest offshore yuan trading centre after Hong Kong. However, now that the UK has decided to leave the EU, London’s role as a platform for investment products such as the sale of dim sum bonds to European investors is now up for questioning. Perhaps some of these deals could shift back to Hong Kong.
Hong Kong is set to gain in terms of its status as a gateway to China as a stock connect between Hong Kong and Shenzhen could be announced this week.
London is also currently a fund management centre, with funds issued in the City being sold in the EU. Whilst negotiations are yet to determine exactly how the UK will exit the EU, it is likely that fund houses will set up offices in other financial hubs such as Dublin. Hong Kong could be a contender for to be a financial hub too, as it has already earned credibility for housing funds in Hong Kong that meet certain criteria to be marketed to millions of potential investors in China.
Of course, there is also HSBC, which is a favourite stock for Hong Kong investors.In February, the bank decided not to move its headquarters from London to Hong Kong, but in light of the Brexit result, the board could reassess their decision.
If seen has a stepping stone to China, Hong Kong is certainly attractive for investors, and now that the UK will be leaving the EU, investors could be looking elsewhere to base their money that also provides a gateway to a lucrative market.
As Asia’s fourth largest economy, South Korea is of course concerned with the ramifications of the UK’s decision to leave the EU. In response to the decision, the Koreans will be betting big on innovation, according Prime Minister Hwang Kyo-Ahn, who spoke at the World Economic Forum in Tianjin,
“We will pre-emptively respond to the Brexit impact through creative endeavors for innovation… Structural reforms in sectors including education, labor and finance will help Korea ride the wave of the fourth industrial revolution,”
According to the PM, Korean economic growth has been burdened by low consumption, tumbling exports and a rapidly aging population. However, the PM suggested that new technologies such as cloud computing and IoT (internet of things) could change that.
Seen as an already innovative country, South Korea won’t be too drastically affected by Brexit as long as it pursues its focus on creativity and innovation. If so, exporting to the wider world will boost their own economy as well as overcoming the EU restrictions imposed by Brexit.
According to the FT, there is a 75% chance that Japanese carmakers Toyota will pull out of the UK if a levy on cars made on Britain is imposed as a result of the UK’s decision to leave the EU.
The two carmakers have invested £2.2bn each over the past two decades. Toyota had already warned of “huge cost reduction challenges” ahead of the referendum in regards to its pants in Burnaston, Derbyshire and Deeside, Wales. 75-80% of Toyotas and Hondas that are produced in the UK are destined for the EU. Koji Endo, analyst of Advanced Research Japan said that remaining profitable would be tough considering the struggles of turning a profit in the UK over the past two decades,
“The reality is that it’s nearly impossible to make profit considering that they had not made much money over the past two decades. Can you keep holding on to a perpetually lossmaking operation in Britain?”
However, the decision to pull out of the UK would take years, even as long as a decade. The Japanese carmakers will have to assess Britain’s process of extricating itself from the EU.
Currently the UK’s largest car plant in Sunderland, is run by Nissan. The plant employs 6,7000 people and is the most successful Japanese carmaker in the UK, producing 500,000 vehicles per year. Whilst Nissan have yet to make an official statement regarding Brexit, analysts believe that Nissan will be more flexible with adjusting its European production, due to its alliance with Renault.
The 10% levy on EU exports to the EU may be offset by the depreciation of the pound. However, Credit Suisse analyst Mashiro Akita said that a 1& rise in the yen against all currencies will result in a reduction in Japanese automakers’ operating profit by 2.5%.
Last year, Honda made its Swindon factory the global hub to export its new five-door version of the Civic Hatchback. However, Honda has fallen behind its Japanese rivals in terms of competing with Europe and thus has been struggling in the UK for years.
Brexit’s impact on Taiwan is minimal, but the government is preparing for global economic changes, according to Cabinet spokesman Tung Chen-yuan,
“With crisis comes opportunity that Taiwan must be able to recognize and grasp”
Lin hopes that the UK and EU will expand their economic trade relations with Asia and consequently, international financial markets should show more interest in investing into Taiwan. The UK will need to renegotiate its relations with all global trading partners, so Taiwan must prepare with new circumstances.
The Ministry of Finance said that Taiwan must prepare for future fluctuations and market panic,
“The ministry stands ready to stabilize the local bourse and ensure financial stability.”
The Central Bank also recognises that Brexit will have limited direct impact on Taiwan and expacts that changes in the international economy to influence investment and consumption in Taiwan.
The FSC believes that Taiwan’s financial institutions have limited risk exposure to the UK market and NDC reckons that Taiwan will emerge relatively unscathed if the international turmoil subsides quickly. However, if the turmoil continues for too long, a chain reaction could potentially reach Taiwan.
Recently, the Singaporean government concluded negotiations for a Free Trade Agreement with the EU, marking the first such agreement between the EU and any ASEAN country. In 2015, Singapore imported more than 29.7 billion euros worth of machinery, transport equipment, chemical products and other manufactured goods from the EU. As a result, Singapore should enjoy cheaper imports. However, the majority of their trade with the EU is actually with Britain.
This means that although Singapore may have signed a deal with the EU, their bargaining power with the UK is now uncertain. A weaker pound could deter Singapore businesses from investing in the UK and may turn their business to other EU countries to trade with. This would mean have a negative impact on Singapore’s bargaining power with the UK.
Nevertheless, as Britain is such a major business partner with Singapore, independence from the EU may result in actually having more influence with regards to trade deals.
Conversely, Britain’s investment into Singapore will expectedly slow due to its weaker currency. However, international companies such as HSBC, Shell, Rolls Royce and Standard Chartered have already spent the past few years growing their presence in Singapore, which may encourage investors to pump more money into Britain.
Of course, British tourism into Singapore will be reduced, whilst holidays to the UK from Singapore will be now more enticing.