The UK’s decision to leave the EU has dragged the Union into a profound crisis. Emergency meetings have been called in Brussels to discuss the future shape of the EU and its relationship with the UK. In the meantime, China has closely watched the developments in Europe and the discussions surrounding Brexit. The EU remains China’s largest trading partner, and over the last 15 years the UK has firmly established itself as the prime destination for Chinese investment within the EU. Brexit is therefore likely to also feature prominently on the agenda of the World Economic Forum in Tianjin, China – the so-called Summer Davos – which will kick off on Monday.
Q&A with Jan Gaspers, Head of Research of the European China Policy Unit at the Mercator Institute for China Studies (MERICS) in Berlin.
How has China responded to the outcome of the referendum?
China’s political leadership has so far adopted a rather subdued stance. The Prime Minister and the Foreign Ministry have urged the EU and the UK to agree on the new terms of their relationship as quickly as possible. Like many of his colleagues around the world, Finance Minister Lou Jiwei has expressed concern about the effects prolonged periods of uncertainty could have on financial markets and the global economy.
Significantly, party-affiliated media, which often serve as a mouthpiece for the Chinese leadership, have engaged in rather harsh rhetoric. The Global Times, for example, has suggested that the British have lost their mind. Party media is exploiting the Brexit vote to send a clear signal to the Chinese public about the alleged pitfalls of democracy. The UK’s ‘No’ to the EU is cited as evidence that democracy is of little value, producing irrational and ultimately harmful outcomes. Party media have also portrayed the outcome of the referendum as a sign of Europe’s overall weakening and of the fact that the power centre in world politics will now shift even further towards Asia. Looking from China, Europe’s reputation has already suffered significantly as a result of the Brexit vote.
Does that mean that Beijing is actually happy about the outcome of the referendum?
Not really. For Beijing’s political leadership, the outcome of the referendum is actually fairly bad news. During his last official visit to the UK in October 2015, China’s state and party leader Xi Jinping was very explicit that Beijing had no interest in the UK leaving the EU. In recent years, London has often served as an advocate of Chinese trade and economic interests in Brussels. China’s other two major European partners, Germany and France, do not seem particularly inclined at the moment to assume a similar role.
China has been trying for some time to forge a closer relationship with Eastern Europe, for example through the 16+1 format. Will Beijing also try to use these closer ties to gain influence on Brussels decision-making?
Smaller EU member states, such as the Czech Republic or Hungary, have already tried to position themselves as potential champions of Chinese interests within the EU, but their nationalist governments often find themselves sidelined in EU policy-making. That makes them of limited value to Beijing when it comes to Brussels decision-making.
Perhaps the more fundamental issue at stake here is that China’s political elites are concerned that the outcome of the referendum could cause a domino effect that would see other member states leaving the EU as well. Looking from Beijing, a further devolution of the Union would mean a shrinking single market, in which Chinese products can be traded freely. It could even mean a shrinking Eurozone and thus a revival of exchange rate volatility negatively affecting Chinese goods traded in Europe. It would also potentially mean that in the future China would have to devote even more resources to understanding what the interests of individual European countries might be.
Over the past 15 years, the UK has become the prime destination for Chinese investments in the EU. How will Chinese investors respond to Brexit?
There are clear indicators suggesting that Chinese investors are concerned. In the short term, we will probably see them pursuing a ‘wait and see’ approach. Investments already scheduled might be postponed for some time. Some might be scrapped altogether. The problem is that some Chinese investors who are already active in the UK are certain to lose if the UK has no longer access to the EU’s single market. Indeed, there are data that suggest that, for some Chinese investors, access to the European single market and the possibility to recruit talent from all across Europe have been key incentives to establish business operations in Britain in the first place. These investors will now start considering whether it actually makes sense to wait for the outcome of the negotiations over Britain’s future access to Europe’s single market. I would not be surprised if many concluded that it is not worth taking the risk and that they will relocate their business operations to continental Europe within the next few months.
However, it is important to also point out that overall Chinese interest in investing in Europe remains strong. In the short term, it is likely that both bigger EU member states, like Germany or France, as well as smaller EU member states in Eastern and Southern Europe will benefit from this.
Does that mean that the ‘golden age’ of Chinese investment in the UK is already over?
Not at all. In terms of total value, the vast bulk of Chinese investment in the UK has flown into real estate projects and infrastructure, such as telecommunications networks, utilities or airports. These types of investments will also continue in the future. For example, the Chinese will maintain a strong appetite for investing in Britain’s nuclear power industry. Chinese investors will also continue taking over British companies to secure brand names. That has been the main reason for why they have bought companies such as Weetabix or PizzaExpress, which have big brand names.
In the medium- to long-term, Chinese investments in the UK might actually even further increase. We have seen in the past that Chinese investors like to make use of periods of economic uncertainty and volatile markets to expand their investments in European countries. If the British pound was to further devalue, this could also render further investments, specifically in real estate projects and infrastructure, even more attractive.