Beijing counting on UK bridge into EU

BEIJING // China is bristling over the European Union’s recent decision rejecting its demand for market economy status. The Communist Party leader and the country’s former chief negotiator for World Trade Organisation, Long Yongtu, describes the decision as a protectionist and anti-globalisation move. Official media carried front-page condemnation of the non-binding resolution passed in the […]

BEIJING // China is bristling over the European Union’s recent decision rejecting its demand for market economy status.

The Communist Party leader and the country’s former chief negotiator for World Trade Organisation, Long Yongtu, describes the decision as a protectionist and anti-globalisation move.

Official media carried front-page condemnation of the non-binding resolution passed in the European Parliament saying that the world’s second-biggest economy has failed to meet EU’s five-point criteria to be regarded as a market economy.

The decision, ahead of the upcoming referendum in which Britain will vote on whether to walk out of EU or stay put, put the United Kingdom’s leverage in Europe in the spotlight; Britain has been the most prominent campaigner in the bloc on Beijing’s behalf regarding its push for market economy status and if it chooses to walk away, China loses its best and most powerful advocate in the EU.

“Britain has supported China in its negotiations on bilateral investment agreement with EU. I personally feel that China has a very good relationship with UK because it believes in free trade, and is open minded,” Zhang Bei, a researcher with the Beijing based China Institute of International Relations tells The National.

China matters a lot to the UK and as such is an important consideration in the Brexit debate. It is UK’s second-largest import partner after the United States. The UK overtook France to become the second-largest European exporter to China after Germany, with exports worth £18.25 billion (Dh97.31bn) in 2014, according to the Beijing office of British Chamber of Commerce (BCC).

Chinese officials have said they prefer a united Europe. In Chinese eyes, the UK is an important gateway for investments across Europe. Excepting Chinese funding of infrastructure projects in Britain, almost all industrial investments are meant for mainland European markets.

Another reason China’s ties with Britain have tightened recently is that Britain was the first country in Europe to join the China sponsored Asian Infrastructure Investment Bank (AIIB) last year. The UK’s welcome support came as Beijing was desperately trying to obtain western backing for the President Xi Jinping’s favourite project. London did what some commentators described as breaking the ranks of western solidarity in the face of US resistance against joining the AIIB.

The move triggered a scramble in mainland Europe, forcing Germany, France and other European countries to join the new bank, which now has 57 member countries. Beijing and Mr Xi were delighted. For the first time, Washington found its closest allies walking away from its policy stance on an issue involving international finance. China remains grateful to London because the AIIB is seen as a key factor in another one of Mr Xi’s pet projects, the Silk Road plan.

Many Chinese companies find it more comfortable to deal with the British in English, and use London’s financial markets than negotiate in the wide diversity in rest of Europe. Besides, Britain is being seen in recent years as somewhat less critical of China on issues such as human rights compared to other countries including Germany and France.

But despite that, a Brexit would see the UK becoming less attractive for Chinese investors. Although the actual implementation of UK’s exit from the European common market would take place two years after a “yes” vote to leave, the impact on investor sentiment in China would be felt much sooner than that.

“One out of two Chinese companies who have invested or have plans to invest in Britain is actually looking at the continental European market,” says Jan Gaspers, the head of research in the European China policy unit of the Berlin-based Mercator Institute for China Studies

“If Britain goes out of EU, it will lose much of its influence as a suitable destination for Chinese investments.”

That is a considerable risk. Chinese companies were responsible for 112 foreign direct investments in UK resulting in 5,927 new and secured jobs in the financial year 2014/5, the BCC says. It quotes a recent forecast by the international law firm Pinsent Masons, which said China intended to invest £105bn in British infrastructure by 2025, with energy, property and the transport sectors likely to be particularly popular.

State-owned China Investment Corporation owns 8.6 per cent of Thames Water and 10 per cent of Heathrow Airport Holdings.

Chinese investment is also evident in major British projects such as the planned French-led £18bn Hinkley Point nuclear power plant, in which the Chinese state operator China General Nuclear Power Corporation (CGN) is a major partner.

Britain’s biggest housing development area, London’s £900 million twin-tower One Nine Elms project, is under way with the Chinese developer Dalian Wanda choosing an Interserve and China State Construction Engineering Corporation joint venture to deliver its scheme.

In addition, HS2 – one of Britain’s most ambitious, and controversial, infrastructure projects – will probably rely on Chinese investment if it is to succeed in anything like the form envisaged: a £42bn high-speed rail network linking London with the “Northern Powerhouse” cities of Leeds, Manchester and Liverpool.

To that end, the UK chancellor of the exchequer, or finance minister, George Osborne spent five days in China in September in a bid to woo potential investors for an £11.8bn tranche of HS2 contracts.

Speaking in the western city of Chengdu, he said: “Launching HS2 is key to supporting long-term economic growth across the north and Midlands.

“That’s why I’m here in China today opening the bidding process for construction contracts worth £11.8bn, which will propel HS2 forward.”

It is by no means clear how these projects, investments both current or future – and indeed China’s wider trade relations with the UK – might be affected by a Brexit next month.

Andrew Kenningham, an economist with Capital Economics, tells The National that, despite what the ‘Leave’ campaigners claim, he does not see a walk-away vote having a major impact on exports and imports between UK and China. “The ‘Brexiteers’ argue that the UK should do a lot more trade and investment with China if we leave the EU, but I am not sure that things would change so much,” he says.

In fact, he adds, the UK’s trade with most parts of the world would remain unaffected if Brexit does happen. “Exports and investment to the UK from the US and Asia are small and should not be much affected. While there could be some temporary increase in demand for safe haven assets, including the dollar, we doubt that would be very significant or long-lasting,” he says.

However, Jacob Kirkegaard, an expert with the Washington-based Peterson Institute of International Economics, believes there would be major repercussions for Britain should it leave the 28-country bloc.

“There will be a significant decline in the value of Pound, maybe 15 to 20 per cent,” he says.

“This will make Chinese exports to the UK very expensive, and dampen it.”

While that should, in theory, make British goods cheaper to sell abroad, that will not necessarily happen, says Mr Kirkegaard.

“It is not clear how much British exports would benefit. UK’s exports have not been helped during past instances of weakening pound.

Even worse, other European nations in the EU will make it extremely expensive for Britain should it quit the flock by creating tariffs and other trade barriers. Several European nations have political parties demanding to get out of EU, and their governments would try to discourage such political sentiment by making Britain’s departure as painful as possible, Mr Kirkegaard says.

David Gosset, the founder of the Euro-China Forum and the director of the Academia Sinica Europe at China Europe International Business School says the prospect of a disintegrating EU following a Brexit is an even more serious concern for Beijing. 
”From a Chinese perspective a strong EU is a necessary condition of a concrete multipolarity and it is with a cohesive EU that the New Silk Road, an Afro-Eurasian strategy, can be co-built.

The ironic juxtaposition of the US presidential candidate Donald Trump’ rallying cry about keeping Mexicans out of the States and the UK’s vote leave backers’ aim to sever connections with the EU is not lost on Mr Gosset.

“Today, on one side of the Atlantic Donald Trump campaigns to build walls and, on the other side, the British Eurosceptics supporting the Brexit undermine the bridges which have been patiently erected to unify a continent.”

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