China’s leadership has outwardly backed the Remain option in the UK’s referendum on EU membership, with President Xi Jinping declaring during his state visit to the UK last year that ‘China hopes to see a prosperous Europe and a united EU, and hopes Britain, as an important member of the EU, can play an even more positive and constructive role in promoting the deepening development of China-EU ties’. But perhaps things are not quite that straightforward. While there are good reasons to take Xi’s words at face value, it is also possible to argue that China’s interests might not be that adversely affected by Brexit.
China is generally reluctant to encourage the break-up of established orders and is uncomfortable with the uncertainty that such actions can generate. Somewhere in the background is China’s own sensitivity that a Brexit might be used as a model for a potential break up of China, or might encourage Taiwan, and even Hong Kong, to go their own way. Brexit, especially if it were to lead to further referendums on the constitution of the United Kingdom, would be a worrying phenomenon for Beijing.
Until recently China saw the European Union as a potential foil against the US on the global stage, but as China becomes more assertive in its region it has, perhaps, less overall interest in Europe acting as a single geopolitical entity. It is much more comfortable with the status quo, where the EU continues to struggle to forge an effective common foreign and security policy and where member states are often prepared to pursue their own relations with China. Brexit would benefit such a policy.
On trade, however, China has undoubtedly benefitted from the presence of the UK within the EU and would miss the UK’s voice in the European Council and at EU−China summits. While it does not see the United Kingdom as the most influential voice shaping European policy – that remains Germany – the UK has consistently taken a liberal approach which has been largely beneficial to Chinese interests. The UK has also initiated or led the way in a number of areas that have been of direct benefit to China. For example, the UK was the first European country to apply for membership of the Asian Infrastructure Investment Bank, a move which was quickly followed by other member states. In the absence of the UK, liberal voices within the EU would find it harder to resist the more protectionist attitudes of some member states. This is probably the essence of the ‘positive and constructive role’ played by the UK that China would like to see preserved.
Britain has become the number one destination for Chinese foreign direct investment in Europe and maintaining and increasing Chinese investment is likely to remain a high priority for any post-Brexit British government. It is not so clear, however, how Chinese investors would react. The loss of automatic access to EU markets and potential tariff problems would be a drawback and there is a fairly widespread view among much of the business community that China would be wary of future investment in Britain under such circumstances. Leading Chinese businessmen with substantial investments in the UK such as Wang Jianlin of Dalian Wanda have said as much, while others have spoken of the widespread feeling in Beijing that UK withdrawal would not be a good thing.
At the same time, Chinese businesses in the UK would be forced to consider whether they should relocate and face the problem of moving to potentially less friendly investment environments should they decide to do so. A big part of the UK’s attraction to Chinese investors might remain intact and companies like Huawei operating in sensitive areas may prefer to remain where they know they are welcome.
Leaving the EU might allow the UK more room to launch new strategic initiatives with China. Wang Hongzhang, chairman of the China Construction Bank, has said that ‘whether the UK will stay in the EU or not will not do any harm to trade and economic ties or financial relations between the UK and China’. While this is possibly true from a policy perspective, it is less certain from an economic one. There are particular areas of interest to China, such as investment in property and the financial services sector, where Brexit would be unlikely to harm China’s interests directly. Chinese interest in UK property remains high, and a post-Brexit British government would probably work hard to continue to attract Chinese business to the City of London. This could be helpful to China’s desire to internationalize the renminbi, for example. Education is another area where the UK would be keen to continue to attract overseas students, of whom Chinese make up a significant proportion, particularly if many EU students were put off by the prospect of rising fees.
While a post-Brexit Britain would be free to negotiate its own trade and investment regime with China, the Chinese would probably conduct such negotiations with more than half an eye on their wider and more important discussions with the EU. The UK is still a substantial economy, but, as with President Obama, Britain might become less of a priority for China than it was before. This is especially likely to be true in areas such as investment in manufacturing where China would wish to export a significant amount of any product produced in the UK to the EU’s single market.
On balance, the loss of Britain’s voice in the EU in a Leave vote could be a net loss for China, but it would retain considerable options. In a post-Brexit world, the UK would be trying harder to penetrate Chinese markets and to attract Chinese investment but the argument would be harder to make to a sceptical Chinese audience and less clear on what would be the competitive advantage to them of locating in the UK. Whatever happens, China will continue to have a strong economic stake in the UK, and it is not going to dump that overnight.
Rod Wye has more than 30 years’ experience working as a government analyst specializing on China and East Asia for the Foreign and Commonwealth Office. He retired as head of research on Asia at the FCO in 2010.