The entire world is hysterical about the Brexit – the UK’s decision last week to leave the European Union. Markets around the world are puking, people within the country are shocked, and people outside the country are wondering whether there’s a way to take it back.
China has been no different.
At the highest level of Chinese government, the reaction to the Brexit has been negative and dangerous, both in word and in deed.
“Against the backdrop of globalization, it’s impossible for each country to talk about its own development discarding the world economic environment,”Chinese Premier Li Keqiang said at a World Economic Forum meeting on Monday.
He said the move increased uncertainty around the world. And as the leader of a country that is finally finding some economic stability after a brutal first few months of the year, uncertainty is the last thing Li needs.
The People’s Bank of China on Monday devalued the yuan by the most since August, a sign the government is concerned that global economic growth will be hampered by the UK’s decision.
Of course it’s not alone in that thought. Barclays thinks the Brexit will burn a tenth of a point off Chinese gross domestic product in 2016 and 2017. It will be “manageable,” but it won’t be easy.
But that’s not the part that could send traders into a cold terror flashback to February. It’s the yuan. Barclays thinks the currency could fall another 10% against the dollar before all this volatility is said and done, “given expected strong safe-haven flows” as investors search for stable places to put their money.
That means yuan-holders will want to take their money out of the country.
You see, for the past year China’s currency has been anything but stable. The government shocked markets with a big devaluation in August, and massive capital flows followed for two months. Those calmed and then resumed again as the yuan fell at the end of 2015 and into the beginning of 2016.
These outflows were the very thing that sent markets careening down earlier this year. It was just an incredible volume of money flowing out of China. The government seemed to plug the hole in March, and things had been OK (a few hiccups aside) until now, but the fear is that Brexit could change all of that.
In May, Goldman Sachs/Gao Hua economist Song Yu told Bloomberg that the calm the yuan was experiencing was a “temporary sweet spot” and that capital controls would not hold outflows back forever.
“But this is very much like a game of a cat trying to catch the rats,” he said. “Whenever the government manages to block a hole through which capital leaks out, people can always dig another hole to bring the money out over time.”
So you can see how this is a problem.
Done dirt cheap
The op-ed pages in China’s state media were more ferocious about the matter over the weekend.The Global Times, a popular news tabloid, said: “Britons are already showing a losing mind-set. They may become citizens of a nation that prefers to shut itself from the outside world.”
More from The Global Times:
“The Leave advocates had been calculating whether their pensions were guaranteed or migrants were encroaching on their neighborhood. Bigger topics such as the country’s aspirations or its global strategy were overlooked.
“Britain has been a special member of the EU. It has not joined the eurozone, nor adopted the Schengen agreement. France and Germany have been resentful of Britain’s half-hearted presence in the EU. In a sense, Britain’s exit may be a relief for both sides.
“However, such relief is in effect a major setback for European integration. Such setbacks don’t happen in good times. Britain’s exit reflects the general decline of Europe.”
There is reason for this anger that goes beyond near- or medium-term currency volatility too. What the UK has decided to do will most likely make China’s biggest long-term economic problem (overcapacity, or having too many goods to sell that no one seems to want) harder to solve.
The UK is one of China’s top three trading partners. China needs the UK to buy as many of its surplus goods as possible. If demand is hampered in the UK, that won’t happen. China needs the global economy to be as strong as it can be, and the UK just gave it a roundhouse kick to the face.