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China special relationship might not survive Brexit

by Jane Macartney | 03.03.2016

A decision by Britain to leave the EU would tarnish the “golden era” in relations with China that David Cameron proclaimed when he welcomed President Xi Jinping to London last year.

Says who? Cameron and Xi themselves.

Cameron waxed lyrical about the opportunities for two-way trade and investment, saying Britain would be China’s gateway to Europe.

The emphasis on the UK’s leading role in the EU begs the question whether Britain would still be as valuable to China if it quit the EU and had to negotiate fresh terms to access the European single market.

China says one of its cardinal principles is never to interfere in the domestic affairs of other countries. But Xi broke that rule when he came to London in October, saying: “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.”

Beijing has traditionally taken a divide-and-rule approach to relations with the EU. It prefers the leverage to be gained from dealing with individual countries rather than a powerful single bloc. Cameron found this out the hard way. After he met the Dalai Lama in London in 2013, China put the UK in the diplomatic doghouse for well over a year. Chastened, Cameron pointedly refused last September to see the exiled spiritual leader, whom Beijing despises as a troublemaker bent on independence.

Cameron’s eagerness to mend fences is rooted firmly in economic self-interest. Britain is the most popular investment destination for Chinese enterprises among the EU’s 28 member status. London has also quickly become the most important offshore centre for trading the renminbi, China’s currency, after Hong Kong.

Close bilateral ties suit China, too. Britain’s relaxed attitude to Chinese investment is a big draw. It’s hard to imagine another EU government falling over itself to invite China to build and operate nuclear power stations on its territory. The UK has shaped banking regulations in such a way that Chinese banks can operate in London as branches rather than subsidiaries, thus needing less capital. The UK is also one of the strongest supporters of China’s drive to win market economy status, which would make it harder for rich nations to punish China for “dumping” goods on world markets for less than they cost to produce.

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So China has good reason for now to put up with British weather and warm beer. But what about after a Brexit? Would Britain still be “China’s best partner in the West – a gateway to Europe”, in the effusive words of Chancellor of the Exchequer George Osborne, if it voted to leave the EU?

The UK would no longer have a say in EU policy-making and could no longer guarantee UK-based Chinese firms access to the EU market. London could also struggle to hang onto its lead in the fast-growing renminbi market. Some observers, such as Yu Jie, China Foresight Project Manager at LSE IDEAS, are convinced that China would seek alternatives if the UK quit Europe. Frankfurt, Paris and Luxembourg are already drumming up Chinese business.

To be sure, Brexit need not spell economic rupture between the UK and China. Beijing is pragmatic and is quite ready to look outside the EU in pursuit of its strategic interests. State-owned ChemChina last month agreed to buy Swiss seeds and pesticides group Syngenta for $43 billion in the largest overseas investment yet by a Chinese firm – and Switzerland is not in the EU. So it is not inevitable that a Chinese company would pass up a British target just because the UK was no longer in the bloc. But given the choice, a Chinese business might well be swayed by the attraction of automatic access to the huge EU market.

China needs to find ever stronger trading and investment partners as its economy loses some of its lustre. A Britain fending for itself outside the EU would no longer be an instinctive preference. In the event of Brexit, the UK might find that its embryonic special relationship with Beijing becomes less special.

Jane Macartney is a former China bureau chief in Beijing for Reuters and The Times.

Edited by Alan Wheatley

Tags: , , Categories: Articles, Brexit