Considered the second largest economy, China was still weighing the impact of the Brexit behind the emerging forecasts about the coming changes in the global economy. Knowing that further market volatility is expected and the economy of China hasn’t fully recovered, how will the country face the fluctuations? Here’s what the authorities have to say.
During the opening ceremony of Summer Davos in Tianjin, Chinese Premier Li Keqiang showed confidence over the current market circumstances. The prime minister was confident enough to say that fluctuation is inevitable in China's economic growth during its economic transition and that they will push structural adjustment to realize restructuring, and keep the economic growth in a reasonable range.
“China's economy won't have a hard landing. Economic fundamentals do not change. Macroeconomic policy needs to be maintained stable and continuous,” Mr. Li Keqiang explained.
Recognizing the importance of the China-Europe relationship and the depth of globalization, he said that they will continue to maintain relations with Europe and the UK and they would like to see a united and stable European Union and a stable and prosperous UK.
Based on the data of a law firm, China accounted for $3.3 billion of direct foreign investment in London. In 2015, British Prime Minister disclosed $54.7 billion worth of deals between China and Britain after the visit of President Xi Jinping to the country.
But the experts do not sound too optimistic about the effect of Brexit in the Chinese economy. David Dollar, a senior fellow with the Foreign Policy and Global Economy and Development programs, noted the trade consequence that Brexit has brought in China.
“China had bet on the U.K. as the best entry point into the European market, and that no longer looks like a good bet. But China’s economy is primarily driven by domestic consumption now, so the effects will not be that great," Dollar speculated.
Further, Dollar also expected trade-weighted yuan to rise as other parts of the world face more headwinds than China faces and China’s large capital outflow is likely to continue.
Meanwhile, a researcher claimed that the major impact was on the currency as the Brexit triggers a broad-based dollar rally that’s sustained, that makes management of the exchange rate harder. Arthur Kroeber of Gavekal Dragonomics exemplified that if the dollar goes up, a lot then Chinese corporations have a lot more incentive to hold dollars rather than renminbi.
“They [Chinese corporations] would start to shift money one way or another from renminbi into dollars, and that gets recorded as a capital outflow. Then in order to maintain the exchange rate the People’s Bank has to spend reserves,” Kroeber added.
A former International Monetary Fund (IMF) economist seconded that the People’s Bank of China ought to let renminbi depreciate with dollar. He sounded unconvinced that global trade or growth would be undermined by Brexit. According to his calculations, asset prices might come under pressure, but central banks might take coordinated actions to counter this.
The bigger picture here is the relationship of China both in Britain and the European Union as the market awaits for the settlement between the two. It might be true that the globalization will affect the trade, politics, investment and currencies, but the next action of the Chinese policymakers can make a difference.