Jun 22, 2017

What Brexit might mean for Hong Kong

What sort of Brexit can we expect, hard or soft?


Brexit. It’s the word on everyone’s lips. Most importantly, what does it mean to Hong Kong some 6,000 miles away. Will Hong Kong gain or lose from Britain’s divorce from the European Union? The continued uncertainty is causing concern for some Hong Kong businesses. Of course, much depends on the whether it’s a “soft exit”, with some sort of retained access to the single market, or “hard exit” with no access at all.


Five different “soft exits” arrangements might be negotiated. The Norwegian style would see full single market access via the European Economic Area, but without being a fully-fledged EU member. The Swiss style could see a myriad of bilateral arrangements being made with individual EU members. The Turkish arrangement might see a customs union being set up to avoid EU tariff barriers but where most EU trade regulations would still apply. The fourth option would rely on WTO rules for entry to the EU but where the UK would unlikely be given any preferential treatment. Lastly but least likely, would be if the UK could negotiate a deal that preserves free trade but without the disadvantages of the other arrangements.


Whatever the deal, the likely economic estimates for UK are thus: the economy could contract about six percent, the pound could drop by some 15 percent and house prices by about 18 percent, wages could drop some four percent and consumer prices rise by nearly three percent. An estimated 820,000 jobs could also be lost as business confidence dwindles and hiring wanes. Foreign investment may also start to leave the UK and head towards some of the European states after weighing the relevant costs and appeal of those options.

There’s a bad moon a-rising (Credence Clearwater Revival)

The UK is the world’s fifth largest economy and so its exit from the EU will have a global impact which in turn could affect Hong Kong. It will certainly cause market volatility and the pound’s fall could drag down the euro. The EU could be hurt through the disruption of its well-established trade relations and this might stunt its growth. Some of the other EU states could possibly consider invoking their own membership referendums and this could further undermine the EU.


For Hong Kong, it will still be business as usual following the invoking of Article 50 of the Lisbon Treaty until a final agreement is hammered out with the EU on the terms of exit. The UK is Hong Kong’s second-largest market within the EU. With the weakening of the pound, prices of imports will rise and for Hong Kong export prices would likely go up. Brexit will also erode Britain’s dominance as an investment destination and many Hong Kong companies may view other European countries as safer havens for their money. As such, the UK will become less attractive as a gateway to Europe or even a base for companies’ regional business headquarters.

The pound is going up flames

 

Some Asian financial analysts feel Brexit may well drive business from both the UK and the EU eastwards, with Hong Kong very well placed to take advantage. Its effect on Hong Kong’s major financial centre status is likely to be less marked than expected. Numerous academic studies have proven that disassociation of a trading or finance bloc by one centre is unlikely unduly harm another global centre. Hopefully, that will prove true for Brexit – hard or soft.


So far, current economic figures have held up better than expected. This has been aided by Britain’s easing of interest rates and its system of buying into those local corporate bonds that make a material contribution to the UK economy.


Accordingly, it seems that the UK’s split from the European Union will only affect Hong Kong in the short term while it re-adjusts its strategic alliances. In the meantime, Hong Kong and UK financial institutions and legal entities can collude on innovative solutions to skirt various national financial regulations to help facilitate better commerce. It’s been done before – nothing illicit, just inventive.

 

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