HONG KONG // In the context of a world packed with uncertainty, Britain’s decision either to leave or remain within the European Union matters a great deal.
But while much has been written about the looming June 23 referendum, and what a vote to leave would mean for the United Kingdom, a “Brexit” would have repercussions in the wider world.
South East Asia, a region packed with vibrant economies, rising firms and ambitious entrepreneurs, has taken the UK in general, and London in particular, to its heart, and for good reason. Britain’s capital is a global financial centre in its own right, offering investors a raft of benefits – political stability, legal certitude, an ocean of skilled human capital and a mostly reliable and pro-business tax code.
But it is also the gateway to Europe. For Asian lenders, consumer goods firms and fund managers, investing in the UK means securing direct access to 508 million EU citizens across 28 nation states. A British vote to secede from Europe next month – and current polls suggest the outcome is too close to call – will force Asian investors to make a judgment call. Should they, in a post-Brexit world, remain loyal to London, or find another European city to fall in love with?
Raw data underlines how indelibly linked Asia is with the United Kingdom. Asian financial services firms alone ploughed US$1.7bn into the UK in the five years to the end of 2015, according to the foreign direct investment tracker fDi Markets. Chinese firms alone chanelled $5.1bn into the UK in 2014 – far more than into any other EU nation – snapping up assets and setting up banking and asset management arms. Pinsent Masons, an international law firm, tips China to invest £105bn (Dh556.56bn) in British real estate, financial services, infrastructure and energy projects between now and 2025.
Little wonder, then, that Asian corporates and investors are worried about the threat of an “Out” vote.
“It is certainly coming up the agenda,” says Andrew Naylor, the Singapore-based executive director at Cicero Group, a consultancy that is helping regional financial firms to weigh the various Brexit risks. “The first question our clients typically ask is: ‘What is the likelihood of Brexit?’ Our reply is that the danger of UK voters opting to leave the EU does exist. But in terms of what a post-Brexit settlement [between the UK and the EU] will look like – that’s a question that cannot be answered.”
At the heart of Asian concerns is “financial passporting”. Vast numbers of financial investors – banks, traders, funds, asset managers – use the UK as a regional springboard. Once they are licensed to operate in the UK, they are, in effect, handed a permit that allows them to trade across borders, buying everything from German equities to Swedish government bonds to Italian distressed debt.
So the question becomes: if the UK divorces itself from Europe, will snubbed legislators in Brussels, Berlin and Frankfurt feel inclined to keep that passporting system in place – or would they cut Britain off from the continent, forcing London to renegotiate all trade and services agreements with the EU? The simple answer is that no one knows, as there is no working precedent here. That is the problem with Brexit – so many imponderables. But it is certainly an issue that worries investors. A survey last month by the think tank New Financial, which polled Asian and global funds, found their biggest concern was the loss of passporting rights.
Sammi Shen, the executive director at Shanghai Nord Engine Asset Management, a $3bn Chinese investment manager with offices in London, wonders whether the UK would remain the right platform for accessing Europe in the event of Brexit.
He says his firm is pushing ahead with a back-up plan, if a UK exit makes it harder to market and trade funds on the continent, highlighting Frankfurt or Luxembourg as possible locations.
Others are thinking along the same lines. Remove the benefits of financial passporting, warns Bill Stacey, the director at the Hong Kong-based consultancy Lion Rock Institute, and the likes of Dublin “start to look more attractive”.
Mr Naylor adds: “The sense I get is that the most likely destinations outside London are Luxembourg followed by Dublin, and then Frankfurt. Although most [of our] clients haven’t really done a detailed study on this.”
If Britain does decide to go its own way, the reverberations big and small will be felt for years. Whatever happens, London will probably retain its status as one of the world’s pre-eminent financial centres. And Britain’s economy would probably continue to muddle along. But a vote for Brexit, notes Richard Jerram, the chief economist at Bank of Singapore, the private banking arm of OCBC Bank, “could be very destabilising for global financial markets”.
For Asian businesses trading and investing in Europe, “Brexit would not mean business as usual”, says Gregor Irwin, the chief economist at the London and Singapore-based political and business consultancy Global Counsel. “It would impact all firms doing business in Europe.”
Other concerns and questions abound. Britain is bursting with financial talent: two million people work in the UK’s financial services sector, allowing them to access any market in the European bloc without needing a work permit. Would this change, post-Brexit? Would London bankers and fund managers need to secure a working European visa overnight?
Over time, Britain would start to look different from the rest of the EU. Anti-business legislation enforced by Brussels bureaucrats would be removed – a bonus in the eyes of many. But that creates other concerns, says Mr Irwin. “Take a Japanese cosmetics firm [for instance]. Currently they adhere to one set of standards across the EU. After Brexit, there may be one rule for Britain, and another for Europe. This won’t be a game-changer, but it does add to compliance costs.”
One final concern for investors, largely overlooked in the rush to read the runes of a potential British exit, is what it would mean for the abandoned party. European officials can mutter darkly about the potential loss of UK international prestige and commercial clout all they want. But the loss of Britain would be a harrowing one for the European project.
It would raise serious concerns in Asia, warns Mr Jerram, about the benefits of investing in a region “where growth has been relatively fragile for the past few years”.
Mr Naylor adds: “Asia’s media has tended to focus on Brexit in terms of the EU project and what it means for regional integration. Is it a signal of European decline – a sign that the European Union is over?”
To that end, the more pertinent question for Asia’s power-packed multinationals, funds and lenders is whether should they be investing in Europe at all.
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