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2017 July
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“Brexit” Faces Numerous Uncertainties

The recently concluded UK election left Britain’s Conservatives short of an overall majority in the House of Commons, resulting in a hung parliament. Theresa May refused to step down and sought to form a government with the Democratic Unionist Party (DUP) of Northern Ireland. However, the new government is likely to face lots of challenges ahead: the close watch of the Labour Party, which has greatly increased its seats and the conflicts within the Conservative Party caused by the election setback. Will the UK be more passive at the “Brexit” negotiation table? How will this affect the situation in Europe?

 

Terence Chong: “Brexit” negotiations ready to start, but impact depends on post-election situation

Harder to exit EU on schedule

Terence Chong, Executive Director of Institute of Global Economics and Finance at the Chinese University of Hong Kong, believes that it is already unlikely to complete the “Brexit” plan on schedule within two years, and the current hung parliament situation has added more uncertainties to the “Brexit” negotiations. The marathon “Brexit” negotiations are expected to become harder and harder when they are actually carried out.

 

Nevertheless, even if there is a change of government in the future, the Labour Party must also comply with the referendum outcome to negotiate with the EU, so the negative impact on “Brexit” has not reached a critical point. However, Chong also said that the UK is not without bargaining chips. London’s status as a global financial centre cannot be replaced overnight as there are no cities among the EU member states capable of taking over this position. Therefore, economic issues will become an important focus of negotiations between the UK and the EU.

 

GBP to stabilize after short-term fluctuations

Chong, who has always paid attention to British Pound (GBP) movements, said that before the UK election, investors were on the sidelines and inclined to be risk-averse while the GBP showed short-term frequent fluctuations; now the hung parliament situation after the election has added instability to post-“Brexit” political development. He expected the GBP to continue to fall in the short term, but he anticipated that when the market has digested the worries, the GBP to USD exchange rate should be able to stabilize at around 1.3 levels. As for the long-term trend, it will depend on the development of the “Brexit” negotiations.

 

In recent years, Hong Kong investment in overseas properties has shown an upward trend, and in view of the falling GBP exchange rates, many Hong Kong investors are thinking of buying properties at relatively low prices in the UK. Chong said that Hong Kong people will generally choose first-tier city London or second-tier cities Manchester and Liverpool for property purchases. Now that the UK election results have led to uncertainties, triggering the GBP to fall and further reduce the cost of buying assets in the short term, it would be advantageous to buyers of completed residential properties. If the GBP continues to be affected by the unstable situation in the future, spending on property mortgages will be decreasing, which will encourage overseas investors to a certain extent.

 

After the referendum, confidence has gradually returned to the real estate market and economic data have stabilized. In addition, Hong Kong people who have the need for further studies or immigration will have certain demand for properties. Moreover, Chinese investors have a strong purchasing power. All these will support the UK real estate market going forward. Therefore, Chong is not too worried that property prices in the UK will fall sharply in the future. Nevertheless, we need to be more prudent when buying overseas properties. Investors still have to pay attention to uncertainties in the local property market.

 

Decline in exchange rates affect export trade

How will GBP fluctuations affect Hong Kong businesses engaged in trade? Chong pointed out that when the GBP or euro falls, from a trade perspective, there will be a positive impact on imports because the HKD will appreciate against the GBP and euro. However, Hong Kong businesses do not have much import business from the UK and the EU, so the negative impact on exports should be greater. After the UK exits the EU, Hong Kong’s exports settled in GBP will be affected if the GBP continues to depreciate and the HKD exchange rate remains high. Business dealings between Mainland/Hong Kong enterprises and the UK could decrease, because buyers in UK will reduce the number of orders due to increased costs.

 

When discussing trade, the “Belt and Road Initiative” is definitely the hottest topic. Philip Hammond, British Chancellor of the Exchequer, has said that the UK is a natural partner of the initiative as it is located at its western end. He projected that Asia’s infrastructure will require US$26 trillion by 2030, and the UK looks forward to playing a role in infrastructure projects. Chong pointed out that as many people in the Central Asian countries along the “Belt and Road Initiative” do not understand English, the UK can play an important role as a middleman in different infrastructure and trade projects as it has the advantage of being familiar with international law and common law.

 

“Brexit” to drive UK towards Belt and Road

In addition, Chong believes that as the “Brexit” process kicks off, the UK will have the opportunity to get closer to China. Political factors will have a significant impact. This is because the UK will lose a certain trade market share after leaving the EU, but it also does not want to remain constrained by the US in economy and trade. Therefore, it needs to find a new market with a big enough share and China naturally becomes its number one target.

 

The UK’s relations with the EU have been neither friendly nor aloof, with some ups and downs in the past 70 years. Chong said that in the long run, it will be very normal to see such separation and union like the UK leaving the EU due to political or economic factors. Therefore, after the UK succeeds in leaving the EU in a few years’ time, it will actually not be surprising to see it reunite with the EU after a number of years.

 

 

Wilson Chan: Snap election led to quagmire, but may not hinder “Brexit” negotiations

Wilson Chan, Lecturer, Global Studies Programme, Department of Sociology at the Chinese University of Hong Kong, pointed out that pre-election polls had not accurately reflected the intention of the young generation of voters. In fact, the result of last year’s “Brexit” referendum had made many young people angry. Hence, the British community repeatedly called for young voters to express their views at the ballot box. The election results show that the vote they cast indeed was an expression of their dissatisfaction with the referendum outcome and the performance of the Conservative Party.

 

Welfare policy not conform to public opinion

“May’s decision to call a snap election was an intention to take advantage of her party’s strong popularity to win more seats in the House of Commons in order to form a strong, stable majority government.” Chan said that May’s move was understandable as she was convinced of winning a great victory in the election.

 

However, it backfired. Chan said that the spate of terrorist attack incidents before the election had little impact on the results. Instead, it was the new manifesto announced by the Conservatives that triggered the loss of popular support within such a short time. This is because the party’s stance on many policy issues failed to comply with public opinion. It even showed that it has lost its bearings and become inconsistent in dealing with many issues.

 

Much pressure inside the party

“May’s refusal to attend BBC’s seven-way election debate also made her the target of public criticism, which went against her desire to shape a strong leadership image.” Chan added that all these paved the way for the Conservative Party’s “miserable victory”. May has not only failed to lead the Conservative Party to obtain an overwhelming victory, but also failed to keep its original advantage of having half of the seats in the House of Commons, which inevitably subject her to great pressure within the party to step down.

 

Nevertheless, while she apologized to her party colleagues for the election setback, May said that she will not resign and want to make amends. Based on the present situation, Chan believes that May should be able to keep her prime ministership for the time being. However, the result of the snap election is far from satisfactory, with the Conservative Party losing its advantage of a majority in the House of Commons. As a result, doubts have arisen inside the party on her leadership; some members might want to challenge her leadership in the party this year.

 

Forming government with Northern Ireland political party

Referring to the cooperation between the Conservative Party and the DUP, Chan said that the two parties hold largely the same position on the “Brexit” issue. The DUP is also not happy to see the Labour Party coming to power in view of the latter’s close ties with Sinn Fein of Northern Ireland. Hence, it should be easy for both parties to reach agreement on major policies as there is not much difference in opinion between them. Nonetheless, there are still significant differences between the two parties in a number of specific policies such as abortion and LGBT (lesbian, gay, bisexual and transgender) rights.

 

Due to the failure to form a majority government, May and the Conservative Party could face a lot of challenges when they assume power. Chan pointed out that the most notable of which is certainly the setup of negotiations with the EU on “Brexit”. Another important matter the new government must focus on is counter-terrorism issues.

 

EU to drive “Brexit” negotiations

“The EU will have the initiative in the “Brexit” negotiations and it will wrestle with the UK over how the negotiations should be conducted.” Chan believes that in consideration of their interests, both the UK and the EU will be committed to negotiations on cross-border trade, commerce, education and people movement in order to achieve results that are mutually acceptable and beneficial. Otherwise, both sides will suffer, leading to a double-loss scenario.

 

Britain to strive for the most favourable conditions

Chan expects the EU to stick to the bottom line, i.e. a single market in Europe and four freedoms of movement across borders: goods, services, capital and people. It will not back down from these two principles. The UK’s plan should be how to coerce and entice the EU into giving it better conditions for negotiations.

 

With the end of the UK election and start of “Brexit” negotiations, Germany will hold parliamentary elections in September, which will also become a global focus. Chan pointed out that as the incumbent German chancellor Merkel and her major rival Schultz, the Social Democrat candidate for German chancellor, are both in the pro-EU camp, Germany will continue to be an important force in maintaining EU solidarity even if Merkel fails to get re-elected.