Britain’s quest for the right point in time

It’s all about timing. This is true for all walks of life: For work, for relationships, for international politics. As you might have discovered yourself, it matters a lot whether you find the right point in time to hand in your resignation. The right point in time to ask your partner if he or she wants to marry you. The right point in time to have kids.

The same goes for the world of business and politics. Timing can be crucial here, as the British have found out since the vote for Brexit. As there is no automatic start to the two year-long divorce proceedings, choosing the right point in time for the beginning of the negotiations might strongly influence the outcome.

This decision – when to trigger Article 50, the critical passage of the Lisbon Treaty – lies solely with the British government. Although they might want to, neither Jean-Claude Juncker, the President of the European Commission, nor the Members of the European Parliament or the 27 other Member States, can force Britain to trigger Article 50.

It’s important to realise that the decision over when to trigger Article 50 is one of the last cards the British government has left to play. It thus made sense that David Cameron, the former Prime Minister, did not trigger it straight away after the – for him – disastrous result of the referendum on the 23rd of June became known (although he had said before he would trigger it straight away). Quite the opposite, he left the decision to his successor.

Coming into office without any detailed plans on how to implement the result of the vote, Britain’s new Prime Minister, Theresa May, has spent the last two months trying to find out what the British position is for a life after the EU. Thanks to the decision in Whitehall not to engage in any prior, in-depth planning for the case of a vote for Brexit, May and her staff, as well the other members of her Cabinet, have found themselves frantically trying to close the gaps before the end of the summer break.

The same is happening on the other side. On Monday, Angela Merkel, French President Francois Hollande and Italy’s Prime Minister Matteo Renzi will meet in Ventotene in Italy. Then, the German Chancellor will head to Estonia and Poland. The goal for this “European Brexit Tour”, as the FT dubbed it, is clear: Coming up with a unified, European position towards Brexit.

Similar to the British, the Europeans don’t have much time left, as there is a big European summit looming which will be held on the 16th of September, in Bratislava. Despite the fact that some leading figures, among them Jean-Claude Juncker as well as Francois Hollande, have demanded the UK to start the divorce talks quickly, it seems that the Europeans have realised that Britain will take its time.

Initially, the autumn or the end of the year seemed like the most feasible time frame for Britain to begin negotiating its exit. Since then, the date has continuously been pushed back: From the end of 2016 to at least 2017. This scenario would give the British government some more time to find out what it wants: The Norwegian model? A Swiss-style agreement? Or maybe no agreement, resulting in a so-called “hard Brexit“? This option would also make it possible to see how the British economy digests the unexpected outcome of the referendum.

Some observers, among them EU-citizens living in the UK, have cherished the idea that Theresa May might kick the ball long into the grass. She could be waiting many more months, even years, they hope, and by that point have waited until the economy is in such a bad state that the electorate might be willing to let go of the idea to leave the EU. This is, of course, pure speculation, as are some of the other theories that are currently being tested.

Then, the Sunday Times made big headlines last weekend by running a story according to which Prime Minister May could wait until late 2017 or even longer before she triggers Article 50. This makes sense, given that both France and Germany will hold national (or federal) elections next year, with very unforeseeable outcomes. With the possibility of both Francois Hollande and Angela Merkel gone before the end of 2017, some more patience might be justified, as a change in government in important countries such as these will definitely influence the outcome of the Brexit-negotiations between London and Brussels.

However, this idea might not go down too well with the “hard“ Brexit-camp, the likes of Brexit Minister David Davis and Trade Minister Liam Fox. Both have campaigned for a quick Brexit in order to radically transform Britain’s relationship with the outside world. Thus, on Friday, there were widespread reports according to which the British government will not wait for the outcome of the French and the German elections before it triggers Article 50, letting the Pound Sterling tumble. From a market point of view, rumours like these are not welcome: The market does not like surprises, it wants ample time to prepare – in order to prevent the worst (In any case, the deployment of Article 50 will result in a heavy sell-off).

To me, it all comes down to how Theresa May squares the circle. How does she reach a common position between soft and hard Brexiteers? Will she manage to align David Davis and Liam Fox, as well as flip-floppers such as Foreign Secretary Boris Johnson? Depending on which position (The Norway model? A Swiss-type agreement? No agreement?) gains the upper hand, May will trigger Article 50 sooner or later. For observers, this will then provide some first insights into what the British government might be after.


After the vote for Brexit: Chinese investment in the UK, Part 2

It’s been very hot and very busy since I landed in Shanghai. The trip – from August 11 to August 20 – is aimed at doing some research for DIE WELT, as well as catching up with contacts that I haven’t to spoken since my last business trip to China in April. In the months that followed, I was occupied with covering the run-up to June 23rd, the day of the British EU-referendum. Hence I did not have time to travel to China.

Here in Shanghai, the vote for Brexit seems to be less of a concern than it is in London, where, close to two months after the referendum, it’s still the dominant topic for dinner conversations, work meetings and small talk on the elevator. Nevertheless, the vote for Brexit does have some significance for the Chinese. For years, the UK has been the top-receiver of Chinese FDI into Europe, a trend that was helped by the country’s openness to foreign investors, the perceived ease of doing business as well as the fact that the UK was a member of EU and thus functioned as a gateway into Europe.

I therefore asked my contacts in Shanghai: Will this change, now that the country wants to leave the EU? Will the country be less attractive for Chinese investors? And does the fact that Prime Minister Theresa May has put the long-awaited Hinkley Point project on hold (the nuclear reactor that was to be built with French and Chinese capital in Somerset) make any difference at all? The decision by Mrs. May – mainly driven by security- and cost concerns – bears a certain irony, given that it became publicly known only hours after EDF, the main financier for the project, finally decided to go ahead with it. Beijing reacted angrily towards the delay. As the Chinese ambassador to the UK, Liu Xiaoming stated in a commentary piece for the FT, Hinkley Point is a “test of mutual trust between UK and China”.

Since then, Prime Minister May has written to President Xi Jinping, assuring the Chinese government of the British intent to continue having strong and fruitful relations between London and Beijing. During her travels to Hangzhou (where the Chinese will host this year’s G20 summit in early September), May will, according to British media, raise the issue again and hopefully find a face-saving solution for both governments.

Interestingly enough, most of my interview partners here in Shanghai do not really share the concern that increased tension between Beijing and London could affect the attractiveness of the UK for Chinese investors. Quite the opposite: A manager from Fosun, the largest privately held Chinese conglomerate, argued on Monday that now, thanks to the depreciation of the pound sterling, the UK could become even more attractive for Chinese investors.

“We love crises“, he said, “they provide us with buying opportunities that did not exist before.“ Glancing over Pudong’s glitzy skyline from Fosun`s headquarter on the Bund, he stated that private conglomerates such as Fosun do not invest because of political guidelines from Beijing but for economic reasons. “The outcome of the British referendum did not change any of this“, he said.

Similar views were shared when I visited Ctrip, the Chinese travel company. Headquartered in Sky Soho Shanghai, a futuristic office complex designed by star architect Zaha Hadid, the company has grown quite substantially over the years, thanks to the ever growing Chinese demand for domestic and international travel. Not only Chinese tourists will flock to the UK, thanks to the lower value of the pound, one of the leading managers at Ctrip said. “I think the relationship between the UK and China will get tighter post-Brexit“, she commented. Even if the Hinkley Point deal was cancelled and the Chinese government reacted furiously, private investors would still buy UK firms, UK property and pour money into other UK assets, she thinks.

As I found out during a panel debate at the European Chamber of Commerce on Tuesday, this has actually happened before. “Remember the deep freeze between Beijing and London when Prime Minister Cameron received the Dalai Lama“, a former British diplomat told me. “Private investment into the UK reached new highs during that time.“

Thus, he argued, even if Hinkley Point was scrapped, this should not lead to a major decrease in Chinese investment into the UK. That’s an interesting assessment, given that the Chinese government influences state-owned enterprises – of which China has many – and thus shapes their foreign investments. The same is true for state-backed venture funds. One would assume that investors influenced by the Chinese government would be less likely to continue investing in the UK after such a high-profile fall-out between London and Beijing.

But, as I was told, this is not true for private investors and their vehicles. “Many Chinese look for brands and products that they can introduce to their Chinese customers“, the former diplomat said, citing examples such as Weetabix, the British cereal firm that was sold to Chinese bidders. “For these transactions, it does not matter whether the relations between governments flourish.“

Still, the type of Chinese investments in the UK might change over time. As a lawyer of Pinsent Masons, the British law firm, pointed out to me on Wednesday, the motivation of Chinese investors abroad could change. “So what is there for Chinese investors to buy, in the UK?“ he, a German that has lived in China for years and years, asked. “There is not too much technology remaining. Chinese investors will put their money elsewhere“, he stated.

A slight hint towards Germany, where Midea, a Chinese appliance maker from Foshan, hast just bought the robotics firm Kuka? Where the automation firm Broetje this week got new, Chinese owners? According to the lawyer, Chinese firms will increasingly shift their European investments towards the acquisition of technology, away from real estate and consumer brands.

It remains to be seen whether British infrastructure will still attract Chinese investment, after a potential cancellation of the Hinkley Point project. “It all depends on the diplomatic skills and the priorities of Prime Minister May“, the co-president of Ctrip said on Monday.

Other large scale projects such as HS2, the planned high-speed rail linking London and the North, face an uncertain future after the vote for Brexit, as the government will have to come up with financing for many more projects, once the UK has left the EU. And, will there be similar security concerns about Chinese investments into rail as there are with nuclear energy?

For other, non-Chinese investors, the current change in sentiment against Chinese involvement in crucial infrastructure projects in the UK might provide a lucky coincidence. As I was told, the Canadian Pension Plan Investment Board (CPPIB) is very interested in buying National Grid, the UK grid operator.

Given that Prime Minister May thinks differently about Chinese capital than her predecessor, the Chinese might not be successful in bidding for this (were they interested). That is especially true after the move by Australian regulators to block the sale of a controlling stake in Australia’s state grid to Chinese buyers. Now, it could be somebody else’s turn.

The Bank of England’s reaction towards the vote for Brexit

The “unreliable boyfriend”: That´s the nickname that the City of London has given Mark Carney, the Canadian who has been running the Bank of England since 2013. How did he earn that honour? Several times last year – with the EU-referendum still months and months away, the British economy presented itself in rude health – Carney hinted towards a potential rate rise, only to disappoint investors and analysts by leaving rates at the level they have been since 2009, 0.5 percent. Since then, the City never really trusted the comments that came out of Threadneedle Street.

About six weeks after the historic vote for Brexit, things have changed quite dramatically. As he proved on Thursday, Mark Carney no longer deserves his nickname. Contrary to the past, the head of the BoE met the expectations of the financial community: On Wednesday, the Monetary Policy Committee (MPC), the core decision-making organ of the Central Bank, decided to cut rates to 0.25 percent and to restart Quantitative Easing (QE). In addition to that, the MPC decided to create a new credit facility for banks and house-building societies.

With these measures in place, Governor Carney and the Chancellor of the Exchequer,  Philip Hammond, hope to moderate the negative impact of the EU-referendum on the British economy. Important indicators such as the most recent Purchasing Managers Index (PMI) point towards a drastic slowdown since the end of June. Because of this situation, the BoE has adjusted its forecast for next year: Instead of 2.3 percent as previously forecasted, the central bank only expects meagre growth of around 0.8 percent, the biggest amendment since 1983. After the expected rate cut, it remains to be seen whether the Central Bank will be able to prevent a hard landing. Ultimately, the core problem of the British economy is caused by the uncertainty about the future relationship between the UK and the EU – a problem that monetary policy cannot solve.

According to the report published on Thursday, the BoE expects an increase in inflation, more unemployment and less consumer demand after the vote for Brexit. At 4.9 percent, unemployment is currently at a historic low. However, it is supposed to rise again, to 5.4 percent in 2017 and 5.6 percent in 2018. Because of the expected slump in consumer demand, the MPC has decided to restart QE, a policy measure that hasn´t been used since 2013. Now, the BoE is allowed to buy British government bonds (gilts) of up to 60 billion pounds and, in addition to this, corporate bonds of up to 10 billion pounds. By including corporate bonds, the BoE follows the example of the European Central Bank (ECB) which started buying corporate bonds in early June as part of its QE-program.

The cut in interest rates will most likely reduce the profitability of British banks. Simon-Kucher & Partners, a strategy consultancy, expects operating profits of the 21 largest banks and house-building societies to decline by up to 1.4 billion pounds, now that rates have been reduced to their lowest level for 322 years. In order to prevent a new banking crisis, the MPC introduced a credit program for banks and house-building societies, the so called “Term Funding Scheme” which provides financial institutions with the opportunity to borrow money at rates close to the bank rate. Previous QE-programs included, the balance sheet of the BoE could swell to levels of up to 545 billion pounds thanks to the measures announced on Thursday.

Initially, analysts and markets reacted positively. However, it remains to be seen whether the measures of the BoE deliver the desired results. The underlying problem of the British economy is not access to capital and a lack of funding, but the heightened levels of uncertainty since the British voted for Brexit on the 23rd of June. As long as there is no clarity over the future relationship between the UK and the EU, monetary policy can only do so much to support confidence and investment.

It depends on the outcome of the negotiations between London and Brussels whether the British economy enters a long and severe crisis or whether it recovers relatively quickly and, maybe even more important, only with minor bruises. According to what Theresa May has said, it will take a while until the official start of the negotiations. The Prime Minister intends to wait until early 2017 before she triggers Article 50 of the Lisbon Treaty which will commence the divorce process between the UK and the EU.

Mark Carney is aware of this, as his letter to Chancellor Hammond indicates. “Many of the adjustments needed to move to that new equilibrium (the new relationship between the UK and the EU) are real in nature, and are not the gift of monetary policy makers. Nonetheless, monetary policy can still play a role in smoothing part of this adjustment by appropriately balancing the forces acting to push inflation above the target with those expected to push activity below the economy’s new path for potential output.” Analysts as well as business associations, such as the British Chambers of Commerce (BCC), remain sceptical as to whether the BoE’s actions will produce the desired results. “Lower interest rates may give a helpful boost to market confidence, but have little-long term effect on businesses when rates are already so low”, comments Adam Marshall, acting Director General of the BCC.

Independent of this, Chancellor Hammond seems to be confident regarding the future prospects for the British economy. “The UK economy is fundamentally strong – employment is at a record high, there are almost a million new businesses since 2010 and the budget deficit has been reduced by almost two-thirds as a share of GDP. This is a new chapter for Britain, but we are well-placed to deal with the volatility caused by the vote to leave the EU”, Hammond writes in a letter to the Governor of the Central Bank.

He continues by stating: “I am prepared to take any necessary steps to support the economy and promote confidence. The UK starts from a position of economic strength as we address the challenges and take advantage of the opportunities that will arise as we forge a new relationship with the EU.” Regardless of the slowdown that indicators such as the most recent version of the PMI point out, the BoE has left its growth forecast for 2016 unchanged. In the year of the EU-referendum, the British economy is supposed to grow by 2 percent, the BoE thinks.

After their decision on Wednesday, the members of the MPC will only reconvene in early November. By then, the impact of the vote for Brexit on the state of the economy should be more obvious than it is today. Should there be a further deterioration of sentiment, the MPC might reduce rates further, but not to zero. According to the statement put out by the BoE, the bank rate is supposed to remain a little above zero, potentially avoiding some of the problems that the European counterpart of the BoE, the ECB, finds itself in after the introduction of negative interest rates.

Not only the BoE, but also the Chancellor could be taking further measures soon. He will deliver his first Autumn Statement in November and is expected to announce fiscal stimulus for the ailing economy.

But will Hammond be able to take away some of the uncertainty British firms suffer from? We’ll see.