Editor's note: At 7 a.m. local time on June 23, Britain held a referendum on whether to remain in the European Union. According to the results announced on June 24, the Leave campaign won by 51.89%. The British people waved their sleeves and prepared to bid farewell to the European Union. This wave was followed by severe shocks in global financial markets, with the pound hitting a 31-year low, stock markets in Europe and the United States plummeting, and the renminbi continuing to depreciate for several days. The Chinese people have to start worrying about how much impact Britain's flapping of butterfly wings will have on China and whether the overseas ambitions of Chinese enterprises will be affected. Dr. Su Chang, currently managing director and head of strategy and industry research at Monita, a Caixin think tank, expressed his views on these concerns to China Cement. In more than ten years of seller research experience, Su Chang mainly covers China's macroeconomic research, American economic research, asset allocation and grassroots research index construction and development, and has led Monita and Shanghai Shenwan Securities Research Institute to establish their own grassroots research index, which has gained widespread attention from customers.
Brexit Affects the World, Where Will China's Building Materials Industry
Go?
Interview with Dr.
Su Chang, Managing Director and Head of Strategy and Industry Research, Monita, Caixin Think Tank
On June 24, in a vote on whether Britain and the European Union should "break up", the Leave Party won the referendum by 51.89%. Tracing back to the source, this result is reasonable and unexpected. Britain's referendum is like a unilateral declaration of separation, originally just to get more love, but act like a spoiled child, a rift between Britain and the European Union. Their turmoil is not only internal, but also makes it impossible for bystanders to stay out of it. What impact did the referendum result have on global financial markets? Will China's economic development be affected? Will the pace of "going out" of Chinese enterprises be hindered? How should cement and other building materials enterprises adjust their strategic layout in Europe? Recently, China Cement Network interviewed Su Chang, managing director of Monita, a Caixin think tank, on these issues.
Su Chang told me that because the referendum on Britain's exit from Europe has no legal significance, there is still uncertainty about whether it will eventually break away from the matter, and it is difficult to predict how much it will affect the whole pattern, but the result of the referendum alone has made the global financial market turbulent.
The uncertainty mentioned by Su Chang comes from the question of whether Britain will eventually start the process of leaving the EU and whether the referendum in Britain will promote the reform of the EU. According to Article 50 of the Lisbon Treaty, once Britain confirms that it wants to leave the EU in accordance with public opinion after the referendum, it needs to submit a formal application to the EU to start the process of leaving the EU. After that, Britain will have two years to negotiate with the member States of the European Union on the agreement signed at the time of accession to the European Union, and the negotiations will reach an agreement with all member States before it can leave the European Union smoothly.
& emsp; & emsp; "It is impossible to say what will happen between the end of the referendum and the start of the Brexit process and the end of the negotiations, so the long-term impact remains to be seen.". At present, we are seeing short-term severe shocks, and it is difficult to draw a conclusion about the future. Su Chang said, "The direct impact of this referendum is that people are worried about the uncertainty of the future, and the banking system is the first to bear the brunt.". What we can see now is the collapse of the pound, the sharp rise of the dollar and the yen, and the obvious decline of German bonds and American bonds. The whole market showed a clear risk aversion.
In this uncertain period, companies across Europe will show a decline in risk appetite and a marked decline in investment willingness. Once investment across the European market weakens, global GDP will be dragged down, with global GDP expected to be dragged down by 0.5% in the third quarter, and China will also be affected. Su Chang predicts that it will take two to four weeks for the market panic caused by the turmoil to stabilize initially, and that the global stock market will be relatively repaired in the next three to six months.
As part of the international monetary system, the renminbi has also depreciated after the referendum. However, the depreciation of the RMB is relative to the exchange rate of the US dollar, and the exchange rate of a basket of currencies remains basically stable. Su Chang believes that the impact of Brexit on the RMB is mostly reflected in the two weeks to a month of global risk aversion. In addition, according to Su Chang's analysis, after the sharp depreciation of the pound and the euro, the competitiveness of Chinese exports to Europe will be greatly weakened, and this pressure may continue for the next three to six months.
For Chinese enterprises, Britain's exit from Europe will also affect its strategic center layout in Europe. As Chinese enterprises will take London as a breakthrough when entering the European market and locate their strategic centers in Britain, if Britain succeeds in leaving Europe in two years, the advantages of free trade enjoyed by Chinese enterprises in Britain will be greatly reduced. In this regard, Su Chang suggested: "If Britain eventually leaves Europe, the institutions originally stationed in Britain must now consider investing in the European continent to make up for the impact of Britain's exit from Europe."
As for the redistribution in Europe, Su Chang reminded Chinese enterprises to consider the instability of the EU as a whole and observe whether the EU will draw lessons from this incident and carry out effective reforms. He believes that if the EU does not reform, its internal instability will not be solved, which is a hidden danger for investors.
Investigating the reasons for Britain's exit from Europe, the fatigue of economic growth and the rise of internal pressure are the main reasons, and this year's immigration crisis has undoubtedly played a catalytic role, exacerbating the internal contradictions of European society. In Su Chang's view, if EU politicians insist on their own way and ignore the demands of ordinary people, public discontent will become more and more intense. It is not impossible for other EU member States to follow Britain's example and seek independent monetary and fiscal policies to stimulate economic fundamentals, which will eventually lead to the disintegration of the EU. Therefore, Su Chang believes that the uncertainty of this split has brought some worries to investors, which is the key point that Chinese enterprises can not ignore when entering the European market.
But if mainstream European politicians begin to comply with public opinion after Britain's exit from Europe, there are also some drawbacks in Su Chang's view. He believes that in the medium and long term, China may face greater pressure on trade. "Chinese companies may face more European anti-dumping investigations, and Europe will take a tougher stance on the issue of recognizing China's market economy status." Su Chang said that once the determination of China's market economy status is affected, there will be a more obvious drag on China's global strategy.
In recent years, Chinese building materials enterprises have been encouraged by the "the Belt and Road" policy to go overseas. So, will this change have an impact on the "going out" of Chinese building materials enterprises? Su Chang said frankly: "For example, the gross profit of the cement industry itself is not high. After Brexit, the EU's investment protectionism will be more obvious. Cement enterprises may be under pressure from the labor sector, as well as various impacts.". In addition, the difficulty of borrowing from overseas banks may be relatively increased, mainly because there are still uncertainties. But he also said that the impact of Britain's exit from Europe on China is indirect, and China's "the Belt and Road" layout is mainly in Central Asia and Central and Eastern Europe, so it will not have a great impact on building materials enterprises going out.
& emsp; & emsp; "If building materials enterprises want to lay out in Europe, they should take into account more risk factors such as exchange rate than before." Su Chang said so. According to his explanation, building materials companies need to better manage their foreign exchange exposure because the exchange rate risk at the time of investment is significantly stronger than before the referendum.
& emsp; & emsp; "As long as the leverage ratio is not particularly high, the pressure is temporary, and now building materials enterprises need not worry too much about the impact of Brexit.". Generally speaking, the impact of the Brexit referendum on China is marginal. It remains to be seen what the future holds. Su Chang said.
Brief introduction of Su Chang:
Su Chang is currently managing director and head of strategy and industry research at Monita, a Caixin think tank. From February 2013 to November 2015, he served as managing director and chief economist of Monita Research. From 2010 to 2012 and from 2012 to 2013, he served as Chief Macro Analyst of Macro Research Department of Shanghai Shenyin Wanguo Securities Research Institute Co., Ltd. and Chief Macro Analyst of Guangfa Securities Research and Development Center. Senior Macro Analyst and Chief Macro Analyst of Monita from 2005 to 2009.
In his more than ten years of experience in seller research, he has mainly covered China's macroeconomic research, American economic research, asset allocation and grassroots research index construction and development, and has led Monita and Shanghai Shenwan Securities Research Institute to establish their own grassroots research index, which has gained widespread attention from customers. From 2004 to 2005, he was a postdoctoral researcher at the Institute of Systems, University of Maryland, USA. He received his Ph.D. degree in Systems Engineering from Boston University, USA, in May 2004. He is a member of the macroeconomic team of the third best sell-side analyst of New Wealth (Shenyin Wanguo) in 2010 and 2011, and the macroeconomic team of the third best sell-side analyst of First Finance and Economics (Shenyin Wanguo) in 2012.
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