UK pullout of EU leaves world wrestling with uncertainty

The continuing upheaval from the UK's historic "Brexit" vote means China and other countries will feel the impact on equities and foreign exchange rates in the short term and trade and investment in the long term, financial analysts said.

Last week's vote to pull out of the European Union (EU) has left the UK and much of the rest of the world wrestling with uncertainty and financial turmoil.

In the wake of global markets hitting record declines on June 24, currencies and stock markets continued to come under pressure on Monday, with stocks sharply lower again in the US and Europe while Asian markets were mixed. In China, the Shanghai Composite gained 1.45 percent.

The British pound sank to $1.31, its lowest level against the US dollar since September 1985. Standard & Poor's ratings service stripped Britain of its last remaining triple-A credit rating, chopping it to double-A and warning more downgrades could follow.

US Treasury Secretary Jack Lew said on Monday that global market turmoil from the UK's vote to leave the EU doesn't look like the makings of another financial crisis and that it isn't posing a serious threat to the US economy.

"There's no sense of a financial crisis developing. Obviously this is a change in policy that has implications which change the decisions that investors make. So I'm not saying there's not an impact on markets, but it's been an orderly impact so far," Lew said in an interview on CNBC.

But Gary Hufbauer of the Washington- based Peterson Institute for International Economics wrote in an e-mail: "If stock markets fall by another 10 percent or more, that will bring a global recession, and China will suffer along with everyone else.

"In the long term, the big question is whether Brexit signals a retreat from globalization and more protection worldwide. If so the outlook for the world economy will be dismal for the next decade."

The value of the British pound and the euro against the yuan will remain very weak, further hurting Chinese exports to the region, said Sung Won Sohn, professor of economics at California State University Channel Islands in Camarillo, California.

"Since (the) UK and EU combined is the largest trading partner for China, its effect on the Chinese economy will be meaningful," he said.

On Monday, the yuan fell to its weakest level against the US dollar since 2010 after China's central bank cut its daily-fix value for the currency by the biggest margin since a depreciation last August.

"The uncertainty over what exactly the vote means, what has to be negotiated with the EU, and how long it will take may keep foreign exchange, equity and bond markets in some turmoil for a while," said Meg Lundsager, public policy fellow at the Wilson Center and a former US executive director at the International Monetary Fund.

Lundsager said China's trade with the UK serves both the UK domestic market and as an entry point for trade with EU members.

"The lack of clarity over the economic and legal ramifications of the vote will affect UK trade with the EU members. Will products originating in China but with value added in the UK face higher tariffs after the split with the EU?

"Will products Chinese firms transit through the EU face trade restrictions in the UK market?

"At the very least, the cost of trade with the UK will increase as producers will face an added layer of regulation, restrictions or re-imposed tariffs," she said.

Hufbauer said that once the shock of Brexit passes he doesn't think there will be a further trade effect "unless we get a generalized upsurge in protection, and other anti-EU referendums in Finland, the Netherlands, France, etc."

Lundsager said the turmoil created by the UK vote has made the job of central banks much harder.

paulwelitzkin@chinadailyusa.com