Brexit won't break China's economy

The Brexit vote rattled global markets, but China has been left relatively unscathed.

The UK’s decision to leave the European Union won’t strongly affect China’s economy, according to Leland Miller, co-founder and CEO of China Beige Book International, a leading data firm that surveys over 3,000 firms and 160 bankers across the country every quarter.

He says though he doesn’t expect Brexit to have much of an impact, many unknown variables may abound in the near term such as other trade re-negotations or a global slowdown that might force China to spur up stimulus. But, ultimately, it’s hard to speculate about the potential repercussions when Brexit will likely impact global markets for the next several years.

“It’s so new. Obviously, everyone’s going to be thinking that there’s a sea change globally,” Miller says. “I don’t think it’s going through the heads of the average Chinese business quite yet.”

Last summer, China experienced a massive stock market crash (the Shanghai Composite dropped 8.5% in a single day), which came after investors piled money into Chinese equities despite the country’s weak economy and company profits.

Miller says the Chinese economy has come a long way from a year ago and is actually on the mend. Driven by the services and construction industries, China is experiencing “moderate trend growth,” according to China Beige Book’s latest report.

“Markets may find this quite surprising considering all the gloominess in the aftermath of the Brexit vote,” he says.

Things are looking much better, with the Chinese economy rebounding from real weakness in Q1 and Q4 of last year. “We’ve had two consecutive quarters where China looked as bad as it has been since the beginning of our survey [started five years ago],” Miller says.

That economic uncertainty triggered the government’s decision to cut interest rates to a record low and crack down on short-sellers, among other moves. Miller’s survey is seeing these policy responses make an impact on the Chinese economy this quarter.

“There are finally signs of effective fiscal stimulus, with the transportation and real estate construction sectors each suddenly showing signs of life,” he says. “This is pure fiscal stimulus coursing through the country, causing a big jump in hiring as well.”

But now, with the Chinese economy looking healthy, he says the government should back off.

“This is the time [the government] should be putting fiscal stimulus away, saving it for an even rainier day. Then they can come back with it if things are problematic,” he says. “But that’s not the Chinese way. So we’ll see if this could go on for several quarters or if it’s just a one quarter blip.”