As the UK decides to leave the Eurpean Union, markets plummet in Asia. This could be especially worrying for China after the country only recently, and as it looks now only for a short time, defeated great concerns about its rising debt levels.

China’s rising debt

Chinese rising debt first became a major concern in 2014 when debt levels reached US$ 28 trillion, nearly 282% of its’ GDP. Only Greece, Portugal, Ireland and Singapore saw greater debt to GDP ratios. China had fuelled its impressive economic rise since the 1990s through foreign investment and exports, but its’ economy had started to slow after a 2007 peak at 14 trillion GDP and fell below US$ 8 trillion in 2014 which caused concern over China’s ability to service its’ debt. Nether the less China has over the past two year managed to defend its’ market position and the first quarter of 2016 saw the highest rate of growth since the end of 2014. GDP has risen above US$ 8 trillion again, leading many to believe that the Chinese economy may be on a way to recovery. However, new gained strength in the economy was once again funded through borrowing, with bad loans being serviced by new loans and the Chinese government investing heavily in construction and investment through a further expansion of credit. Debt levels are still at 240% of GDP and public debt has further risen from 58% in 2014 to 65% in 2016. These figures may even be an underestimate of real levels as local governments, necessitated to borrow due to low tax incomes, often write of borrowing as corporate debt due to legal barriers to local government borrowing.

Asian markets plummet

China may have hoped they avoided painful structural adjustments to decrease debt levels for a prolonged period of time, but last night’s Brexit results may destroy any hope that he country has for now escaped the critical stage. Asian markets have started to plummet with Tokyo, Hong Kong and Sydney loosing 7.2 percent, 4.7 percent and 3.18 percent respectively. The Chinese and communist party controlled news wire Xinhua had previously estimated that a Brexit vote would likely put downward pressure on global markets and could cause Chinese markets to drop 5 to 10% and first motions in the market have shown such fears to be true. This development may result in the debate over the concerns around Chinese rising debt to be wide open again, especially considering the costly venture of currency manipulation China was involved in throughout the past two years, which lost China US$ 8 billion of its impressive accrual of foreign exchange reserves.

China’s foreing exchange reserves

Like many other Asian countries China started to accumulate foreign exchange reserve after the Asian Financial Crisis in the late 1990s and by 2014 its’ reserves stood close to US$ 4 trillion, which is more than the amount of all foreign exchange reserve of the next six biggest reserves held by other countries combined and equalled nearly half the Chinese GDP. But as of 2016 Chinese foreign exchange reserves stand at only US$ 3.2 trillion and in January this year alone a further US$ 99.5 billion. Much of these losses can be attributed to a miscalculation on the events and American actions post the Global Financial Crisis. Post the global financial crisis, the US greatly depreciated its’ currency through a number of waves of quantitative easing. China, trying to maintain its’ peg to the dollar and keep its’ competitiveness, engaged in major currency manipulation to hinder its’ currency from appreciating. However, the US did surprisingly well in soaking up the added liquidity and by 2014 the dollar was getting stronger again. Not having anticipated these developments, many countries such as Brazil saw themselves in trouble as their currencies suddenly started to plummet. In order for China not to follow Brazil’s path it had to use vast amounts of its’ foreign exchange reserves to prop up its’ currency.

What this could mean for the future

The change in foreign exchange reserves, in respect to the 2014 position, may have major consequences for China, should rising debt levels become a concern again. While in 2014, the vast amount of foreign reserves may have calmed investors and assured that confidence in China could be sustained, by now China has already lost much of its’ reserves to prop up its’ currency. Should the talk about China’s debt spark up again in the eye of trembling Asian markets, China may this time not find itself in the position to defend its’ currency and economic position. It remains to see if last night’s Brexit vote is to cause long term downwards effects on world markets and how the Chinese Central Bank will deal with such events.

Katharina Fleiner 24/06/2016

As the referendum is now only one day away and arguments for both ‘Remain’ and ‘Leave’ are being considered, one of the major questions, which may come to affect voting decisions greatly, is that of the effect a Brexit vote could have on UK pensions. It was noted, after the Scottish independence referendum, that pension security was the major concern which won the vote for the ‘No-to-independence’ side. If the consideration of pension safety should play a similar role in Thursday’s referendum, staying in the EU clearly becomes the more likely choice for a number of reasons discussed below.

The ‘Leave’ campaigns argument for more self-determination on UK pension policy does not add up

The ‘Leave’ campaign has tried to make UK pension policy an argument in their favour, stating that current and future EU legislation on pensions will infringe and harm UK interests. The European Union currently has some legislation which affects UK pension policy, mainly to the purpose of harmonisation of certain aspects to allow for the possibility for free movement of people across the European economic area. There are currently negotiations over new additions to harmonised legislation on the way which could bring changes to the UK pensions system that may not be welcomes by everyone. However, blaming the European Union and UK inability to affect EU law making sufficiently for the implementation of somewhat unfavourable changes may have to be considered as scapegoating. Blaming international organisations for unpopular but necessary policy measures has always been a common choice for political parties and governments to avoid having to take responsibility and face voters disinclination head on. In the case of EU policy decision on pensions it would be reasonable to think that this may be the case. Like many other European countries, the UK is currently facing the issue of an ageing population. The UK parliament estimates that between 2015 and 2020 the general population is going to grow around 3%, while the population over the age of 65 is expected to increase by 12% (1.1 million) and the number of people aged over 85 by 18% (300,000). Therefore, some new policy changes which can create better working opportunities for older workers, encourage more private pensions and raise pensioner age, as much as they are painful to some, may simply be necessary to support the demographic change. Leaving the European Union gives the UK more self-determination over its’ legislature, but it does not change the fact that the issue of an ageing population is putting strain on current UK pension policy and needs to be addressed through changes. The new-found freedom is also unlikely to be used to reverse the adoption of the Specific Funding Requirements, one of the main EU directives on pensions. The UK’s predecessor, the Minimum Funding Requirement, had been recognised for its inadequacy and many Trade Unions are likely to lobby for the preservation of the current directive.

The UK’s ability to make changes to UK pensions legislation depends on a post Brexit negotiated deal

Further, any ability for more self-determination on this policy area also depends on the negotiations on the terms of the UK’s exit from the European Union. Should the UK decide to join the European Economic Area, like countries such as Switzerland and Norway, it will still have to harmonize pension legislation with the European Union, without having a say in their design any more.

Why Brexit may decrease your UK pension value

Lastly, there is great concern over what market movements could mean for UK pensions. Most UK workers save into a defined contribution pension. These pensions do not have a fixed term on retirement income but depend on the market. Financial instability or, in the worst case, a market crash will lead to these pensions being worth considerably less. While this may not affect young people greatly, as they have time to wait for markets to recover in the future, people who are looking to retire soon should be worried about how much their hard work will pay out in the end. Even workers who are looking forward to a fixed term pension may have reason to worry. A Brexit vote may lead to the Pound losing in worth and inflation to go up, meaning that their money will ultimately buy less. This especially is, reason for concern for the many pensioners who have set out to enjoy their retirement abroad. As their pension is fixed in terms of Pounds their real living income will decrease as the Pound loses out against local currencies. Further they face the threat of losing access to local health services which are currently freely usable to them under EU legislation.