Home » How does the weak pound affect Chinese Companies?
Recently, we published an article which took a look into the possible side-effects of the United Kingdom’s announced exit from the European Union. While at the time, it was difficult to predict what effects (if any) were going to happen, recent news has shown quantifiable damage.
The investment firm, Cheung Kong Infrastructure (CKI), announced year end results showing a decline of 8.8% in pre-tax profits, once taking into account special one off items. While the financial performance of the firm within the UK remained largely flat, the company is exposed to the current volatile nature of the British currency. Currently the firm is estimated to generate 73% of their revenue from the British market, meaning any movements in the currency directly impact against the firm’s profits.
However, the company CKI is not the only one with a heavy interest in the British market. Property has been an area many Chinese firms and citizens have invested in, particularly in London and doubts are starting to arise in the aftermath of the referendum vote. The UK’s property market has now started to stagnate, with property asking prices falling 0.9% post referendum.
Other companies include Chinese conglomerate Sinochem Group which owns the British company Emerald Energy. This is just one example of the many Chinese companies which have bought brands and corporations in the UK, primarily in the property market but also including energy, finance, food, transport as well as others.
The weakening pound is starting to have the knock on effect globally, and many Chinese firms will see an impact upon their finances. While the majority will have well-diversified portfolios and very few will see critical consequences, a large amount will still see the damage come the end of their accounting years.
Many leaders and economists have urged the United Kingdom to invoke article 50 and proceed with their exit as soon as possible. However, it appears the countries new leader is going to wait and let the process drag out longer than needed. Chinese firms and many countries currently within the European Union are currently suffering from the side effects of the uncertainty priced into the financial markets. As soon as the picture is clear, it will be much easier for everyone to move forward. Even if after the eventual exit from the European Union happens and the pound continues to weaken, the recovery will be much closer than dragging the situation out.
Ultimately, the first signs have been seen in the recent financial performance of CKI. With many Chinese companies also relying on the British market for revenue, the weakening pound will become a recurring excuse by CEO’s when addressing shareholders. In our last article on the effects of Brexit upon China, we looked at areas like the two nations relationships. However, the biggest impact which will become a regular news piece, will be the weakening pound.
Questions will begin to arise about the long term investment Chinese companies have within the United Kingdom. A weakening pound, effectively means there is less profits to be had by foreign investment. Perhaps companies will begin to look further afield for their investments, and begin to skip the country when they look at locations to invest in. While in the short term, no immediate results are clear, only time will tell whether intentions are starting to change.