China likely to unveil fresh stimulus as exports to UK and Europe cool in post-Brexit world

China is likely to inject fresh stimulus into its economy in a move to safeguard against a slowdown amid expectations of weaker export growth to both the European Union and the UK, following last week's (23 June) surprise move by Britons to opt out of the EU.

Investment bank China International Capital Corporation (CICC) said that China's exports to Britain and Europe are expected to face headwinds in the post-Brexit world.

The impact is likely to weigh on China's already cooling economic growth and is likely to force Beijing's hand in protecting its own economy against a slowdown, China's first joint-venture investment bank said, according to South China Morning Post.

CICC is expecting China's export growth to the EU to fall by five to six percentage points. China's overall export growth in turn is expected to dip by one percentage point. This is, according to CICC, based on the assumption that the European economy would lose one percentage point of potential GDP growth due to the "shockwaves created by Britain's stunning exit decision."

The forecast figures will see China's economic growth in 2016 to be 0.2 percentage points lower as exports account for 20% of Beijing's total GDP. In a worst case scenario, should the EU's growth slow down by 2 percentage points, this will have a more than 5 percentage point impact on China's exports and GDP.

That is not all. The recent sharp appreciation of the yuan against the pound and the euro following the outcome of the EU referendum on 23 June, will "add to the downside risks to China's exports,"

The CICC noted that during the European sovereign debt crisis in 2011 and 2012, the EU's economic growth fell 2.3 percentage points, causing a 6.2% drop in China's exports to the EU in 2012. "However, the impact of Brexit may be milder when compared to events four years ago, depending on the response from central banks," the report said.

The investment bank however acknowledged that Brexit will "significantly" dampen investment flows between China and the UK and even the EU. "China's capital may become more cautious towards investment in Europe. Should Brexit undermine London's status as an international financial centre, China's investment in the UK could also be affected," CICC added.

Some of the stimulus incentives that Beijing is likely to implement include either cutting the bank's reserve requirement ration several times or lowering its interest rate. The CICC had forecast a one time RRR cut and no interest rate cuts for the rest of 2016, based on the assumption that the UK would choose to remain in the EU.

Moves by major central banks, including the Bank of England to implement monetary easing and inject liquidity would provide the People's Bank of China with some room to loosen its monetary policy. Further, the Brexit vote will now put the US in a difficult position regarding raising interest rates, which in turn may help the yuan stabilise in the medium term.