Evaluate The Impact Of Brexit On International Financial Markets (Essay Sample)

International Financial Markets
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Institution Affiliation
International Financial Markets
Following the referendum on Brexit, the European financial market is projected to experience shocks since it has already started receiving some shock signals. The risks are going to take toll order on the general economy of the European countries and the world as a whole. According to the Financial Policy Committee report, the referendum has brought many systematic financial challenges to not only the UK but also to other European nations through the existing loopholes in the global economy. These risk factors come through channels that the FPC has identified to be of high severity to the world’s economy. Some of the risk channels as determined by the FPC include the UK huge financial deficit, the UK commercial real estate market, UK household indebtedness, slow global economic growth rate, and volatilities in the global capital markets. The paper intends to discuss the economic issues that surround the referendum on the Brexit and make a commercial market comparison of European countries through the analysis of various exchange rates and trade volume. The Brexit vote negatively affected the international financial market due to uncertainties that come with it.
The Exchange Rate Movements And Trade Between China And The USA
As the Britons decided to leave the European Union, the international financial markets were affected in different degree. Given that financial markets are highly integrated, many countries other than the UK had adverse economy effects, and therefore, it is prudent to expect that the exchange rate between the US and China was affected as well (SHAN, 2017). In a bid to understand the effect, the paper is going to evaluate the trade between the two countries over the last five years.
The business corporation between China and the US has generated significant benefits for both countries over the past years. Beginning 2009, trade between the two countries has been on an upward trend. For example, in 2009, China became number three regarding market opportunities for the US. In that financial year, the US firms cumulatively invested about $ 62.2 billion in the projects in China which earned the investors close to $8 billion. (SHAN, 2017). Thanks to the economic reforms of 1979, China is fast growing into world’s largest economy. Ideally, the entrance of China in the World Trade Organization expanded the US- China trade relationship. But, over the past five years, the relationship has faced challenges due to factors such as the huge US trade deficit with China, the refusal of Chinese policy makers to recognize the currency markets, the Chinese biased implementation of WTO duties, and unfavourable Chinese industrial policy (Cho & Koo, 2004). Regardless of the above hardships, trade between the two countries is on the rise. From 2012 to 2017, for instance, the exchange rate have grown exponentially. According to data from OANDA (2017), the exchange rate has recorded a high of 6.64301 with a low of 6.14326 (OANDA, 2017). The rates indicate the even during the economic crisis, the trade between China and the US has not experienced drastic fall. In fact, on average, between 2012 and 2016 the exchange rates is 6.29844 (OANDA, 2017).
Table 1: The Exchange Rates Of The US And China Over The Past Five Years.
Average annual BID rates @ +/- 0%
/currency/historical-rates/
End Date USD/CNY
12/31/2016 6.64301
12/31/2015 6.21754
12/31/2014 6.14326
12/31/2013 6.18994
Period Average 6.29844
Period Low 6.14326
Period High 6.64301
Source: OANDA (2017)
Exchange Rate Movement And Trade Between China And The UK
The trade between the UK and China is an imbalanced trade with China taking a bigger share of the trade volumes. Britain is way behind China in comparison with the growing economy of China. In fact, the UK is not earning the benefits in the export trade between it and China (Groom & O’Connor, 2017). Before the debate of Brexit, economist projected that the UK urbanization and the growing middle class would help the country’s economy to grow. But when the politics of Brexit began, many investors developed a wait-and-see attitude thereby affecting the economic growth. An analysis of the exchange rate between China and the UK reveals an unsteady trend. According to Financial Times, though the UK exports to China has doubled in the past five years, the country’s share of the Chinese import has remained as low as less than 1%. For example, in 2016, the UK exports to China were $10.1 billion (Groom & O’Connor, 2017). Surprisingly, the main reason for the low benefit is not the Brexit referendum but the systematic economic factors. The economic factors such as the UK sells fewer capital goods and raw materials which are the most import of China. For instance, in 2011, the UK only exported 19% of machinery and electrical products to China with services accounting for over 25% of the total export. For putting the statistics into perspective, OANDA exchange rate data would be helpful. The OANDA rates indicate that China has strong exchange rates over the UK in the past five years. In 2013, the rates were 9.68227 followed by an increase in the following year to 10.1205. But from 2015, when the debate of Brexit began, the rates fell sharply (OANDA, 2017). The exchange rates moved from 9.50203 to 8.99255 in 2015 and 2016 respectively. One can clear see that the referendum significantly affected the trade between China and the UK based on this information.
Table 2: The Exchange Rate in UK and China in past five years
Average annual BID rates @ +/- 0%
/currency/historical-rates/
End Date GBP/CNY
12/31/2016 8.99255
12/31/2015 9.50203
12/31/2014 10.1205
12/31/2013 9.68227
Period Average 9.57434
Period Low 8.99255
Period High 10.1205
Source: OANDA (2017)
Exchange Rate Movement And Trade Between China And Japan
The trade between Japan and China since 2012 had seen an upward growth trend except in 2013 when the global economy slammed. In 2012, Japan and China began to trade their currencies (the Japanese Yen and Chinese Yuan) directly through the inter-bank foreign exchange market (Takahashi, 2015). The direct current exchanges between the two countries have strengthened the economic tie and led to a consolidation of their third and second largest global economy. Besides, the direct currency, trade strategy has created a cushion against the fall in the dollar in the international market (Takahashi, 2015). Because of the good trade ties, Japan has remained the fourth largest trade partner to China while China is the biggest Japanese trade partner for the past five years. According to the International Monetary Fund report (2012), the trade between China and Japan totalled to 19.9% of the world’s gross domestic product (GDP). In fact, the bilateral trade between the two nation increased by 14.3% to about $ 344.9 billion in 2011(Takahashi, 2015). But since the economic downturn in 2013, the Japanese trade balance deficit with China continues to fall by 2.7% (OANDA, 2017). The fall in trade balances is due one; the pushed down Japanese export, the falling import, and the decline in total trade. From the data, the Brexit is not a major factor influencing the trade
Table3: The exchange rate between China and Japan in the Past Five Years
Average annual BID rates @ +/- 0%
/currency/historical-rates/
End Date CNY/JPY
12/31/2016 16.3711
12/31/2015 19.4022
12/31/2014 17.2209
12/31/2013 15.7588
Period Average 17.1883
Period Low 15.7588
Period High 19.4022
Source: OANDA (2017)
The Link Between Trade Volume And Exchange Rates
The link between the trade volumes and the exchange rates has relatively remained over the past five years. Going by the above stock trends indicated in tables one, two, and three, it is clear that to some degree, the exchange rates were affected by the Brexit vote. Since in a typical international trade, there is a correlation between volume of trade and the exchange rate where the higher the rates the exchange rates, the lower volume of business and vice versa. In other words, countries with stronger exchange rates usually have a large volume of trade since it is cheaper for them to trade against weaker currencies the opposite applies to those nations with weaker currencies. For example, the UK exchange rate strength declined meaning its volume of trade reduced over the period. The export trends indicate that UK export to China has been on the rise in the past five years even in when the pound was weakening. Since 2012, the export volume has been above 2% of the total UK export.
The UK Efficiency Of Response To The Vote
The UK stock market has received major shock due to the referendum on its membership in the EU. Immediately after the referendum, the UK share prices has been low in a major financial market in Europe and other states (Irwin, 2015). However, the next trends are not sufficient reason enough to qualify the theory that the Brexit is responsible for the declining stock prices. For an in-depth analysis of the stock trends, the Kiel Institute For The World Economy conducted a study to demystify the myth (Irwin, 2015). For instance, in 2016 the stock market indices were on the rise until the mid-financial year. But immediately after the vote, the indices reduced by about 10% with the lowest indices recorded with the Nice terror attacks and Turkey. During the Brexit, the GBP lost 8% of its value against the US dollars, and 10% loss against Euro (Irwin, 2015). The implication of the index fall is that investment in the UK was cheaper for the Dollar and E...