Falling pound could trigger UK financial system crisis: experts

Tourists walk in Parliament Square in London, Britain July 11, 2022. London is currently experiencing a heatwave as temperatures hit a high of 32 degrees Celsius in west London on Monday. (Photo: Xinhua)

The fall in the pound could signal that the UK could face a crisis in the financial system, Chinese analysts said on Tuesday, adding that the situation would be aggravated by the foreign policy based on the ideology adopted by the new Prime. British Minister Liz Truss.

The pound hit its lowest level against the US dollar on Monday since 1985.

Financial assets in the UK are exposed to increasing risks under the impact of the fall of the pound sterling, which has shaken investor confidence and caused an exodus of investors from the country, with its status as a global financial center undermined , according to Zhang Monan, deputy director of the Institute of American and European Studies, China Center for International Economic Exchanges.

The pound hovered around 1.08 against the dollar on Tuesday after falling to its lowest level since 1985, trading at 1.0327 against the greenback on Monday, amid news of historic tax cuts, judged by some analysts as reckless.

The depreciation of the pound hurt the share prices of UK-listed companies. For example, CK Asset, controlled by Li Ka-shing’s family, fell 8.6% to HK$48.20 ($6.15) on Monday.

As pound-denominated assets fall in value, more companies could opt to cash in and exit the UK market, Zhang said, noting that the pound’s depreciation could lead to the same type of financial crisis as the one in that Southeast Asia and Argentina faced years ago.

Yang Aozheng, an analyst at market research firm FXTM, said in a research note sent to the Global Times on Tuesday that in the short to medium term, the pound could weaken to parity with the US dollar, investors being increasingly concerned about the economic situation in London. Politics.

The British Pound has seriously weakened as other developed country currencies also fell.

A Bloomberg report on Monday suggested that the expected volatility of G7 currencies is now more difficult to manage than currencies of emerging countries, noting that the pound is more volatile than the Brazilian real or the Polish zloty.

Zhang noted that many G7 countries are facing their worst problems since the end of World War II, and they share similarities in that their economic woes stem from their sanctions on Russia, which caused energy crises. and inflationary. Emerging market economies, while also facing the threat of a strong US dollar, are not facing the same level of energy crisis.

In response to aggressive interest rate hikes by the US Federal Reserve, countries around the world have acted to strengthen their currencies. The Japanese government and central bank are buying yen to support the currency, with a scale of intervention that may have reached $20.7 billion last week, according to media reports on Tuesday.

Gao Ying, president of the Euro-American Chamber of Commerce and Industry, told the Global Times on Tuesday that the investment strategy of Chinese companies in the UK will not be affected by the weakening of the pound, as the investments are targeted at innovative and technologically advanced UK companies.

However, Chinese companies will still face headwinds given the UK government’s restrictive measures against them, Zhang said, noting that ideological clashes will only cost the UK opportunities to ride out the economic storm at home. come. Truss recently pledged to reduce the UK’s dependence on China.

Zhang said that due to the complementary nature of the economic and trade structures of China and the UK, bilateral trade would not be affected much by the depreciation of the pound, adding that the UK’s service exports United States, such as financial and insurance services, would remain unchanged.

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Don F. Davis