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British election sows fresh doubts for Asian investors

Inconclusive poll could throw Brexit and global trade plans off track

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British Prime Minister Theresa May leaves the Conservative Party's Headquarters after the general election in London on June 9.   © Reuters

After a historic miscalculation by Prime Minister Theresa May, Britain's general election has ended inconclusively with no single party winning enough seats to form a majority government. The final outcome will only be known in coming days, but already it is clear that May's ruling Conservative Party is bruised and weakened. Her own future is in doubt, as is Britain's plan to make a clean and decisive break from the European Union.

The poll has also left foreign governments and investors in doubt about Britain's trajectory, casting uncertainty over crucial negotiations over the Brexit process and also weighing in the currency and stock markets.

Under May, Britain had advocated a masterplan for a rejuvenated Britain, its sovereignty returned, reaching out for post-Brexit trade deals that would have a strong focus on Asia.

The current uncertainty will do little to dampen the Asian pull and may even end up strengthening it further.

But May's promise of delivering "certainty" under her "strong and stable leadership" now lies in tatters, and Britain's future with Europe is once again being sent back to the drawing board.

A day ago, the world's fifth-biggest economy was set to leave the EU's single market and wider customs union, as laid out by the Conservative Party in its election manifesto. Now, even the minister in charge of Britain's EU departure, David Davis, has conceded that the new government would not have a mandate to implement what has become known as a "hard Brexit."

Former business secretary Vince Cable, from the small, centrist Liberal Democrats, said a hard Brexit was now no longer an option. Ten seats in parliament were won by the Ulster Unionists, from Northern Ireland, where Britain has its only land border with Europe. May was reported to have struck a deal with the DUP for their support the morning after the poll. "No one wants to see a 'hard' Brexit," said DUP leader Arlene Foster. "What we want to see is a workable plan to leave the EU, and that's what the national vote was about -- therefore we need to get on with that."

EU talks deadline

Under the present timetable, Parliament meets next Tuesday June 13, by which time May (or her successor if she is ousted) will need to have put together a credible deal to stay in power. The new government's program will then be announced on June 19 in the Queen's Speech. On the same day, Brexit negotiations are due to begin with the EU, although this deadline is now likely to slip.

The initial EU sessions were expected to be hostile and abrasive, with a dispute over the multibillion euro exit fee Britain may have to pay in its outstanding EU obligations. Other fractious issues included the rights of 3.5 million EU citizens living in Britain and details of border controls, shared security arrangements and tariffs, about which May had offered scant detail.

While hesitant in openly interfering with Britain's democratic process, Asian companies and their governments made no secret of their preference for Britain to stay inside the EU. May had stuck to a strident line that no deal with the EU was better than a bad deal, which set alarm bells ringing among investors.

The Japanese government sent a 15-page letter asking Britain to avoid economic instability: "It is imperative the outcome is free of unpleasant surprises and reducing the risk emanating from uncertainty."

The Japanese Business Federation, or Keidanren, lobbied bluntly. "Please negotiate with a deeper consideration for the economy," it asked on behalf of the more than 1,000 Japanese companies which have invested a total of $52 billion and employ 140,000 people in Britain.

China issued warnings. Its companies needed to take precautions over Brexit, specifically in the financial sector, which Beijing has been using extensively in its expansion into Europe.

The Federation of Indian Chambers of Commerce and Industry feared what it described as a "double-hit" impacting the 800 Indian companies operating in Britain. Exports were already declining and the pound, suppressed by Brexit prospects, delivered less return.

Many multinationals have settled for setting up satellite offices in EU countries with a "wait and see" attitude on how the negotiations would unfold. Few want the upheaval of moving regional headquarters.

Buoyant investment

Amid all this, Asian investment into Britain had been surprisingly buoyant.

Japanese telecoms giant SoftBank marked last year's biggest investment from Asia when it acquired the British chip designer ARM for $31 billion, the biggest purchase ever of a European technology company.

Overall Asian investment into the European technology sector reached $58 billion, much of it into London, which is now a regional technology hub.

Chinese investment since the Brexit vote includes Dalian Wanda's acquisition of Odeon and UCI Cinemas for $1.2 billion and a $650 billion real estate project at Nine Elms on the south bank of the River Thames; a massive project by Sichuan Guodong Construction to regenerate a swathe of the northern city of Sheffield, starting with $300 million over the next three years; and the $58 million purchase by the Chinese Fosun conglomerate of the football club Wolverhampton Wanderers.

There is also a long-term Chinese commitment to Britain's nuclear power industry with China General Nuclear making a 33% investment in the proposed Hinckley Point C power station, the first to be built for 20 years.

Although it has tapered off in recent years, India's trade with Britain has tripled since 2000. Indian companies now employ 110,000 people in the country. Indian industrialists were also poised to take advantage of Britain's post-Brexit initiative to create a Commonwealth trading network.

"This would reflect the nature of the Commonwealth as a flexible alignment rather than a rigid alliance," said Richard Burge, chief executive of the Commonwealth Enterprise and Investment Council. "What the Commonwealth could do very well is develop a template of features that bilateral trade agreements between Commonwealth countries could, or should include."

Regardless of the election result, Britain will find it difficult to negotiate early trade agreements with the bigger economies of China, India and the U.S. But it has been eyeing smaller Association of Southeast Asian Nations members as potential partners with which to strike early new trade deals once it has left the EU. In the cases of Singapore and Malaysia, there would be the dual incentive of the refreshed Commonwealth link.

Exports from ASEAN to the UK have halved from about 4% of the total in 1995. Into Europe, ASEAN exports have dropped from 20.5% to just over 12%, and business analysts believe this trend could be reversed.

"It's really important for the UK to rack up a few trade deals," said Oxford University economist Linda Yueh. "It can then use those deals to entice other nations to come to the table."

Yueh also believes that there is little threat to Britain's status as a hub for financial services. "London has been a global financial capital for a long time," she said, "even though Britain is not the biggest economy in the world."

Over the past year, the hard Brexit policy of May's government has prompted predictions of withdrawn investment, high unemployment and economic decline. The Conservative's continued austerity policies also appear to have put off many voters, pushing them into the arms of the left-wing Labour Party under Jeremy Corbyn.

Whatever shape the new government takes, voters have demanded that it ends the harshness of the cuts to public services and keeps Britain close to Europe.

There will still be a Brexit, but of a different style.

A win-win scenario would be one in which Asian companies could retain Britain as their gateway to Europe while benefiting from its new, independent hand reaching out for enhanced trade.

Humphrey Hawksley is a former BBC Asia correspondent. His next book, Asian Waters, is published later this year.

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