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

The plunging pound may signal that the UK could face a financial system crisis, Chinese analysts said on Tuesday, adding that the situation will be aggravated by the ideology-based foreign policy taken by Britain's new Prime Minister Liz Truss.

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

Financial assets in the UK are exposed to growing risks under the impact of the plunging pound, which has rattled 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 at 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, deemed by some analysts as reckless.

The depreciating pound has hurt the share prices of listed companies in the UK. For example, CK Asset, controlled by Li Ka-shing's family, tumbled 8.6 percent to reach HK$48.20 ($6.15) on Monday.

As pound-denominated assets lose value, more companies may choose to cash out and leave the UK market, Zhang said, noting that the depreciation of the pound could lead to the same kind of financial crisis faced by Southeast Asia and Argentina years ago.

Yang Aozheng, an analyst with 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, as investors are increasingly concerned about London's economic policy. 

The seriously weakened pound came as other currencies of the developed countries fell too.

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

Zhang noted that many G7 counties face their worst problems since the end of World War II, and they share similarities in that their economic woes come from their sanctions against Russia, which induced energy and inflation crises. Emerging market economies, while also facing the menace of a strong US dollar, don't face the same level of energy crisis.

To cope with the US Federal Reserve's aggressive interest rate hikes, countries around the world have acted to bolster their currencies. The Japanese government and the central bank are buying yen to shore up the currency, with a scale of intervention that may have reached $20.7 billion last week, according to media reports on Tuesday.
 
Gao Ying, chairwoman of the European American Chamber of Commerce and Industry, told the Global Times on Tuesday that Chinese companies' investment strategy in the UK will not be affected by the weakened pound as the investments are targeted at innovative and technologically advanced UK companies.

Chinese companies will still face headwinds, though, given the UK government's restrictive measures on them, Zhang said, noting that hyping ideological conflicts will only cost the UK opportunities to weather the coming economic storm. Truss has recently vowed to reduce the UK's dependence on China.

Zhang said due to the complementary nature of the economic and trade structures of China and the UK, bilateral trade won't be much affected by the depreciating pound, adding that the UK's services exports such as financial and insurance services will remain unchanged.