As the West confronts Russia over its invasion into Ukraine, China faces a three-sided dilemma: maintaining its partnership with Russia without aggravating its relations with the West, while also respecting the principle of territorial integrity. Given the worldwide pressures for China to condemn Russia, can Beijing bridge the unbridgeable and sustain the growth objectives that underpin the credibility of the Communist Party? The solution may lie in offering Beijing inducements rather than delivering threats.
Between the two major autocratic powers, Russia was seen as less constrained in its foreign policy interventions, assuming that the world was dependent on its energy resources. So the severity of the Ukraine-related sanctions, including a phased scale-back of imports of its gas and oil, has shocked Moscow.
China, as the largest trading nation and a major recipient of foreign investment, was seen as more vulnerable to sanctions, since it relies on the multilateral financial system to prosper. With manageable fiscal deficits, modest inflation rates, and more than ample international reserves, China can weather financial repercussions from the Ukraine crisis. But GDP growth is another matter. China’s 5.5 percent target for this year seems modest in relation to the 8.1 percent recorded last year. However, quarterly growth had declined to 4 percent by the end of 2021, and the forecasts of the International Monetary Fund and other institutions are closer to 5 percent for 2022.
Beijing is usually conservative in setting growth targets, but this year is different. Great care has gone into promoting the theme of stability and providing assurances that the economy is back on track, in order to create a positive environment for President Xi Jinping’s claim for an unprecedented third five-year term at the party congress this fall. But China can no longer count on a rebound in the property market to revive growth, given the financial excesses of major developers such as Evergrande. Personal consumption remains tepid, given the pandemic uncertainties and closed borders. An infrastructure-led stimulus by the local authorities is unlikely, given depressed land sales and concerns over bond-fueled debt holdings. Moreover, new pandemic outbreaks, even if localized, have led to lockdowns and production shutdowns. This year’s growth prospects have more downside risks than upsides.
To support an aggressive growth target, the recently concluded National People’s Congress endorsed a larger fiscal deficit, which—combined with unspent funds from last year—could support a modest stimulus program. But this will not be enough. The Ukraine crisis threatens to lower this year’s growth rate to 4.5 percent—or even less. For an economy that a decade ago was growing at double-digit rates, falling into the 4 percent range would mark a disturbing phase in China’s economic evolution. Energy price increases, commodity price increases, and supply chain disruptions are the three major factors contributing to this decline.
Russia is the world’s largest oil exporter and provides about a quarter of all the oil imported by the EU and 15 percent of China’s total imports. Russian gas exports account for about 40 percent of Europe’s needs, with Germany and Italy being the most dependent. The location of existing pipelines limits Europe’s options if gas flows from Russia are curtailed. China relies on a single pipeline for importing gas from Russia and has been wary about becoming more dependent, but given attractive concessions, a second pipeline is now being constructed. China has other options if oil and gas supplies from Russia are disrupted, but the surge in prices will dampen consumption and investment.
Global supply chains were already under stress before the crisis. Now add a breakdown in Euro-Asia transport links, including shipping lanes in the Black Sea, lengthened air routes from Europe to Asia because of the need to bypass Russian airspace, and unreliable rail links connecting Europe through Russia and Central Asia to China. As the center of Asia’s production-sharing network, China has much to lose with this fractured global supply chain. Reputational damage will exacerbate the situation, as Western buyers drop Chinese suppliers to protest Beijing’s policies.
Reduced availability of Russian raw materials, such as aluminum and steel, for manufacturing and construction will lead to higher prices and sporadic plant closures globally. Automakers, already suffering from semiconductor shortages, now need alternative sources for platinum for producing catalytic converters and nickel for batteries to power electric vehicles. Global food security is also at risk, since Ukraine and Russia are major exporters of wheat and corn to China and others.
Considering these factors, Beijing would seem unlikely or incapable of coming to Moscow’s rescue. UN data indicates that China exported only about $70 billion of goods to Russia in 2021, while exports to the EU and United States totaled over $1 trillion. Beijing will not want to lose access to Western markets by violating the sanctions. China could absorb some of Russia’s lost gas sales, but the amounts are constrained by the size of the existing pipeline, and it will not add to its adequate stocks of oil without discounts. China can help in facilitating financial transactions, as Russians switch to China’s UnionPay system after the loss of Visa and Mastercard services. Given its limited coverage, China’s own cross-border clearing system for financial transactions is a poor substitute for the West’s SWIFT network. Moreover, China’s major banks will comply with any sanctions for fear of being cut off from a dollar-based international financial system.
Aside from any possible response to the recent unconfirmed reports about Moscow asking for military assistance, China’s support for Russia will be mainly in the form of condemning the sanctions and acknowledging Moscow’s concerns about NATO’s encroachment into its sphere of influence. This narrative drives popular Chinese sentiments that after Russia, China could become the next target of Western pressures—symbolized by the Australia, UK, and U.S. security pact (AUKUS) and the U.S.-led Quadrilateral Security Dialogue (Quad) with Australia, India, and Japan. This view of China in the crosshairs is reinforced by Washington’s instinct to threaten Beijing, as exemplified in U.S. Commerce Secretary Gina Raimondo’s warnings about shutting down China’s high-tech companies if they violate the trade sanctions. U.S. actions taken days after the Ukraine invasion, such as a U.S. warship sailing through the Taiwan straits and a military delegation visiting Taiwan, are seen as calculated provocations.
But more effective than confrontational messages might be to offer China inducements to reconsider its relationship with Russia. Few Western policymakers pause to ask what Beijing might want from Brussels or Washington to become more cooperative.
The U.S.-China trade war obscured the fact that Europe’s economic links with China far exceed those of the United States. The reality is that the EU’s foreign investments in China have been about twice as much as America’s over the past decade. Germany in particular relies on China as a manufacturing base for exporting to other countries. Persuading Beijing to intervene with Moscow would be made more credible if Brussels signaled a willingness to revive negotiations on the bilateral investment treaty that was put on hold because of China’s Xinjiang policies. China, however, does not want to be seen as unilaterally abandoning Russia, so Xi has indicated to French President Emmanuel Macron and Germany Chancellor Olaf Scholz a willingness to support a joint mediation effort.
Washington could begin by cutting back on the trade war–related tariffs that are widely seen as ineffective. Even more persuasive would be to signal that it is time to lower tensions. As with the stunning shift in U.S. policies toward Venezuela, a totally out-of-character move for Biden would be to invite China to participate in Quad discussions on shared concerns such as climate change, tech standards, and pandemic responses. Such signals would help dispel Beijing’s notions that the Ukraine crisis has its parallels in the United States trying to box-in China in Asia.
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