A simple numerical comparison of economic power as shown in the previous article does not make much sense between China and Taiwan. The difference is too big. Therefore, assuming that China fully supports the Russian economy that ended the Ukrainian war, let us consider the magnitude of the burden and its impact on Taiwan.
1. Changes in economic and geopolitical order
The possibility of China’s default Russian economy being regenerated after the end of the Ukrainian War seems to be a generally impossible choice given the heavy burden and the risk of hostility to Western nations. However, it is expected that there will be some movement to bring the Russian economy into its own economic zone and to expand its influence on primary products such as food and energy.
In the long run, the Ukrainian war will change the state of energy trade, reorganize the supply chain, subdivide the payment network, and if each country reviews its reserve currency holdings, the world’s economy will be affected by this war. Geopolitical order can change radically. For example, China’s financial payment system (CIPS), which replaces SWIFT, may expand, especially in China and Russia. There is also the idea of seeing this change as a strategic positive factor in some parts of China. Not only will the Ukrainian War bring hardships and humanitarian crises, but the entire world economy will be affected by slowing growth and accelerating inflation. The effect will be transmitted mainly through the following three routes.
(1) Rising prices of primary products such as food and energy will further push up inflation, and as a result, the value of income will decrease and demand will be squeezed.
(2) Globally, in addition to turmoil in trade, supply chains, and remittances, we will deal with the historic surge in refugee outflows.
(3) Deterioration of business sentiment and heightened investor anxiety will weigh on asset prices, tightening the financial environment and, in some cases, inducing capital outflows from emerging market countries.
I would like to consider whether China can really support the exhausted Russian economy amid such major changes in the world’s economic and geopolitical environment.
2. China’s domestic opinion
I would like to clarify in advance that there are the following opinions in China.
On March 5, Professor Hu Wei, a professor at the Shanghai Communist Party Committee, argued that China should cut off its ties with Russia and cooperate with the Western countries of the United States, Europe and Japan, which is in the national interest. Specifically, it touches on the effects of sanctions on Western countries and the possibility of political changes due to anti-war forces in Russia. At the National People’s Congress on March 11, Prime Minister Li Keqiang will support China’s 5.5% growth target this year with fiscal stimulus measures. Russia’s share of China’s exports is relatively small, so the direct impact of the Ukrainian war is minor. This is a statement denying active involvement in Russia as well as the stability of the Chinese economy. On March 15, former Prime Minister Zhu Rongji opposed the three elections of President Xi Jinping. Xi Jinping’s leadership has expressed concern about the impact on the Chinese economy following the military invasion of Ukraine by Russia, which has been strengthening relations with the speculation of a joint struggle with the United States. These statements make it clear that the Communist Party leadership is not always in agreement.
3. China’s rescue of Russia
What are the benefits of China’s bailout in Russia’s sanctions and disagreements within the Communist Party in the West?
It is not easy for China to have Russia, which has fallen into default after being ejected from the world economy as a villain. On the other hand, if you look at the world from a bird’s-eye view, China has no choice but to hold Russia. Putin Russia’s existence is indispensable for China, which seeks domestic unification through a politically confrontational structure with the United States, and I do not want to even imagine the collapse and democratization of Russia. If Putin’s government collapses and Russia becomes a democratic government, all the pressure of Western nations will turn to China. As the Chinese Communist Party, that alone must be avoided.
So what kind of relief is possible?
Since it will not be possible to unfreeze financial assets until the reconstruction of Ukraine, the financial settlement system (CIPS) that replaces SWIFT will be expanded first to liquidate bilateral trade and remittances. Furthermore, if China moves to support Russia’s finances, RMB-denominated assets held as foreign exchange reserves may be utilized. According to June 2021 data, about 13% ($ 77 billion) of Russia’s reserves are Chinese assets, and selling those assets will give Russia a certain amount of liquidity.
In addition, the People’s Bank of China and the Central Bank of Russia have a currency swap agreement of 150 billion yuan (about 23.8 billion dollars), so both China and Russia can provide liquidity for business continuity. That said, the current annual transaction value of CIPS is less than that of SWIFT per day, and the number of transactions per day is less than 1/4000. Given these circumstances, we judge that financial relief and revitalization of the Russian economy will not be possible in the short term unless sanctions are lifted in Western countries.
Next to the financial aspect, the most important factor is the management decision of foreign-affiliated companies. The development of the Chinese economy over the last 30 years is due to the generous investment of foreign-affiliated companies, both soft and hard. Unreasonable bailouts and aid that fill the Western economic sanctions from the need for political bailouts from Russia have increased awareness of reputational risk among Western companies, eventually leading to downward revisions to investment plans and Chinese businesses. There is a high possibility that a review will occur.
I think China has experienced many exercises during the Ukrainian War. Looking at the EU, NATO, and the United States, which are more united, I think they understood the recklessness of Taiwan’s unification.