The impact of the Russia-Ukraine war on the Chinese economy

31 Mar 2022
economy
Xu Le
Lecturer, Department of Strategy and Policy, National University of Singapore Business School
The ongoing Russia-Ukraine war has brought about significant impacts on the global economy. While some analysts think that China's economy will benefit from the war, NUS academic Xu Le points out that the situation is not clear-cut, as China will have to face hits to its exports, as well as rising energy prices and challenges to food security.
Ukrainian serviceman secures the site of a bombing at a shopping centre as Russia's invasion of Ukraine continues, in Kyiv, Ukraine, 21 March 2022. (Marko Djurica/File Photo/Reuters)

It has been more than a month since Russia launched a "special military operation" in Ukraine. This has had a significant impact on the global economy - commodity prices are going up to record highs, supply chains are being disrupted, while rising inflation and slowing economic growth have lowered business and investment expectations. These effects are posing considerable challenges to post-Covid economic recovery for every country in the world.

Many countries have condemned Russia for the war, but China has largely sought to maintain a neutral stance. As the fighting continues, some analysts think that China's economy will benefit from the war, while others have the opposite view. The answer may lie somewhere in between.

Impact on Chinese exports to the EU

Exports are a vital contributor to China's economy. This factor has been crucial in allowing it to outperform other economies during the pandemic. Exports are also considered a significant growth driver for the Chinese economy in 2022 as the country works to achieve its Gross Domestic Product (GDP) growth target of around 5.5%.

In 2021, China was the second largest partner for the European Union (EU) in terms of export of goods (10.2%) and the largest partner for the EU's import of goods (22.4%), according to data from Eurostat.

China's total export growth will fall by 0.3 percentage points for every 1 percentage point drop in the EU's GDP growth.

This file photo taken on 12 October 2021 shows containers stacked at Lianyungang port, in Jiangsu province, China. (AFP)

It is evident that the EU's trade volumes with China are determined by the grouping's economic growth rates. However, the Russian-Ukraine war has cast a pall on the EU's economic outlook. Energy prices in Europe are going up, affecting business confidence as well as domestic consumption. These impacts will likely slow down the EU's economic growth and reduce its demand for imported goods. This in turn will decelerate China's export growth.

The United Nations Conference on Trade and Development (UNCTAD) has lowered its expectations for global economic growth by 1% from 3.6% to 2.6%, noting that Europe will be harder hit by both high commodity prices and the Ukraine war. The stagflation in the EU, a situation of inflationary pressure and stagnant growth, will spill over to other economies.

As assessed by a senior China economist from ANZ Research, China's export growth positively correlates with the EU's economic growth, that is, China's total export growth will fall by 0.3 percentage points for every 1 percentage point drop in the EU's GDP growth.

China's exports to Russia surged 41.5% on the year for January and February, while imports grew by 35.8%.

Impact on Chinese exports to Russia

Western sanctions on Russia and international firms' withdrawal from Russia are strengthening the trade ties between China and Russia, creating more opportunities for Chinese companies.

China's exports to Russia surged 41.5% on the year for January and February, while imports grew by 35.8%. The main products exported to Russia are broadcasting equipment, computers and household goods, while those imported from Russia are mainly commodities and energy.

A vehicle moves a shipping container at a commercial port in Vladivostok, Russia, 22 October 2021. (Tatiana Meel/File Photo/Reuters)

At the beginning of March, Apple and Samsung halted the sales of their products in Russia. Some Chinese smartphone brands immediately seized this market opportunity. But these companies have now become cautious about their shipments to Russia because of the risks involved in the exchange rate of the rouble and potential sanctions.

However, the surge in exports to Russia does not sufficiently offset the potential loss in exports to the EU, as China's exports to Russia are only 2% of its total exports in 2021.

The impact on energy imported to China

One of the adverse impacts of the Russian-Ukraine war is an oil price shock. China has surpassed the US to become the world's largest gross crude oil importer. The increase in oil import prices has pushed up retail gasoline and diesel prices, passing some of the burden to producers and consumers. This in turn would push up the production cost of goods and services, narrow down profit margins and decrease consumers' disposable incomes.

Russia is an important crude oil supplier for China. Some analysts say that due to the West's sanctions on Russia's oil exports, China can purchase oil from Russia at a lower price. However, that is not likely to affect China's public prices for gasoline and diesel in the short term. On the one hand, the current pricing mechanism is associated with global crude oil benchmark prices. On the other hand, Chinese buyers need to face shipping uncertainty.

Overall, China's energy supply will be "guaranteed", but its energy prices may rise unless the government intervenes.

View shows railroad freight cars, including oil tanks, in Omsk, Russia, 1 May 2020. (File Photo/Reuters)

Besides oil, natural gas is another vital energy resource in meeting China's fast-growing demand. Thanks to the good bilateral relationship between the two countries, Russia and China signed a 30-year contract to ensure the supply stability of natural gas via a new pipeline, and the transaction will be settled with euros. Reports say that China was considering buying or increasing stakes in Russian energy and commodities companies. But with the escalating sanctions on Russia, China has suspended talks for the investment.

Overall, China's energy supply will be "guaranteed", but its energy prices may rise unless the government intervenes.

The impact on food imported to China

Ukraine was one of China's main source countries for corn, which is commonly used in pig and poultry feed. Due to the war, the supply of corn has become uncertain, and the price of corn is surging. In fact, China is turning to buying corn from the US.

Meanwhile, China is trying to use cheaper alternatives, such as wheat. In February, as part of its efforts to address food security concerns, China allowed large-scale wheat imports from all regions of Russia.

Workers use planters to plant corn seeds on the fields in a village on the outskirts of Wuwei, Gansu province, China, 14 April 2021. (Carlos Garcia Rawlins/File Photo/Reuters)

China's food security is the foundation of its economic growth. The complicated international environment and the evolving situation of the war have brought about many uncertainties to the global food market, putting tremendous pressure on food price stability. To stabilise its food supply and food prices, China will need to diversify its import sources and also reduce reliance on its imports overall and increase domestic production.

China, which is developing its international payment system based on the RMB, is likely to grow its global influence in this area over time.

Potential benefits to China

An upside for China is that the world's attention has shifted from the pandemic to the Russia-Ukraine war. Before the war, China was blamed for Covid-19, and anti-China sentiment in the US and some other countries continued to rise. Such a hostile international environment does no good to China's economic development.

Residents extinguish a fire after a bombing destroyed a family home in a northern district of Kharkiv as Russia's attack on Ukraine continues, in Ukraine, 24 March 2022. (Thomas Peter/Reuters)

Now, more attention will be placed on high energy prices, global inflation, an impending food crisis and fears of economic recession. China is no longer the main target of criticism. On top of that, the war is accelerating the de-dollarisation process of some countries. China, which is developing its international payment system based on the RMB, is likely to grow its global influence in this area over time.

Some analysts have lowered China's economic growth forecast to 5.1 or 5.2% in 2022. But the data is at least positive, which is far better than some other countries' situations. Other analysts believe that China will be the "winner" in the crisis. This is still inconclusive as it is a game with many players. The result is determined not only by China's strategies but also by other players' responses.

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