China and Russia have long had a common interest in undermining the US-led global order, in my view. Russia’s war against Ukraine has added to the tensions surrounding China’s already fragile relationship with the West. Many investors are wondering how China will manage these strategic relationships as the war continues. Below, I share my views on China’s geopolitical balancing act through the lens of President Xi Jinping’s agenda.
1) Where does China stand on Russia’s war with Ukraine?
Uncomfortably in the middle. So far, Beijing has not condemned the invasion of Ukraine or joined the West in imposing financial sanctions on Russia. At the same time, it has refrained from extending unconditional support for Russian president Vladimir Putin. I believe China has essentially three options here:
1) Turn its back on Russia—strategic partner with common interests
2) Turn its back on the West and risk economic damage through secondary sanctions or other punitive measures
3) Sit on the fence for as long as possible
I think China is likely to stick with the third option. Beijing has insisted that its relationship with Moscow is “rock solid” because it does not want to alienate Russia. I believe that will remain true as long as China can preserve the relationship without risking secondary sanctions that would damage China’s economic rise. The Chinese Communist Party’s legitimacy to rule is largely based on delivering strong economic growth. I believe the party’s economic agenda will be a key priority for President Xi as he seeks a third term later this year. On the other hand, in the event of a chaotic Russian defeat, the possibility of a pro-Western regime change in Russia could pose a major threat to Beijing.
In my view, Beijing is seeking an impossible balancing act while attempting to find a face-saving off-ramp for President Putin. But I believe if push came to shove, China would likely choose economics over politics. In other words, I do not think China would risk trade with the European Union and the US by providing military support for Russia’s invasion or deliberately violating Western sanctions.
2) Will China help Russia bypass sanctions?
I believe China would prefer to remain "neutral" on the sanctions front while continuing to back Russia with words rather than deeds. In my view, China is too integrated into the global economy to risk being sanctioned itself, and the benefits of helping Russia bypass sanctions are limited. Following the announcement of sanctions against Russia in early March, Chinese state banks began restricting credit for purchases of Russian commodities and the China-backed Asian Infrastructure Investment Bank (AIIB) suspended its Russia-related activities. These moves underscore the limits of Beijing's pledge to maintain economic ties with Russia in the face of sanctions. While it is possible that some small, local-level banks could develop a workaround as “specialist” banks dealing with Russia, I doubt any such dealings would be meaningful.
On the trade front, China is likely to continue deepening economic relations with Russia where it can without directly violating US and international sanctions against Russia. I believe more sanctions will increase the use of the renminbi for Russia-China trade settlement. In my view, China's rumored buying of Russian assets and energy has more to do with Beijing’s goal of securing long-term energy supplies and capitalizing on current perceived cheap prices than explicitly siding with Russia. China is expected to absorb incremental amounts of Russian oil and gas by circumventing financial sanctions. However, China does not currently have the infrastructure to soak up more Russian crude oil on any significant scale. Overall, I believe China will comply with the sanctions—to the degree needed to stave off secondary sanctions against itself.
3) Does China see this war as an opportunity to invade Taiwan?
Not in my opinion. Preventing Taiwan independence—not reunification—appears to be Beijing’s top priority, at least for the next five years or so. As mentioned above, President Xi does not want to compromise his domestic agenda ahead of his third term. Starting a war that would seriously damage China’s economy—and one it would likely lose—runs counter to President Xi’s goals of economic and political stability. At the same time, playing the prospect of using force against Taiwan without taking any such action would help him maintain his grip on power.
Chinese leaders seem to believe that time is on their side. President Xi has told China’s military to complete its modernization by 2027. His “Vision 2035” plan seeks to transform China into the world’s largest economy. I believe Beijing will not take any risks vis-à-vis Taiwan until it believes it has sufficient military and economic power to ensure success. It is also likely that Chinese leaders are watching how sanctions against Russia unfold and will, if necessary, adapt their strategy.
A potential medium-term risk of cross-strait military escalation is Taiwan’s 2024 presidential elections—especially if someone who explicitly supports an independence referendum were to win. We will closely follow the run-up to the election and the vote itself.
This blog post is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Information, including that obtained from outside sources, is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization. This information is subject to change at any time without notice. Market conditions are extremely fluid and change frequently.