Russia’s invasion of Ukraine is clearly straining China’s relations with the West. What is less clear is what the implications of this will be for China’s trade and economic policies and, by extension, on the development and interactions of Asia’s markets. These are common questions that I get from investors these days and they are hard to answer without a great deal of speculation. However, there are some trends that are already in place and the conflict in the Ukraine may accelerate some of these trends.
First, China has been searching for more self-sufficiency and its “dual circulation” strategy is all about increasing self-sufficiency whilst remaining part of global markets. Things like self-sufficiency in food are going to be impossible to achieve as China has little arable land relative to its population. Relying on food imports means that it needs to retain good relations with the US and also Russia. Southeast Asia could also be a source of food and agricultural imports from Africa may continue to increase. So, the One Belt One Road initiative that seeks to increase economic ties and transportation routes through Southeast Asia and to Europe and the East coast of Africa is an important part of their economic diplomacy, particularly if the relationship with the US sours further.
China wants also to be self-sufficient in technology. At the moment that is hard to do when China is almost entirely reliant on the outside world for semiconductors—the building blocks of hardware. Even the equipment bought by China’s suppliers of semiconductors to make the chips is predominantly made by the U.S. and European Union (EU) countries. This reliance leaves China with a need for huge investment at home in the factories needed to make the chips but also the intermediate goods and raw materials required to be able to manufacture at home. This is a long-term project and surely the invasion of the Ukraine comes at an inopportune time for China as relations with the West are strained even as it is just embarking on this initiative.
Finally, there is the need for financial self-sufficiency. The threat of sanctions with the U.S. and the potential for being locked out of the U.S. dollar trading system means that China has been eager to set up its own renminbi (RMB)-based payments systems and to try and internationalize its treasury market. This is all part of a desire to have long-term financial interrelations through the RMB, much as the U.S. does with the dollar. It has had some success attracting investment from the EU and more latterly (and more significantly) Russia. Also, pricing of oil in RMB. But these are still early steps—the system is still nascent. However, as we know with the experience of the dollar post World War One, things can change rapidly.