Beijing is practicing the balancing act: the Ukraine war harbors many dangers for China

Beijing is practicing the balancing act
The Ukraine war poses many dangers for China

As a partner against the West, Russia is important to China. Economically, however, Beijing cannot afford to alienate the USA and the EU. So it tries the balancing act – but at the same time gets caught off guard by rising energy prices.

The conflict surrounding the Russian invasion of Ukraine is exacerbating economic uncertainties for China. The sanctions and skyrocketing energy prices are also affecting Russia’s “strategic partner”, which is not only in a political dilemma. Economically, too, it is a tightrope act for the second largest economy.

China’s cooperation with the US and the EU is far more important than that with Russia, which is economically just as big as Belgium and the Netherlands combined. “It will be a difficult balancing act for China,” says Max Zenglein from the Merics China Institute in Berlin. Since China is very international, there is a lot at stake: “China will be careful that the relationship with Russia does not endanger its long-term interests,” believes the expert. “The war also creates confusing challenges for the Chinese economy, from which it cannot isolate itself.”

The sanctions, which largely exclude Russia from the international banking communications network Swift, have “very negative effects” on trade between Russia and China, especially for imports of Russian oil and gas, points out Professor Shi Yinhong of Beijing People’s University. In addition, energy prices have skyrocketed – to the detriment of China, which is one of the world’s largest energy importers and is already under economic pressure.

Sanctions will not be circumvented

Although China rejects the sanctions against Russia, the professor believes it will abide by them so as not to alienate the West or become the target of sanctions itself. “China’s banks have a close relationship with the world financial system, which is very important for China,” says Shi Yinhong. China will not take any risks for its own banking system, even if it wants to help Russia to overcome difficulties – “as far as possible”.

Chinese banks in Singapore were among the first to stop issuing letters of credit, according to Jörg Wuttke, President of the European Chamber of Commerce in China. “You couldn’t see how the banks behaved in compliance with the sanctions and shut everything down so quickly,” says Wuttke. “Fear of the Americans is behind this,” a senior Chinese source told him. China will not circumvent the sanctions: “Like good students, the Chinese will do everything possible to ensure that their companies know exactly what they are doing when they get involved with the Russians.”

The Chinese will also face other setbacks. Not only do they suffer from rising prices for imports of energy, but also of grain. Trade with Ukraine, where China owns wheat fields, is important. But nothing can be imported from there because the ports are blocked. “Now China has to shop elsewhere, and shopping elsewhere is always expensive,” says Wuttke.

CIPS cannot replace Swift

China can only benefit from Russia’s auto industry, where Western manufacturers are withdrawing and China could now perhaps export more cars. One of the winners of the conflict could also be the Chinese interbank system CIPS (Cross-Border Interbank Payment System), which China created in 2015 for its New Silk Road initiative – also to promote the use of the yuan as an international currency and to reduce dependence on the dollar .

However, CIPS does not have the capacity to replace Swift. Only 76 banks participate directly, mostly offshoots of Chinese banks abroad. The 672 indirectly involved banks, including institutes from Russia and international names, mostly work unchanged within this mechanism via Swift. Both systems complement each other rather than compete.

Politically, China is attempting the impossible: staying out of the conflict and continuing to stand shoulder to shoulder with Russia against rival USA. Beijing neither condemned nor condoned the invasion. It abstained from condemning Russia in the UN Security Council and the General Assembly. At the same time, Beijing expresses sharp criticism of the USA and the eastward expansion of NATO and repeatedly emphasizes Russia’s security interests. China is thus further isolating itself.

Merics expert Zenglein assumes that the trade relations, which were already “characterized by increasing geopolitical rivalries,” will become even more difficult. The West is also moving closer together towards China. Similarly, EU Chamber President Wuttke sees a “turning point”. Americans and Europeans have been “in the same bed” since the Ukraine war, he says. “And the Americans will then get very cuddly and say: Guys, by the way, what about the containment of China? And who then wants to say no?” Wuttke said. “The Russians have managed to completely change our China policy in Europe.”

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