China Risks Missing Economic Growth Target by Supporting Russia

March 13, 2022 Updated: March 14, 2022

News Analysis

Beijing has a number of options to offset the impact of Western sanctions on Moscow, but none are big enough to save Russia, and all would decrease China’s chances of hitting its 5.5 percent growth target, which is already the lowest in decades.

Just before the Ukraine invasion, Beijing and Moscow signed an agreement, reaffirming their friendship and expanding China’s gas purchases from Russia by about $117.5 billion, while pledging to increase trade by at least $100 billion over the next few years. At that time, no one could have predicted the enormity of the coming sanctions. Neither could anyone have anticipated the tight, anti-Russia coalition that would form, with the United States, the United Kingdom, the European Union, NATO, Japan, and other allies all unifying to bring sanctions against Russia.

In addition to the boycotts by banks and credit card companies, shippers, such as Maersk, are refusing to transport goods to and from Russia. Exports and imports are threatened, representing about half of the economy. Since the sanctions began, the Russian ruble has lost approximately 30 percent of its values.

In short, the Russian economy is crumbling, which means that any workaround or any mitigating strategy Beijing comes up with would have to be large enough to carry the weight of the entire economy. And this comes while China’s own economy is looking at the slowest GDP growth in years.

The Chinese Communist Party’s (CCP) promise to increase gas purchases and trade are not cash that China would be handing to Russia at the moment. Instead, it represents a projected increase in trade over a period of years. And even with the increased trade, Russia’s gas exports to China would fall short of replacing the volume lost through the decertification of the Nord Stream 2 pipeline to Europe, by roughly 55 billion cubic meters each year.

The CCP is also promising to buy more Russian grain, but how much is not yet known. Once again, this may not help Russia in the immediate future, as the wheat-growing region of Russia is not set up for export to China. Logistics systems would have to be put in place, which would cost time and money. And for China to purchase anything from Russia, whether it’s oil or wheat, the issue of how to send and process payments will have to be addressed, as Russia has been effectively banned from using U.S. dollars and U.S.-based payment systems.

The CCP could offer its Cross-Border Interbank Payment System (CIPS), as an alternative to the Western SWIFT, for interbank transfers. But CIPS is still in its infancy and not broadly internationalized.

Another issue is currency. Only less than 3 percent of the world’s trade settlement is done in yuan, and almost none is done in rubles. Russia currently holds about $140 billion worth of China sovereign bonds. China could let Russia call these early, pay in yuan, and then use yuan as a medium of exchange with Russia. This would greatly decrease Russia’s foreign currency reserves, further weakening the ruble. It also presupposes that Moscow wants to trade in yuan. Additionally, paying off its debts early would be costly for the CCP, at a time when China is also cash-strapped. And still, this would not be enough money to recover all of the damage done by the sanctions.

While none of China’s possible workarounds will be significant enough to save Russia, any of them is enough to ruin China’s relationship with the West. The Biden administration has threatened sanctions on those who violate the sanctions or continue to support Russia. And China does a great deal more trade with the United States and the EU than with Russia.

Furthermore, China’s trade with countries outside of the U.S. sphere is largely done in dollars, using the U.S. payment systems. If sanctions cut China off from these payment systems, like they are doing to Russia, the CCP could follow a similar fate.

China UnionPay
Chinese visitors walk past a sign for China UnionPay outside a pawn shop in Macau on Nov. 20, 2013. (Tyrone Siu/Reuters)

Visa and Mastercard both suspended service in Russia. The CCP has offered up UnionPay cards as an alternative. Aside from the time and money that it will take to set up the infrastructure for the Chinese cards to function with Russian banks, the services cannot be in U.S. dollars, for fear of violating U.S. sanctions.

This gets back to the issue of currency. The ruble is worth almost nothing and Moscow may not want the yuan used for domestic purchases inside of Russia. And even if this issue is settled and the cards go live, this does not solve Russia’s problem of not being able to buy and sell on world markets.

As the ruble plummets, workarounds become more and more difficult because Russia would be buying expensive yuan with cheap rubles. The only thing Russia can do to slow the ruble’s devaluation is to use U.S. dollars to buy up rubles on international exchange markets. And this is not something China can readily help with. It would also wipe out Russia’s U.S. dollar reserves.

Chinese Premier Li Keqiang expressed his skepticism at China achieving its 5.5 percent growth target. He cited the pandemic and the Ukraine war as two of the obstacles standing in Beijing’s way.

ING, Morgan Stanley, and other international financial institutions have already predicted that China will not hit its growth target, even before the Ukraine invasion. China’s economy has been plagued by its wealth redistribution and common prosperity, which has been strangling wealthy individuals and companies, as well as its “zero-COVID” policy, suppressed consumer demand, high debt, flagging real estate sector, skyrocketing oil prices, and a host of other problems.

Taking on the support of the entire Russian economy and risking possible sanctions could easily be the tipping point for China’s GDP.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Antonio Graceffo, Ph.D., has spent more than 20 years in Asia. He is a graduate of the Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Graceffo works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."