Beijing is pursuing a conservative strategy against the backdrop of Covid lockdowns, regulatory concerns and a slowing economy. Longer term it may benefit.
As the Russian invasion of Ukraine continues, its impact has become a global problem, not least for China's president Xi Jinping whose cosy relationship with his counterpart in Moscow is ruffling feathers in the West.
China has already perturbed investors during the pandemic with its regulatory interferences, property-market debt default risks, tightening grip on Hong Kong and belligerent stance towards Taiwan.
Draconian lockdowns of large cities to contain Covid breakouts have hardly helped to assuage investors’ deep-felt anxieties.
Despite the improvement to its total score in Euromoney’s country risk survey last year, China is still considered a high enough risk that is ranked 47th out of 174 countries.
Russia contributes a mere 3% share in China's trade, whereas the EU and the US together account for about 25%, so full-blown support to Russia risks China's trade and technology ties with the West- Prachi Gupta
That puts the country in the third of Euromoney’s five categories, on a par with Paraguay and Bermuda in relative risk terms.
The prospect of China and Russia forming an axis of authoritarianism is certainly unsettling, but country risk experts believe their friendship has its limits.
China after all is not so dependent on Russia for its energy or trade, and Beijing has been nurturing relations too with Ukraine over Belt and Road Initiative projects.
The overriding aim for China is stability, in what is an important year for Xi in his pursuit of a third term.
Putting the Chinese Communist Party’s (CCP’s) legitimacy at stake from backing a loser or making the economic fallout worse run contrary to its strategic aims.
According to ECR survey panellist, Prachi Gupta, adjunct professor at Temple University, the Chinese economy is now about 10 times bigger than that of Russia.
“Moreover, Russia contributes a mere 3% share in China's trade, whereas the EU and the US together account for about 25%, so full-blown support to Russia risks China's trade and technology ties with the West,” she says.
Speaking in a personal capacity professor Li Yan, another of ECR’s survey contributors, does not believe Beijing will support Moscow diplomatically or militarily despite the Chinese having a strong voice of emotional support for Russia.
“Most Chinese believe that Russia is besieged by Nato and is fighting for survival to prevent Nato's eastward expansion,” he says. "This situation is likely related to the political, economic and military pressure, and aggressiveness towards China from the US."
However, such support is evidently non-rational for China. Its failure to criticise Russia does not mean that China supports Russia in waging war because a peaceful and secure Ukraine is also what China expects.
“It is known that Ukraine is an important node for the Belt and Road Initiative, and Sino-Ukrainian relations have been good, actually,” Yan adds.
It will not have gone unnoticed either that there are many Chinese state-owned businesses invested in Ukraine, in the food industry, the ports and rail transport, for example.
Still, China can also take advantage of a weakened Russia that becomes more reliant on it for diplomatic and economic support.
Beijing can involve itself more financially, snapping-up devalued Russian assets. Beijing may also find Moscow more amenable on mutual areas of interest, such as the former Soviet republics in Central Asia, natural resource exploitation in the Artic and military technology transfers.
China is hoping it can bridge the divide and keep out of the conflict too while a lasting peace is secured and with Putin remaining in power.
A lot of existing Chinese business is at stake, and the country can ignore potential sanctions from the US and Europe, Li says, as they are “not credible threats or political risks for China.”
On the contrary, the crisis is perceived to be an asset for Chinese nationalism, which in turn provides a ringing endorsement for the CCP.
China’s ability to propagate misinformation backing up Russia’s spurious claims of Ukrainian 'nazi-ism' and Western provocation only serve to empower the Chinese state.
The crisis does put the BRI on hold of course, but this is a risk for Ukraine and not China, Li says.
In the context of shrinking demand, negative supply shocks and weakening expectations at the end of last year, China has announced the annual growth target to be 5.5% for 2022- Jiang Yue
A third ECR contributor, Jiang Yue, teaching fellow at the International Business School Suzhou, Xi'an Jiaotong-Liverpool University, agrees that China will maintain its own “strategic balance” on the conflict in terms of both politics and economics, bearing in mind other recent shocks that have occurred.
Gupta believes that China's current strategy is inclined towards assessing the strength of Nato and its capacity to remain united as the war continues. This also offers China an opportunity to measure the impact of financial and digital sanctions as the Russian economy is targeted.
Besides, she notes there are homegrown economic risks as China strengthens lockdowns under its zero-Covid policy to curb the spread of the pandemic: “This will reduce domestic demand and worsen delays in the global supply chain, negatively impacting on economic growth.”
Yue says that last year, despite reported annual average real GDP growth rate of 8%, the last two quarters were below the normal trend: “In the context of shrinking demand, negative supply shocks and weakening expectations at the end of last year, China has announced the annual growth target to be 5.5% for 2022.”
The economic risks would appear to be to the downside too, given the regulatory challenges, property-market defaults and – not least – the prospect of slowing growth in Europe and other key markets for Chinese goods.
Yue adds that since the start of the Ukraine war, there have been rising prices for oil, as well as other metallic products applied as raw materials in, for instance, the real-estate industry.
“Moreover, the recent Covid waves in multiple regions and cities in China, including Shanghai and Shenzhen, have slowed down mobility, causing pressure on demand/supply conditions.”
In that respect, short-term risks have increased, but longer term the Ukraine crisis may in fact strengthen China’s hand.