Reuters: War in Ukraine could lead to emergence of a new Sino-Russian trade bloc

China’s stance on Russia’s war on Ukraine in the coming months will reshape global money and trade flows, possibly leading to the emergence of new economic spheres, investors say.

According to Reuters, last month, shortly before Russian President Vladimir Putin sent troops to Ukraine, he and Chinese President Xi Jinping spoke in Beijing of a “borderless” partnership, promising more co-operation. against the West.

Beijing has refused to join Western countries in condemning what Moscow calls a “special military operation,” and has called for restraint on all sides.

Sino-Russian trade increased by 35% in 2021 to $ 146.9 billion, according to Chinese customs data, a trend that is likely to accelerate with new sweeping sanctions cutting Russia off from Western markets.

A shift in trade flows has already begun since the annexation of Crimea by Russia in 2014, said Tom James, chief executive of TradeFlow Capital Management in Singapore, a trade finance fund.

“Russia has already started trading in renminbi with China,” he said, adding that banks could trade with each other outside the SWIFT network – from which Moscow is now excluded – and that Beijing could benefit significantly if and not without risks.

Just over a quarter of Chinese exports to Russia were settled in yuan in the first half of 2021, up from just 2% in 2013, as both countries try to reduce their reliance on the dollar.

“Factor X is the tariffs and the sanctions or the quotas, if they are set, in terms of how many Russian products the countries are willing to take,” James said. “It is already triggering a kind of protectionism by countries for food safety.”

China’s difficult balance

Financial markets are worried that a Russia-China bloc could retaliate against the US, with Chinese stocks among the worst returns since the invasion of Ukraine began on February 24.

China’s Shanghai Composite Index and Hong Kong’s Hang Seng Index have each lost about 6% since the start of the war. In comparison, the shares gained about 1% worldwide, while the S&P 500 had a gain of 1.6%.

China’s hitherto stable currency has also begun to show some initial signs of vulnerability and volatility, hitting a three-month low on Tuesday.

“The pressure is very high at the moment,” a Chinese government adviser told Reuters on condition of anonymity.

“It is realistic to buy some oil and gas from Russia, but everyone is watching you,” he said. “We do not want to upset Russia, but at the same time it is difficult not to take the side of the majority of countries.”

China’s trade with Russia is overshadowed by what it conducts with Western countries. China’s trade last month amounted to $ 137 billion with the European Union and $ 123.3 billion with the United States, but only $ 26.4 billion with Russia.

Asked about the risks Beijing could face if it provides financial assistance to Moscow, including the impact of sanctions, the Chinese Foreign Ministry told Reuters in a statement: “China and Russia will continue to conduct normal economic and trade cooperation in a spirit of mutual respect, equality and mutual benefit “.

But the pressure on world trade from the war is already evident in export bans and supply chain blockades. Goods such as coal from Indonesia to Egyptian legumes and vegetable oils are not available for sale abroad.

Food buyers are looking for rice to replace Ukrainian and Russian wheat. systemic.

In its place there are hints of a new order of things, where Russia’s commodity and energy exports find markets in China and India, while Australia’s minerals and gas end up in Europe.

The emergence of a new “bipolar” economic system

Morgan Stanley strategist Jonathan Garner said in a recent podcast that he is more cautious about India and China and seeks exposure in Australia as an exporter aligned with global capital and therefore less prone to withdrawing.

India, meanwhile, a buyer of Russian military equipment, is considering a bid for cheap Russian crude and, according to banking sources, is considering setting up a payment mechanism for the rupee-ruble trade.

Decisions in China, the world’s largest exporter, have the potential to drive significant flows of money and goods out of a dollar-dominated system – something Beijing has been striving to do for a decade.

“They are essentially creating their own operating platform, which is different from the last 70 years of the US-led global capital system,” said George Boubouras, head of research at K2 Asset Management, which invests in based in Melbourne.

This week, the Wall Street Journal reported that talks between China and Saudi Arabia on exchanging oil for yuan instead of dollars accelerated, perhaps a step forward in efforts to promote the yuan as a trading and reserve currency. Reuters was unable to confirm the report.

However, China maintains “tight straps” on the yuan and its acceptance as a reserve currency remains modest. Most market participants also doubt that China will be suddenly cut off from its western export markets, but there is a clear indication of a seasonal change in market comments.

“Once this crisis (and the war) is over, the US dollar should be much weaker and, on the other hand, the renminbi much stronger,” Credit Suisse strategic analyst Zoltan Pozsar said in a statement. a “regime change” as China buys Russian goods.

Diego Parrilla, who runs Quadriga Igneo, a $ 150 million hedge fund designed to take advantage of the unrest, has a very different view and bets that the yuan will fall as trade fragmented and China prints or borrows. more and more to support its economy.

“There is no going back from here. Russia is heading east, not west. I think globalization as we know it is over and we are in a de facto bipolar world,” he said.