China’s “Bottom Line” on Russia

As China grapples with talking points concerning its political relationship with Russia, financial incentives and sanctions threats will undermine the economic relationship between the two countries. The Russian invasion has highlighted a stark divide between China’s political interest in asserting a multipolar world order and the technocratic demands of Beijing’s continued global economic and financial engagement.

Posted March 25, 2022
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Beijing’s Russia Reckoning

Russia’s military challenges in Ukraine and the concerted Western response are forcing hard choices in Beijing. Regardless of how China balances its support for Russia and its long-term interests in access to the global financial system, Beijing’s decisions in the coming months will be carefully scrutinized.

So long as the G7 consensus on sanctions against Russia holds and the United States can credibly threaten secondary sanctions on Chinese institutions, China is likely to prioritize those institutions’ continued access to US dollar and euro financing. This means it is likely to encourage its big banks to comply with the financial sanctions aimed at Russia and tread carefully in helping Moscow navigate export controls on key technologies. Beijing will want to avoid becoming a bigger target for Washington. While there is some space for China to continue non-dollar trade with Russia through banks that are less exposed to sanctions, there are limits to how much Beijing can ease Moscow’s economic stress through trade.

Posted March 3, 2022
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Financial Decoupling: What, Me Worry?

Following Didi’s sudden announcement, concerns about a wave of delistings of Chinese stocks from US exchanges have risen while institutional investors have been grappling with new regulatory and political risks emerging from Beijing. Yet despite these issues, foreign portfolio investments have continued pouring into China’s equity and fixed income markets this year at a pace of around $140-150 billion annualized on net, down only slightly from 2020 levels.

Strong capital inflows and record trade surpluses explain why China is less vulnerable to a sudden depreciation of its currency than in 2015, even as the PBOC’s monetary policy trajectory will diverge from the Fed’s, and the RMB has surged back to early 2015 levels on a trade-weighted basis. However, foreign portfolio inflows and trade surpluses should moderate in 2022, and the balance of risks to the currency clearly points to more weakness ahead.

Posted December 13, 2021
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