It has been more than a month since Russia launched “a special military operation” against Ukraine. The impacts of the war on the global economy are significant—commodities prices jump to a record-high level, supply chains are disrupted, high inflation strikes, and slow economic growth lowers business and investment expectations. These pose considerable challenges to post-COVID economic recovery for every country globally. 

Many countries condemn the war, but China stays neutral. Some analysts thought China’s economy would benefit from the war, while others felt differently. What are the impacts of the Russian-Ukraine war on the Chinese economy? 

1) The impact on Chinese exports to the EU

Exports are a vital contributor to China’s economy, making it outperform other economies during the pandemic. Exports are also considered a significant growth driver for the Chinese economy in 2022 and its Gross Domestic Product (GDP) target of around 5.5 per cent. 

In 2021, China was the second-largest partner for the European Union’s (EU) export of goods (10.2  per cent) and the largest partner for the EU’s import of goods (22.4 per cent), according to data from Eurostat. The eurozone’s economic growth determines its trading volumes with China.

However, the Russian-Ukraine war has cast a shadow on the EU’s economic outlook. It pushes up the energy prices in Europe, hitting business confidence and domestic consumption. It is likely to slow down the EU’s economic growth and reduce its demand for imported goods, which decelerates China’s export growth.

The United Nations Conference on Trade and Development has lowered its expectation for global economic growth by 1 per cent to 2.6 per cent, and much of the slowdown will be in the eurozone. The stagflation in the EU, a situation of inflationary pressure and stagnant growth, will spill over to other economies. 

According to ANZ’s research, China’s export growth positively correlates with the eurozone’s economic growth. China’s total export growth will fall by 0.3 per cent for every 1 per cent drop in the EU’s GDP growth. 

2) The impact on Chinese exports to Russia

The Western sanctions on Russia and international firms’ withdrawal from Russia tighten the trading ties between China and Russia, creating more opportunities for Chinese companies. 

According to recently published data, China’s exports to Russia surged 41.5 per cent on the year for January and February, while imports grew 35.8 per cent. The main products exported to Russia are broadcasting equipment, computers, and household goods, while those imported from Russia are mainly commodities and energies.

At the beginning of March, Apple and Samsung halted the sales of their products in Russia. Some Chinese smartphone brands immediately seized this market opportunity. But these companies have become cautious because of the risks in the exchange rate of rubble and potential sanctions. 

However, the surge in exports to Russia does not sufficiently offset the potential loss in exports to the EU, as China’s exports to Russia are only 2 per cent of its total exports in 2021.

3) The impact on energy imported to China

One of the adverse impacts of the Russian-Ukraine war is an oil price shock. China has surpassed the United States and become the world’s largest gross crude oil importer. The increase in importing oil prices has pushed up its retail gasoline and diesel prices, undoubtedly passing on to producers and consumers. It would push up the production cost of goods and services, narrow down the profit margins and decrease consumers’ disposable incomes.

Russia is an important crude oil supplier for China. Due to the Western sanctions on Russia’s oil exports, some analysts thought China could purchase oil from Russia at a lower price. However, that is not likely to affect China’s public prices for gasoline and diesel in the short term. On the one hand, the current pricing mechanism is associated with global crude oil benchmark prices. On the other hand, Chinese buyers need to face shipping uncertainty.

Besides oil, natural gas is another vital resource in meeting China’s fast-growing demand. Thanks to the good bilateral relationship between the two countries, Russia and China signed a 30-year contract to ensure the supply stability of natural gas via a new pipeline, and the transaction will be settled with euros. 

According to Bloomberg, China is considering buying or increasing stakes in Russian energy and commodities companies. But with the escalating sanctions on Russia, China has suspended talks for the investment.

Overall, China’s energy supply will be “guaranteed”, but its energy prices may rise unless the government intervenes.

4) The impact on food imported to China

Ukraine was one of China’s main source countries for corn. And corn is commonly used in pig and poultry feed. Due to the war, the supply of corn becomes uncertain, and the price of corn surged. China has to buy US corn instead. 

Meanwhile, it tries to use cheaper alternatives, such as wheat. In February, China allowed large-scale wheat imports from all regions of Russia to address food security concerns.

China’s food security is the foundation of its economic growth. The complicated international environment and the evolving situation of the war brought many uncertainties to the global food market, putting tremendous pressure on food price stability.

To stabilise food supply and food price, China will need to diversify and reduce reliance on its imports and increase domestic production.

5) Potential benefits to China

Global attention has now switched from the pandemic to the Russia-Ukraine war. Before the war, China was blamed for COVID-19, and anti-China sentiment in the US and some other countries continued to rise. Such a hostile international environment does no good to China’s economic development. 

The war has changed things. The COVID-19 blame game between China and US will soon be over. More attention is now on high energy prices, global inflation, food crisis and economic recession. China is not the target of criticism anymore. On top of that, the war accelerates the de-dollarisation process of some countries. China, which is developing its international payment system based on the yuan, is likely to grow its global influence in this area over time. 

Some analysts lowered China’s economic growth expectation to 5.1 or 5.2 per cent in 2022. But the data is at least positive, which is far better than some other countries’ situation. Other analysts thought China would be the “winner” in the crisis. This is still inconclusive as it is a game with many players. The game’s result is determined not only by China’s strategies but also by other players’ responses.

The article is an abridged version of the one first published in ThinkChina.