The Great Neighbour Returns Home

THE MOST TELLING remark that President Xi Jinping made during his trip to Moscow may have been, ‘Now there are changes that haven’t happened in 100 years. When we are together, we drive these changes.’

The inevitability of the end of the American century is a recurrent theme of Xi’s, with the sometimes stated, sometimes unstated implication that China will replace the United States as the global hegemon.

Russia and China believe they share an interest in accelerating the decline of US-led Western power. Both accuse the West of responding with policies of ‘containment, encirclement and suppression’.

Xi’s state visit saw repeated assertions of his deepening friendship with his host, Russia’s President Vladimir Putin. At one point, he called China and Russia ‘great neighbouring powers and comprehensive strategic partners’.

Undoubtedly, the visit strengthened formal ties between the two countries. Documents were signed on further economic cooperation and deepening the bilateral partnership.

Yet a relationship based on shared hostility to the West may be more a marriage of convenience than a deep friendship, and there are signs that the strengthening of bilateral ties is occurring in a way that makes Beijing the main beneficiary.

That is most evident in the economic relationship. China can sell Russia the goods it needs that the West has sanctioned, and as the West shuns Russian energy, China can buy it on the cheap.

Xi’s holding off on building the Power of Siberia 2 gas pipeline connecting the two countries, a priority for Putin, was a subtle sign of which party holds the leverage.

Any Western hopes that Xi might use his trip to broker peace in Ukraine, however slight to begin with, quickly evaporated. By the end, the message was that the West was prolonging the war by refusing to accept China’s peace plan.

Xi’s presentation of Beijing as a pragmatic peacemaker, the honest broker of world affairs, in contrast to the Washington warmonger, the flailing ideologue, will resonate with much of its intended audience, the Global South.

Yet, after Xi flew out of Moscow, leaving behind an invitation to Putin to revisit Beijing later this year, a new wave of Russian drone attacks hit Kyiv

Mr Xi Goes To Moscow

THE EMPEROR DOES not usually travel to visit the vassal.

However, President Xi Jinping will go to Moscow to meet his Russian counterpart and friend Vladimir Putin on Monday and Tuesday.

It will be his first visit to Russia since Putin’s invasion of Ukraine shortly after the two leaders declared their partnership without limits when they met during the Beijing Winter Olympics in February 2022.

Yet the war has made it transparent that there are limits to the relationship, and they are becoming complex.

The visit will be widely seen as a show of support by Xi for Putin, a message that China stands by its friends aimed at the Global South as much as at the West.

However, the visit also promotes hopes that Xi can develop an exit strategy with Putin to end the fighting, although, to this Bystander, those hopes are not well-founded.

China has put forward a 12-point peace plan, largely dismissed in the West as providing a ceasefire during which Moscow can regroup and rearm. The proposal does not require Russian troops to leave occupied territory. It also requires the West to withdraw, leading Moscow and Kyiv to negotiate an end to the conflict, presumably mediated by Beijing.

Xi is expected to talk to Ukrainian President Volodymyr Zelensky after he has met Putin. That may be the start of some shuttle diplomacy, but how much scope Xi has to pursue it is uncertain.

His biggest constraint is that any end to the war in Ukraine acceptable to the West will also require a new security architecture in Europe. While it would suit Xi to shape that to China’s advantage, it would be a monumental task that appears unachievable given the deteriorating state of China-US relations.

Putin’s surprise visit to the occupied Ukrainian port of Mariupol on Saturday suggests the Russian leader has no intention of backing down. The International Criminal Court issuing a warrant for his arrest gives him further incentive not to do so.

At this point, there is little basis for a negotiated end to the war. A protracted conflict seems inevitable, although the length of the kinetic phase of the war may be clearer once the spring surges are done. Yet they do not promise a decisive breakthrough for either side.

Meanwhile, the geopolitical sakes for Xi remain high. For as long as Washington cannot let Moscow win the war, China cannot afford for Moscow to lose it. That may be the one thing the imperial visit underlines.

Russia’s Fulsomeness Discomforts Its Firm Friend China

MOSCOW HAS BEEN far more forthcoming about the help Russia is receiving from China than Beijing, and probably than Beijing would like.

News that President Xi Jinping would meet his Russian counterpart, Vladimir Putin, during the first day of the Shanghai Cooperation Organisation (SCO) summit in Samarkand on September 15-16, first came from the Russian side, as did statements that the two would discuss Russia’s war in Ukraine and Taiwan. Beijing has yet to confirm that the two men will meet one-to-one.

Beijing has tried to walk a fine line in public between fulfilling its commitments to its ‘no limits’ friendship with Moscow, declared when Putin visited Xi during February’s Beijing Winter Olympics, and opening itself to Western sanctions for aiding Russia’s Ukraine war.

In that light, the official Russian readout of the meeting last week between Russian lawmakers and Li Zhanshu, chairman of the National People’s Congress Standing Committee and the third most senior Party official (seen in the photo above with Putin), would have been received uncomfortably in Beijing.

This quoted Li as saying:

China understands and supports Russia on issues that represent its vital interests, in particular on the situation in Ukraine…We fully understand the necessity of all the measures taken by Russia aimed at protecting its key interests, we are providing our assistance.

Chinese reports did not mention Ukraine.

Russia’s Tass news agency also quoted Li as telling Vyacheslav Volodin, his counterpart in the Russian Duma (parliament), during a separate meeting:

In the context of US sanctions imposed against you and against us, some of our joint areas of cooperation are indeed gradually becoming more sensitive, but I am convinced that we should not halt our cooperation just because we are afraid of sanctions.

This week, Moscow appears to have been trying hard to tone down its fulsomeness about the bilateral relationship. Kremlin aide Yuri Ushakov said at a briefing in Moscow merely that Moscow values China’s ‘balanced approach’ to the Ukraine conflict.

This Bystander suspects that such carefully balanced rhetoric will be challenging to sustain in Samarkand as the two leaders put forth their alternative world order to challenge the United States.

The Longer The Ukraine Crisis, The More Of A Non-Player China Becomes

PRESIDENT XI JINPING can be taken at face value when he told his US counterpart Joe Biden in Friday’s two-hour video call that China does not want war in Ukraine.

His friend, Russia’s President Vladimir Putin, giving the West a quick and bloody nose in Ukraine would have been one thing. Xi could have cheered on from the side but be otherwise uninvolved. His view of the West’s secular decline and democracies’ failings would have been further confirmed.

However, events have turned out badly for China, and become worse the longer they drag on. The West’s response to Russia’s invasion has been forceful and unified. An anticipated lightening military victory has become a siege war of attrition. Soaring energy, metals and food prices and renewed disruption to supply chains have stiffened the economic headwinds buffeting China.

Most of all, China is caught uncomfortably in the middle diplomatically. Xi cannot (and will not) abandon his friend, yet, nor can he side with the West over the conflict.

China has had to perform diplomatic gymnastics to preserve its principles of indivisible sovereignty and non-interference in the internal affairs of others, both violated by Russia’s invasion. Calls for resolving the conflict by diplomatic means sound rote, and Beijing’s lack of experience and possibly capacity to broker peace have been exposed.

Economically, future trade with Europe and the United States, already more than five times larger than that with Russia, is in the balance. Maintaining economic relations with the West while opposing US ‘hegemony’ has been a tightrope Beijing has chosen to walk. Yet, as Biden made clear to Xi in their call, getting knocked off by the imposition of yet more Western economic sanctions for aiding Moscow is a growing risk. China will be particularly reticent to help Moscow circumvent financial sanctions, as those are where it and Chinese firms will be most vulnerable.

Beijing also needs Russia’s implicit security guarantees in Central Asia for the Belt and Road. These will be coloured by the outcome of Ukraine, which limits China’s opportunities now to exploit Russian weakness to secure cheap energy and commodities.

China has never joined Russia in any military intervention abroad and is unlikely to start now, even if it supplies materials for the Russian army’s use. War in Ukraine is not a core interest, and its leadership displays caution on matters not related to its core interests. In such circumstances, it prioritises creating a stable international environment conducive to China’s economic development.

It does not look as if Beijing knows how to do that, beyond repeating calls for a negotiated settlement. A telltale sign was the readouts of the Xi-Biden call: whereas the United States portrayed Ukraine as the focus of the call, China’s portrayed US-China relations as the main topic.

Yet taking a formal lead in mediating a peace in Ukraine would underline how Beijing’s relationship with Moscow was more one of convenience and a shared adversary rather than the ‘no limits’ alliance portrayed. It could also be taken domestically as yielding to Western pressure.

Further, failure of such talks would be a diplomatic embarrassment that could rebound internally with uncertain effects, given the imminence of the Party Congress in the autumn.

US Reminds China It Is Still Taking Care Of Business

JUST BEFORE FORMER US President Donald Trump left office, he signed into law the Holding Foreign Companies Accountable Act (HFCAA), which allows the delisting of any foreign — for which read Chinese — company publicly traded in the United States that does not let US regulators inspect its finances to the same extent required of US companies.

US-listed Chinese companies must disclose their non-US operations’ audits, which Chinese regulations prohibit auditors from sharing.

The law also targets alleged Chinese government control of such companies and was part of Trump’s broader strategy to limit Chinese companies’ access to US capital and technology.

On March 8, HFCAA was used for the first time. The US Securities and Exchange Commission provisionally listed five Chinese companies that it said were not in compliance — biotech firms BeiGene and Zai Lab, Yum China, which runs KFC and Pizza Hut fast food outlets, ACM Research, a semiconductor process equipment manufacturer, and pharma firm HutchMed China.

As the accounting scandal involving Luckin Coffee in 2020 showed, there are legitimate investor reasons for HFCAA, and its wheels turn exceedingly slowly. Delisting will not necessarily follow. The firms have opportunities to come into compliance. Even if they do not, 2024 is the earliest delisting would occur.

So the timing may be coincidental, but this Bystander doubts it.

Concern about Russia using China to end-run Western sanctions over Ukraine is growing within the Biden administration. The SEC’s announcement follows warnings by US Commerce Secretary Gina Raimondo that the US could ‘essentially shut down’ any Chinese companies that defy US sanctions by continuing to supply chips and other advanced technology to Russia.

Semiconductor Manufacturing International Corp, a chipmaker Raimondo mentioned, could become a new Huawei.

Delisting the five companies named would not necessarily impact US efforts to isolate Russia technologically. and certainly not in time to disrupt wartime supply lines.

However, the threat adds to the signals to China and its companies to tread carefully when it comes to US sanctions (and Chinese firms will be careful not to put their exports to the US and EU at risk by overtly violating them), or exploiting the situation created by the war in Ukraine.

This week, Bloomberg reported that some of China’s state-owned energy and commodities giants, including China National Petroleum Corp, China Petrochemical Corp, Aluminum Corp of China and China Minmetals Corp, are considering the opportunities for investment in Russian counterparts such as Gazprom and Rusal.

As well as providing economic support to a strategic partner, any deals would bolster Beijing’s efforts to improve its energy and food security. China is already the leading market for Russia’s exports, taking 13.5% of the total. That will only grow as Western sanctions that China has no intention of honouring bite on Russia.

Trade deals announced shortly before the invasion of Ukraine when Russian President Vladimir Putin was in China for the Beijing Winter Olympics last month now seem even more like a prelude to the future.

That future will be about trade deals in which Russian commodities fulfil China’s needs for energy and food, and China meets Russia’s needs for technology and advanced manufactures containing it like aircraft.

Update: Reuters news agency reports that discussions between Washington and Beijing on resolving the audit issue are progressing ‘relatively smoothly‘, although it sounds as if there is still a fair way to go to bridge the gap between the two sides.

Footnote: Around 250 Chinese companies listed on US exchanges could fall foul of HFCAA, according to another little-known Trump-era agency, the US-China Economic and Security Review Commission, which advises on the US national security implications of China’s bilateral economic activities. A steady addition of small batches to the SEC’s provisional list would accelerate the relocation of listings from the United States to Hong Kong.

Ukraine Crisis Will Slow China’s Economy

CHINA WILL NOT be immune from the global economic impacts of the Ukraine crisis.

Higher prices for energy and food and metals commodities — Russia and Ukraine are significant producers of all three — will raise inflation, providing a drag on real GDP growth. Almost certain recessions in Ukraine and Russia due to the fighting and sanctions, respectively, and an intensification of existing bottlenecks in global supply chains for raw and intermediate goods will exacerbate the impact.

It is too early to know the severity of these shocks, given their dependency on the outcome of the crisis. However, some scenario-based estimates are being made.

One set that crosses this Bystander’s desk comes from The Conference Board, a US business research organisation, which produced the chart above. Assuming an oil price averaging $125 a barrel in the second quarter of this year, The Conference Board estimates that China’s GDP growth for this year will be reduced by between point two and point five of a percentage point and by the same amount in 2023.

By comparison, the comparative numbers for the world economy are reductions of 0.4-0.9 percentage points and 0.1-0.3 percentage points, respectively.

Long-term energy contracts and the likelihood of buying more discounted Russian energy and agricultural commodities such as wheat that Moscow will not be able to sell into sanctioning markets will somewhat mitigate the impact on China. Nonetheless, the Conference Board is forecasting a 0.5-1.5 percentage points increase in year-on-year consumer price inflation in China for this year and a 0.1-0.8 percentage points increase in 2023.

Those will be unwelcome numbers for authorities already struggling to tame politically sensitive energy and food price rises.

The Ukraine crisis will add to the challenge of meeting the newly announced target of 5.5% GDP growth for this year. That was already looking ambitious. Headwinds from the real estate slump, the cost of the zero-Covid tolerance policy and the measures imposed by the United States to limit Chinese access to US capital, technology and intellectual property are already slowing the economy’s momentum.

Blacking Out Yellow And Blue

OUR MAN AMONG the muddied oafs tells us that China continues strictly to enforce the non-politicisation of sport. Chinese broadcasters reportedly intend to take English Premier League football matches off the air this weekend because of the English clubs’ planned shows of support for Ukraine.

The BBC says that team captains will wear armbands in Ukraine’s colours of blue and yellow. Stadium screens will display ‘Football Stands Together’ in front of the country’s flag. Similar shows of opposition to the Russian invasion of Ukraine have been made at matches played over the past week. FIFA, the sport’s world governing body, has suspended the Russian national team and clubs from its competitions.

This follows the International Paralympic Committee’s banning of Russian and Belarusian athletes from the 2022 Beijing Winter Paralympics, which President Xi Jinping opened today in the Bird’s Nest stadium without mentioning absentees.

Taiwan Is Not A Small Ukraine

THE UKRAINE CRISIS has drawn inevitable — but ill-founded — comparisons with Taiwan.

More strident nationalist voices in China are calling on Beijing to mimic Moscow’s ‘liberation’ line and take the opportunity of the West’s diverted attention to reclaim the island by force. They interpret the United States’ unwillingness to send troops to Ukraine as a systemic weakness that would mean Washington would similarly not intervene on Taipei’s behalf.

That would be a misunderstanding of the United States’ intent, and of the capability of the People’s Liberation Army to deliver a fait accompli by scoring a military victory before US forces arrive.

Nonetheless, earlier in the week, Taiwan’s President Tsai Ing-wen ordered the armed forces to increase their surveillance and strengthen their combat readiness. She also instructed security services to be alert for information warfare.

In this Bystander’s view, covert infowar operations to demoralise Taiwan are more likely than a military assault. So, too, a stepping up of the PLA Airforce flights across the median line in the Taiwan Strait and into Taiwan’s air defence identification zone.

Nor should some action against Taiwan’s small islands near the mainland coast or more distant ones in the South China Sea be discounted. China tried this twice in the 1950s, once successfully, once not.

The islands would be difficult for Taipei to defend, so the costs for China in taking them would likely be low and success more likely.

Geography and meteorology make a military invasion of Taiwan more challenging than an invasion of Ukraine. PLA forces would have to undertake a combined amphibious and airborne landing. Crossing the often storm-tossed waters of the Taiwan Strait would be far more difficult than sending tanks and infantry rumbling across a land border with secure supply lines in their wake, and doubly so for an army that has not been battle-tested since 1979.

The military uncertainty would raise the political risk of an attack on Taipei so close to the Party Congress due in the autumn. Beyond the near certainty that the United States and its allies would come to Taipei’s aid militarily, Western sanctions imposed in response to such an attack would be significantly more severe than those related to Xinjiang and Hong Kong.

President Xi Jinping is walking a geopolitical tightrope over Ukraine. He will likely be cautious and absorb the military and political lessons from how Russia’s invasion plays out.

Once the Congress is passed, and, assumedly, Xi has consolidated his control and secured a third term, an invasion of Taiwan in the medium to long term would become more likely. A favourable and low-cost outcome for Russia in Ukraine or a perceptible weak Western response would shorten the time horizon.

China Will Help Russia Economically But On Its Own Terms

THE TIMING OF the announcement by China’s customs authorities that they would approve all Russian wheat and barley imports — just hours after Russia launched its invasion of Ukraine — seems barely coincidental.

It also underlines how China is acting in its national interest as much as supporting its neighbour.

Presidents Xi Jinping and Vladimir Putin agreed to the end of the import ban when the latter attended the Beijing Winter Olympic Games earlier this month.

State media is suggesting that shows there is no connection between lifting the import ban and the invasion of Ukraine. However, that line raises more questions than it answers about how much Xi and Putin discussed Russia’s plans in advance.

Russia is the world’s largest wheat exporter, with around an 18% global market share. It has been excluded from the Chinese market because of concerns about introducing dwarf bunt fungus (seen in the photograph above) — a disease that can stunt wheat and other crops, reducing yields by up to three-quarters.

China often cites phytosanitary reasons to justify non-tariff barriers to trade, but the fungus is a serious threat; hitherto, China had zero tolerance for dwarf bunt spores in imported grain. Putin agreed that Russia would suspend wheat shipments to China if the contaminants were found.

For Russia, the agreement offered the reassurance of a secure buyer to mitigate possible Western sanctions. For China, it will mean a supply of cheap wheat to offset the looming shortages caused by flooding that disrupted last year’s sowing season across one-third of the country’s wheat acreage. Food security is a priority concern for Xi.

With 1.4 billion mouths to feed and rising use of wheat for animal feed, China is already the world’s largest wheat market, accounting for shy of one-fifth of the world’s consumption. It has somewhat opaque import quotas established when it first joined the World Trade Organization in 2001 that were intended to open up the market. Imports are running at well below allowable volumes. There is headroom to expand imports from Russia.

Some reports suggest that this new trade will be settled in yuan, not the dollars customary in commodities trading. That will be easier as some of the imported wheat will come from Chinese-owned farms in Russia’s Far East that up until now could only sell their produce in the domestic Russian market.

The two countries’ central banks agreed a three-year $24 billion currency swap in 2014 to facilitate trade financing in yuan. This has been renewed twice since. One effect has been to reduce the dollar’s share of financing of Russia’s exports to China from almost all of it in 2013 to around 40%.

In January, Russia’s state-owned Gazprom signed a 30-year contract to supply natural gas to China’s northeast from the Russian Far East. This will be priced in euros to avoid using dollars. Beijing insisted on favourable terms given Moscow’s desire to diversify its export markets for its energy since the sanctions imposed for Russia’s annexation of Crimea in 2014, which also produced a cut-price supply contract.

Russia has been building up its reserves of euros and yuan at the expense of the dollar since the imposition of the sanctions for annexing Crimea. Since 2017, the yuan’s share of Russia’s foreign-currency reserves has risen to 13% from 3% and the euro’s share to 32% from 22%, while the dollar’s share has fallen to 16% in 2021 from 46% in 2017.

The two countries’ central banks agreed a three-year $24 billion currency swap in 2014 to facilitate trade financing in yuan. This has been renewed twice since. One effect has been to reduce the dollar’s share of financing of Russia’s exports to China to around 40%, against almost all of it in 2013.

When they met earlier this month, Xi and Putin said they aimed to raise their countries’ bilateral trade to $250 billion from $140 billion last year. China will dictate the terms with a hard head more than a friendly heart.

Russia’s Ukraine Invasion Leaves China In A Quandry

CHINA DID NOT want a Russian invasion of Ukraine and, ahead of Russia sending in troops, had distanced itself slightly from Moscow despite the agreement between Presidents Xi Jinping and Vladimir Putin during the Beijing Winter Olympics reaffirming their ‘no limits’ partnership.

A shared antipathy to US foreign policies is one thing; going to war as allies is another. Historically, the relationship between Beijing and Moscow has blown hot and cold. Partly, that is because there has rarely been the parity of power that is one of the prerequisites for a strong security alliance. Today, China is far the stronger of the two. Nor is ‘my enemy’s enemy is my friend’ the true confluence of interests that is another prerequisite.

Beijing has not followed Moscow in recognising the Russian-backed separatist-held areas of Donetsk and Luhansk as independent. (It was not happy when Russia annexed Crimea in 2014.) It will be keen to avoid the diplomatic gymnastics necessary to avoid violating its oft-repeated principle that China does not interfere in the internal affairs of others and that other countries should not interfere in its internal affairs.

However, it will now face having to make realpolitik choices.

It is unlikely to endorse the invasion formally but equally unlikely to condemn it. Nor will it join international sanctions against Russia, arguing that sanctions are ineffective. In doing so, it is taking a swipe at US sanctions against China more than advancing an argument on first principles (not that that argument is not without foundation).

Moscow will undoubtedly look to Beijing for economic support to provide sanctions relief. That will mostly come from increased Chinese purchases of Russian gas, as already agreed via Gazprom’s newly signed second gas supply contract.

Beyond that, China will offer little more than rhetorical support. In November, the two countries signed a three-year military cooperation agreement for joint military exercises and patrols. However, the primary purpose is political, and military inter-operability is limited.

Of several joint exercises undertaken in 2021, most served to bolster Beijing’s display of force towards Japan and South Korea, neither country being a particular focus of Russian foreign policy concern. Tellingly, China did not reciprocate by participating in Russian exercises on its European borders.

If Putin thought he could expect China’s full-hearted support for an invasion of Ukraine, he misread Xi badly. China has distanced itself from the invasion, with officials stressing that Russia ‘is an independent major country, and it decides its policy and actions independently according to its own strategic judgment and interests’.

Foreign Minister Wang Yi has repeatedly made China’s usual milquetoast calls for restraint on all sides and for the situation to be resolved through dialogue. Yet his spokesperson — Hua Chunying, making an unexpected return to the podium to conduct the ministry’s routine press conference on February 23 despite her recent promotion of assistant minister — was typically pugnacious towards the United States:

A key question here is what role the US, the culprit of current tensions surrounding Ukraine, has played. If someone keeps pouring oil on the flame while accusing others of not doing their best to put out the fire, such kind of behaviour is clearly irresponsible and immoral.

She struck the same note the following day, following the start of the Russian military action. State media and social media, too, reinforce the narrative that the United States is responsible for the tensions in Ukraine. They are also dampening any discussion about Russia protecting or reincorporating minorities that could raise awkward questions inside China about the situations of many of its population.

Beijing will also be warry of nationalist voices that say Russia’s invasion of Ukraine provides a template for invading Taiwan. However, it will be calibrating the West’s response to Putin’s moves into Ukraine as a guide to how far it can continue to push against Taipei without getting significant international pushback.

Further complicating China’s position over Ukraine is its trade and investment interests along the Belt and Road, particularly in the former Soviet states of Central Asia. While it accepts Moscow’s security dominance there, it has sought to deploy its commercial power to establish its influence.

Ukraine is a way station along the Belt and Road’s routes to Europe. Last year, China signed an investment agreement with Ukraine, which it also hopes will become a source of food imports. China is already Ukraine’s largest trading partner.

War in Ukraine will set back Beijing’s efforts to drive a wedge between the EU and the United States over their strategic responses to China.
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