China’s exposure to the Russia sanctions, explained

As Russia’s economy teeters under the West’s brutal sanctions regime, what will happen to China, its largest trading partner?

• China’s direct exposure is small, Daniel Ahn, ex-chief economist at the U.S. State Department, told The China Project. While China is Russia’s largest trading partner, Russia is not even in China’s top 10. Bilateral trade will continue as well, since Russia’s trade surplus vis-a-vis China ensures that Chinese exports keep flowing until trade nets out.
• Chinese businesses and banks appear reluctant to transact with Russia for fear of secondary sanctions. According to Bloomberg, two of China’s biggest commercial banks just restricted financing or purchases of Russian commodities. Another company to watch is SMIC, which supplies chips to both the West and Russia. Carefully complying with the Western sanctions regime would be much safer for the Chinese chipmaker’s bottom lines. But Beijing may have different plans.
• China’s economic ties with Russia will grow in the middle to long term. For reasons both strategic and economic, China will eventually become a “no-questions-asked” buyer of Russian gas and other resources that Russia can no longer sell to the West. Companies like Baidu, Huawei, and BYD can fill the void recently left by Google, Apple, and Ford. These changes will also help meet China’s goals of circulating its currency more widely.

The context: In just a week, as Russia’s war with Ukraine blazed, Western public opinion on sanctions flipped from seeing them as an impotent salvo to liberalism’s most devastating weapon. The about-face came after unexpectedly unified action from the EU and U.S., and strong Ukrainian resistance, led by the now widely celebrated president Volodymyr Zelenskyy.

Takeaways:

• Western sanctions will supercharge China’s campaign for self-sufficiency. Supply chains and central bank reserves may pull out of Western nations, Chinese researchers and students may be discouraged from studying abroad, and Chinese enterprises may be forced to choose between the West and the rest.
• The Russian sanctions don’t correspond easily with the Taiwan invasion case. China is not Russia. It is more resilient to central bank freezes due to its trade surplus, and its presence in the global economy makes any serious Western sanctions double-edged. If the U.S. sanctioned Chinese-made iPhones, for example, Apple’s $2.7 trillion market value “would go to zero overnight,” Victor Shih, a political scientist at the University of California, San Diego, told The China Project.
• The sanctions are widening the gulf between Beijing and its businesses. Geopolitical factors push China toward its neighbor, as an economic collapse would be disastrous for Beijing. But Chinese businesses cannot help but take Western sanctions seriously for fear of being next on the sanctions list. As the dilemma between strategy and economics plays out, which side will Beijing come down on?