China watches warily as Ukraine makes U.S., EU and Japan strengthen their alliance


Chinese President Xi Jinping and Russian President Vladimir Putin attend a meeting during the BRICS (Brazil, Russia, India, China, and South Africa) summit in Brasilia on November 14, 2019.

Pavel Golovkin | Afp | Getty Images

BEIJING — Since taking office last year, President Joe Biden has pursued a strategy of restoring relationships with allies to put pressure on Beijing.

The Russian invasion of Ukraine nearly two weeks ago showed what those allies can do.

For China, the speed and severity with which the U.S. and its allies sanctioned Russia is a warning sign that could guide future economic and foreign policy.

Chinese officials have increased efforts to buttress their country’s self-reliance since President Donald Trump sanctioned telecommunications giant Huawei and slapped tariffs on billions of dollars’ worth of Chinese goods.

But Trump did all that singlehandedly — while simultaneously damaging ties with Europe and provoking uncertainty among U.S. allies in Asia.

The response to Ukraine has been anything but a go-it-alone move by the United States.

“Given the success that the U.S. has had in coordinating the financial sanctions and export controls not just with Europe but also with Japan, a key player in tech value chains — this is extremely alarming for China,” said Reva Goujon, senior manager for the China corporate advisory team at Rhodium Group.

“This is a very multilateral moment,” Goujon said. “At a high level, you would think China would benefit from [the U.S.] having a big distraction in Europe, but actually [this] only accentuates those policy debates over critical exposure and vulnerabilities to Chinese supply chains.”

From Germany to Japan, many countries have joined the U.S. in freezing the assets of Russian oligarchs, restricting access of Russia’s biggest banks to the global financial system, and cutting off Russia from critical technology.

China condemns ‘unilateral’ sanctions

China’s Foreign Ministry has repeatedly said it “opposes all illegal unilateral sanctions.” It has not elaborated on how the sanctions against Russia, which have been imposed by many countries, could be considered unilateral.

When asked about an “alliance of Western nations” pushing Russia out of the SWIFT banking network, Foreign Ministry Spokesperson Wang Wenbin said last week that “China does not agree with resolving issues with sanctions, still less unilateral sanctions that lack the basis of international law,” according to an English-language press conference transcript.

Later in the week, spokesperson Wang reiterated that position in response to a question about whether Western sanctions on trade with Russia would affect China.

Sanctions “only create serious difficulties to the economy and livelihood of relevant countries and further intensify division and confrontation,” he said.

China’s Europe balance

Escalating trade tensions between the U.S. and China in the last few years had already accelerated Beijing’s efforts to firm up ties with Europe. The Ukraine war threatens all that.

China’s “balancing act” of trying to quietly support Russia while keeping up relations with Europe is “going to be more and more difficult. That has consequences for trade links, primarily with the EU,” said Nick Marro, global trade leader at The Economist Intelligence Unit.

I think the West is very caught up in the moment, … this idea that the U.S.-led liberal order is back, Germany has woken up, even Switzerland.

Reva Goujon

Rhodium Group

Marro noted that reputational risks rise for China “the more China tries to fudge its stance on Russia and focus its criticism on NATO and the U.S.”

“China was hoping to use the EU as a way to offset the pressure it was facing from the U.S.,” Marro said. “Right now, Europe sees Russia as an existential threat.”

“Right now the impact for China [from the sanctions] really is secondary,” Marro said. “This conflict raises bigger questions around industrial policy and China’s diplomatic relations with the West.”

China’s big economy

China is dealing with a host of its own economic challenges, from sluggish consumer demand to a slowdown in its massive property sector. Politically, Beijing is concerned with stability this year as leaders are set to meet in the fall to give Xi an unprecedented third term.

That all said, China is more entrenched in the global economy than Russia is and doesn’t have the same vulnerabilities — to sanctions, for example — that Russia has.

Europe relies on Russian oil and natural gas, but Russia is otherwise small in global terms, with an economy the size of the U.S. state of Texas.

Read more about China from CNBC Pro

Because Western trade with China is far greater than it is with Russia, a full trade war with China “would be quite costly [for the West] and in nobody’s interest,” said Alexander-Nikolai Sandkamp, a fellow at the German-based Kiel Institute for the World Economy.

“The West would welcome it if China took a stand against Russia and joined more actively the Western protests,” he said. “Now that China is remaining relatively neutral, that’s probably the best that we can expect.”

The Ukraine war and sanctions will likely lower global gross domestic product by only 0.2% this year, with a bigger impact in Europe, according to Tommy Wu, a lead economist at Oxford Economics.

China, Russia and SWIFT

Global finance provides a clear example of the limits on China’s ability to support Russia. Just days after the war began, the U.S. and EU pledged to remove some Russian banks from SWIFT, the standard interbank messaging system for financial institutions.

“If all Russian institutions are banned from joining the SWIFT network, then I think the level of political pressure is very different from what it is now,” said ­­Zhu Ning, professor of finance and deputy dean at the Shanghai Advanced Institute of Finance.

“Then any attempt to avoid punishment” would be considered “complicit,” he said. “Quite tricky for Chinese financial institutions.”

The Beijing-based Asian Infrastructure Investment Bank announced last week it was suspending activities related to Russia and Belarus.

Short-lasting Western unity?

On the other hand, there’s also the matter of general political dysfunction in the United States, where the Democrat and Republican parties are increasingly unable to work together to achieve even widely supported domestic goals.

Rhodium Group’s Goujon pointed out that the U.S. presidential election in 2024 poses a risk to how long the unity lasts among U.S. allies.

“I think the West is very caught up in the moment, … this idea that the U.S.-led liberal order is back, Germany has woken up, even Switzerland,” she said.

“But there are other countries like Mexico, like India, that we see embrace the Chinese narrative of the multipolar order more readily,” she said, “and that’s where I think China is waiting for the heat of the war to die.”

Regardless, the Biden administration is trying hard to unify the world’s democracies — and since the Ukraine war started, more of them seem to be listening.

Last week, the leaders of the Quad — Australia, India, Japan and the U.S. — held a call about the conflict and to reaffirm their commitment to work together as a group. However, India has yet to condemn Russia’s invasion of Ukraine.

Strengthening the Quad is part of Biden’s strategy “to restore American leadership in the Indo-Pacific,” as announced in a fact sheet published in February. A U.S. official told reporters in a briefing last month there was no intention to engage Beijing on the economic aspects of building up the Indo-Pacific.  

When asked Monday about Biden’s Indo-Pacific strategy, Chinese Foreign Minister Wang claimed the U.S. goal is to create an Indo-Pacific version of NATO. “China wants all parties to join us in doing the right thing,” he said, via an official translator. “Together we will reject attempts to create small, divisive circles within the Pacific.”

Wang said during the annual press briefing that China opposes bloc politics. He portrayed Beijing’s ties with Europe, India, Southeast Asia, Latin America, Africa and other countries and regions as separate from China’s other foreign relations.

This article was originally published on CNBC