All the energy effects of the Russia-Ukraine war for China
Russia-Ukraine war and higher oil prices: what impact on China? The analysis by Jian Shi Cortesi, GAM's China and Asia Equity Investment Director
After a dramatic downward cycle over the past 12 months, China was outperforming earlier in the year just as the Federal Reserve began discussing rate hikes. This was while China was going through a rate-cutting cycle. However, the Russia-Ukraine conflict negatively impacted global markets, and as of the end of February, China was down 6.7% year to date, with a similar picture in Asia.
What impact does the Russia-Ukraine conflict have on Asia / China?
Although our holdings have limited exposure to Russia or Ukraine, the main impact comes from rising oil prices. This is particularly challenging for an oil importing country like India. In terms of international trade, we don't expect it to have a big impact as China's export to Russia is actually quite small, as Russia's GDP is about the size of a large province of China. On the other hand, as Russia is boycotted by many countries, it may be more dependent on trade with China.
Furthermore, the increase in the price of oil has led to a further boost in the production of renewable energy. This is a huge opportunity for Asia and China, as the region is home to much of the renewable energy supply chain, including solar equipment, wind turbines and electric vehicle batteries.
Another side effect of the situation in Ukraine is that China will increase investment in the development of the e-CNY – its sovereign cryptocurrency. During the China-US trade war, the US talked about banning China from the SWIFT system, as it did with Russian banks. While China has already launched the e-CNY, it now needs to work on its adoption. The cryptocurrency will allow the buyer and seller of an exchange to settle the trade directly through the blockchain without going through the SWIFT network or the relevant international banks.
Taiwan is a very current topic. The People's Republic of China, ruled by the Communist Party of China (CCP), defines its territory as China plus Taiwan, but does not control Taiwan. In Taiwan, the Constitution says it is part of the Republic of China and defines its territory as Taiwan plus mainland China. This is the result of the last civil war.
The CCP believes, or wishes, that Mainland China and Taiwan will eventually be reunited through peaceful talks such as those between East and West Germany. However, in recent years in Taiwan, some politicians have pushed to change the Constitution to redefine Taiwan as a separate sovereign entity, with its territory covering the island of Taiwan. For China, this is the fundamental question. If Taiwan were to do so, the Chinese government has openly said it would use military forces to take control of Taiwan. This would put the US in a very difficult situation, because it would be faced with two options – they can fight with China or do nothing – and neither option is particularly attractive.
However, the United States has a very strong influence on Taiwan and has a strong motivation to prevent it from changing the Constitution, to allow lasting peace. There is a very high probability that this balancing act will continue, in our opinion. Looking at Ukraine, what is worrying is that different parties may miscalculate the situation, leading to unintended consequences. Therefore, we see a high probability of peacekeeping in the Taiwan Strait, but we will monitor the situation closely. Should Taiwan decide to change its Constitution, it would be a signal to go into a very defensive positioning in investment portfolios, in our opinion.
We may also see a relaxation of China's restrictions on Covid-19 over the next year. Domestic mobility has already largely recovered, but international travel is still largely blocked as hotel quarantines remain in place for international passengers. China is very cautious and is watching developments in other countries, waiting for concrete evidence that Covid-19 is becoming endemic. The death rate from Covid-19 has dropped to 0.3%, it is becoming less dangerous and so we expect to see some incremental reopening that we believe should benefit travel companies.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/tutti-gli-effetti-energetici-della-guerra-russia-ucraina-per-la-cina/ on Sun, 13 Mar 2022 06:30:00 +0000.