China is the wild card. President Xi Jinping has vowed that the friendship between China and Russia has “no limits,” and he certainly has the tools to help soften the blow of unprecedented sanctions imposed by the US and European Union on Vladimir Putin’s wartime economy.
Beijing could buy some of Russia’s $130 billion horde of gold held by the Russian central bank and pay for it in US dollars. It could reactivate a currency swap line, which was established after Russia’s annexation of Crimea in 2014, and serve as the lender of the last resort. It could also step up trade with Russia, buying more oil, natural gas, wheat and fertilizers. Even better, China could buy stakes in Russian energy and commodities companies — although such deliberations are at an early stage, according to Bloomberg News. Plus, China has a long history of working around US sanctions. In the past, it has used small, systemically unimportant banks to do business with Iran.
But provoking leaders of its two dominant markets is the last thing China needs right now. With its property industry slumping and small businesses suffocating from a strict zero Covid policy, resilient international sales are perhaps the economy’s saving grace. China doesn’t want to alienate the US and the European Union, which together account for about 35% of its exports, especially if it still aims to reach its ambitious 5.5% growth target. The math won’t work.
Real estate, which represents about a quarter of the economy, has extended its nosedive into a second year. Last month, home sales of the largest 100 developers slumped 47.2% from a year ago, more than January’s 39.6% decline. New construction starts were down 33% in December, the latest data available. A 1 percentage point decline in real-estate investment will reduce China’s GDP growth by 0.13 percentage points, even as policy makers step up counter-cyclical support, estimates Bloomberg Economics’ David Qu.
As the National People’s Congress convenes this week, Premier Li Keqiang took pains to lay out in his annual work report the steps the government is taking to help businesses. This year, tax cuts and rebates, which prioritize small and medium enterprises and manufacturers, will amount to 2.5 trillion yuan ($400 billion), more than doubling last year’s cuts.
The largesse reflects the government’s own nod that its zero tolerance to Covid is hurting private enterprises. Retail sales growth was practically flat in December, while catering services, dominated by small business, fell from a year ago, according to the latest data. A recent survey of small businesses showed that average sales were at only 30.6% of the pre-pandemic level, and their cash pile could run out in less than three months if there was no incoming revenue. As China confronts its worst outbreak since the early days of the pandemic, the road to economic recovery remains long and winding.
Meanwhile, China is churning out a record 10.8 million university graduates this year, and they’ll need jobs. But crackdowns last year on Big Tech and real estate cut off prized career paths. New job postings in the real estate sector fell 29% from a year ago, while roughly half of those working for internet companies said their employers have been laying off staff, according to a survey by Zhaopin, an online job recruiter. The government is keeping its urban unemployment target of no more than 5.5% unchanged this year.
What’s left is exports. During the pandemic, China benefited tremendously from the world’s demand for masks, medical supplies and work-from-home equipment, such as computers and keyboards. In December, exports soared to a record high of $340 billion. Would China risk turning off the US and Europe to give Putin a hand?
Granted, Xi’s friendship with Putin may be genuine — they share the world view that expanding Western influence and the US are their top mutual antagonists. But putting that view into practice on behalf of an ally who invaded its neighbor risks undermining Xi’s top priority: stability, a key phrase emphasized at this week’s Congress meetings.
Starting a war that sends the price of oil soaring above $125 a barrel does not promote stability. By attacking Ukraine, Russia is piling a potential energy crisis onto a friend that is still trying to defuse a financial time bomb started by its ambitious and distressed property builders. No matter how “rock solid” Beijing claims the relationship to be, China isn’t likely to come to Putin’s aid.
Bloomberg
