We did wonder in previous scribblings whether China might be the surprise catalyst for peace in Ukraine. Well, we could be about to find out. The Financial Times’ Demetri Sevastopulo is a long way from his Dublin home town and TCD alma mater but has just published a scoop on Russia asking China “for military equipment and other assistance”. The request in itself is not a huge surprise given both nations as recently as February 4th were proclaiming a friendship “without limits”. However, that was before Russia invaded Ukraine 18 days ago and the world changed. China too. The following developments in China’s universe suggest there might, after all, be limits to their friendship with Russia…

  • Shenzhen: The technology hub city, Shenzhen, and its almost 18 million residents has just gone into lockdown after a spike in Covid-19 infection rates. Foxconn, a key component supplier to Apple, has temporarily shut its operations and global supply chains will nervously watch for any impact on the operation of the world’s 4th largest container port. Of course, Russia, cannot be blamed for this specific development but it only increases the pressures on the Chinese economy which is facing some real challenges..
  • Credit/Lending: The $50 trillion Chinese property market just experienced a fall in mortgage lending in February for the first time in…. 15 years.
  • House Building: China’s top house building firms are seeing sales in the first 2 months of 2022 tumble by between 25% and 45%.
  • Chinese Bonds: Bonds issued by Chinese firms overseas and denominated in US dollars are collapsing in price and suffering credit downgrades by the ratings agencies which, in turn, has prompted more selling. Ugly stuff but there’s more…
  • Chinese Stocks: The main Shanghai Composite index fell almost 3% today but the technology-focused Hang Seng China Enterprises index is being truly hammered with a 7% slap down and volatility not seen since 2008. Chinese technology stocks have now lost $2.1 trillion of value from their peak and it’s not just happening in China. The US listings of these same companies have endured an epic 72% collapse from their 2021 highs on the Nasdaq.

The Beijing authorities will be acutely aware that “China risk” is being priced by international investors very differently to a year ago. I don’t propose to list the reasons for this shift over the past 12 months but be absolutely clear that Russia “going rogue” is forcing investors to consider the less unthinkable prospect of China going rogue over Taiwan, Hong Kong, trade or technology. We mentioned events on the London Metal Exchange (LME) in a previous article but it is worth revisiting to highlight three things:

  1. Incredibly, the LME market for trading nickel remains closed.
  2. The entities who are holding the enormous($12 billion) loss positions are a mix of Chinese banks, a Chinese nickel producer, Tsingshan, and its “Big Shot” owner, Xiang Guangda. The banks who want to collect their “winnings” include JP Morgan and BNP Paribas.
  3. And…here’s the kicker – the company which owns the LME and decided to shut down trading in nickel is Hong Kong Exchanges and Clearing ie subject to significant Chinese political influence. Just to be clear, an exchange should NEVER be a counter-party risk.

The financial reality is stark. China is under pressure despite its perceived strength in global trade. Its two largest trading partners by far are the EU and US. So, it won’t have escaped the notice of seasoned Sino-watchers that Chinese banks are terrified of sanctions and being excluded from US dollar payment systems. Hence, Chinese banks have been reluctant to finance the Beijing promised ‘purchases” of Russian goods and Chinese manufacturers have also refused to supply Russian airlines with aircraft parts. You do wonder whether the supply of “military equipment” is in any way a realistic expectation for Putin? Then again.. Kyiv was supposed to fall in 3 days. In Beijing the geopolitical calculations over the coming days will focus on three things:

  1. China’s critical property market does not need a global economic slow down to increase investor risk aversion.
  2. President Xi is preparing the way for an unprecedented 3rd term as leader of the Chinese Communist Party and President.
  3. The surprisingly aggressive use of financial and technology sanctions by the liberal-democratic West against Russia appears to have triggered financial markets to consider ‘de-globalisation’ and the prospect of other bad actor nations being cut off from technology or financial ecosystems. China features in every one of those risk analyses.

A pragmatic approach from China and its perceived influence in brokering a Ukrainian peace would be a double-whammy win for President Xi. A recovery in the global economy would be good, but a recovery in “China risk” pricing would be even better. The Putin credit card can’t come close to competing with that. So, here’s hoping that card is declined.