Ukraine war: What lessons does China learn?

Eng Teck Tan, Senior Portfolio Manager (China equities) at Nikko AM, assess the impact the Russia-Ukraine war has on China.

While the uncertainty stemming from the Russia-Ukraine conflict could accelerate the rise in commodity prices and thereby push cost inflation higher for most producers, China’s exports and manufacturing sectors are unlikely to be impacted very much as they have been facing higher prices for the last few quarters and have moved towards higher valued-added and more efficient production.

Even though China is seen as the major economy with close diplomatic ties to Russia, in reality the economic impact Russia has on China is fairly limited. China’s trade with Russia is less than 5% of its overall trade, and China could benefit slightly as Russia will now become a guaranteed a source of commodities, especially natural gas. At the same time, China might benefit from the push towards renewable energy by other countries, especially those in Europe, as it is the largest producer of solar equipment. In itself, China will also push for renewables (it already has a strong mandate to do so) and will likely achieve its renewable target sooner.

From a political perspective, there has been discussions on whether the Russia-Ukraine conflict could add to China’s tensions with Taiwan. Our view remains that the historical background and the timeline regarding the two situations are different. We believe that there could be significantly more at stake for China in a potential conflict with Taiwan, which will likely attract even more attention from the international community, especially in Asia, and therefore such a development appears less likely. However, China is definitely watching the world’s reaction to the Russia-Ukraine conflict. At the same time, given its close economic ties (probably the closest among the major economies) to Russia and status as the second largest economy in the world, the rest of the world is keeping a close eye on China’s response to the Russia-Ukraine conflict to decide whether it has a future as a responsible major global power.

Read more views from Nikko AM on the Russia-Ukraine war at emea.nikkoam.com.