Without compromise in Ukraine, the world economy is set to face economic tsunamis on the back of misguided sanctions. China will meet the rising risks with resiliency.
On February 24, Russian President Vladimir Putin denounced three decades of broken pledges and NATO expansion seeking to “demilitarize and de-nazify” Ukraine ordering a “special military operation.” In the West, the speech was portrayed as a conspiracy fantasy.
Yet, declassified documents show that several US and European leaders did give security assurances against NATO eastward expansion at the turn of the 1990s. And these pledges were posted online by the Washington-based National Security Archive in 2017.
Moreover, NATO expansion was condemned widely already in 1997 by 50 leading US foreign policy experts. Recently, Michael Mandelbaum, one of those experts, called it “one of the greatest blunders in the history of American foreign policy.” And yet, as in 2014, the friction is being promoted today by the same US leadership as in 2014, which has also supported far-right extremists that Ukrainian people shun.
Along with US political leadership in 2014 and today, the blueprint comes from a 2019 report by RAND, US defense contractors’ prime think-tank, which outlined the steps for maximum sanctions. Ukraine is the means. The goal is to debilitate the Russian economy, by default. The consequent impairment of the world economy is seen as collateral damage.
By contrast, China, right from the beginning, has called for talks to end the deadly conflict urging “maximum restraint” and “de-escalation.”
Chinese energy security, diminished global economic prospects
Despite promises to the contrary, the Biden administration’s sanctions have been designed to cause extensive harm to the Russian economy and its people.
Indeed, global economy “could soon be faced with one of the largest energy supply shocks ever,” as Goldman Sachs has warned.
Due to the central role of both Russia and Ukraine in the global agricultural markets, the UN has warned the world is facing a meltdown of the global food system.
As for China, some of the government’s key investment areas focus on food and energy security. “It is important to fill the rice bowl of Chinese people, mainly with Chinese grain,” as President Xi Jinping recently said.
Last year, China’s energy imports amounted to almost $425 billion, with more than half of them being crude oil. The oil and natural gas imports are diversified, so the losses could be offset in part by cheaper imports from Russia, China’s second-largest oil importer. Recently, the two also signed a new 30-year $112 billion natural gas contract. And Saudi Arabia, China’s largest source of oil, is considering accepting yuan for some oil purchases, instead of US dollar.
As the yuan has strengthened from about 7.18 in June 2020 to about $6.35, the appreciation will allow China also to secure imports of other commodities at lower cost.
China’s growth amid the shocks
Before March, Chinese economic performance indicated promising stabilization, thanks to export-led industrial expansion and rising global demand. Similarly, retail sales rebounded, including more expensive items, such as car.
On the supply side, government’s fiscal spending and infrastructure investment strengthened fixed asset investment. As policies have been refined in the property markets, presold homes may be completed with the support of new purchases.
However, headwinds have accelerated rapidly since late February. After Hong Kong, COVID-19 infections have been reported in several Chinese mainland cities, including Shenzhen, Guangdong province, and Shanghai, prompting authorities to implement stricter anti-pandemic measures. As factories in Guangdong, for example, account for a fourth of China’s exports, the challenge is to contain the spread of the infections, in order to prevent further disruptions in supply.
China’s economic targets for 2022
The new Government Work Report, submitted by Premier Li Keqiang during the annual session of the National People’s Congress early this month, says the government will provide strong support for the economy and boost fiscal spending. The central bank (PBOC) will further ease monetary policy.
The new GDP growth target for the year has been set at “around 5.5 percent,” while the goal is also to create over 11 million new jobs.
The longer the Ukraine crisis and the pandemic last, the more adverse will be their impact on global economic prospects. With the Ukraine crisis and its likely prolonged aftermath, the consequent headwinds, coupled with 10-percent inflation and aggressive rate hikes, will penalize US recovery.
A protracted impact would be particularly painful for Europe, which is pushed to pay the primary bill for the misguided geopolitics.
Global economy too close to the edge
In the West, economic sanctions have been portrayed as a solution to the Ukraine crisis with minimal harm to the world economy. In reality, the sanctions will prolong the conflict and amplify global economic risks.
First, Russia is no Afghanistan. Its $1.8 trillion economy is the world’s 11th largest. It is a global supplier of oil and natural gas, and a leading nuclear power.
Second, thanks to US protectionism and trade wars since 2017, global recovery has been undermined. Stagflation in the West is a self-induced calamity.
Third, in the absence of enduring peace, protracted sanctions, following the pandemic-induced economic depression, could cause more lost years in the West and lost decades in many developing economies.
Fourth, the new Cold Wars and NATO expansion steer fiscal packages away from welfare and security, where they are most needed, toward rearmament drives that benefit mainly Pentagon’s big defense contractors.
And fifth, as the US Federal Reserve has begun its aggressive round of rate hikes, it will accelerate economic shocks. In India, fleeing foreign investors have already sold more equities than during the 2008 crisis.
Together, these factors will penalize global growth prospects. Fueled by rising downside risks, world economy is too close to the edge.
A version of the commentary was published by China Daily on March 21, 2022