A Blog by Jonathan Low


Mar 13, 2022

Why Chinese Investors Are Choosing the US Over Russia

Despite socio-political differences, the US is China's largest trading partner and is likely to remain so. 

The US is reliable, wealthy and relatively transparent. Investments in the US are protected, by and large, by the mutual benefits of continuing those economic and financial relationships - and by the rule of law. Russia, by comparison is corrupt, opaque and its currency has collapsed. In addition to which, Russia does not have that much China wants to buy, including oil. While China and Russia share a competitive dislike for the US, China needs the US more than it needs Russia. JL

Anna Gordon reports in Chief Investment Officer, image, The Economist:

Regardless of Chinese investors’ political inclinations, the risks of investing in Russia right now are not worth it for many. Chinese investors have been watching this collapse closely, leery of being caught up in the nightmare. Two major Chinese state-owned banks are now restricted from financing Russian commodities. The Bank of China in Singapore stopped financing deals with Russian oil companies. "The relationship between Russia and China is transactional and Russia doesn’t have many goods China is willing to buy.” The US is China's largest trading partner. Investing in the West is much simpler and more secure. No unnecessary economic risk, not many political factors, and more transparent.

The Chinese government’s public attitude towards the war in Ukraine might be the very definition of Orwell’s doublespeak. On one hand, China’s foreign minister has referred to Russia as its “most important strategic partner.” The Chinese government has refused to endorse sanctions against the country and its state media seems to show a substantial affinity for Russian disinformation.

But on the other hand, the Chinese government has openly called for an end to violence in the region and has promised to send humanitarian aid to Ukraine. Underlying it all is a more subtle message that seems to show that China’s support of Russia is being tested.

Perhaps the most telling of all is Chinese institutional investors’ newfound hesitancy towards Russian investments.

Chinese Investors are Leery of Russia

Regardless of Chinese investors’ political inclinations, the risks of investing in Russia right now are not worth it for many.

“Currently, the risk is simply too huge,” said Yuan Jiang, a Chinese Ph.D. candidate at Queensland University who specializes in Russia-China relations.

But even before the war, Jiang said that Chinese institutions were weary of their northern neighbor.

“Russian markets are full of political corruptions and other dangers,” said Jiang.

Jiang said that traditionally, only state-funded institutions or large corporations would invest in Russia, due to the high risk.

Now, however, even those investors are shying away. The Russian ruble has lost almost 50% of its value against the dollar since January 1. Major Russian banks have been banned from the Society for Worldwide Interbank Financial Telecommunication, causing financial collapse. Sberbank, for example, lost more than 96% of its shareholder value.

Chinese investors have been watching this collapse closely, leery of being caught up in the nightmare. Two major Chinese state-owned banks are now restricted from financing Russian commodities, according to Bloomberg. A Reuters article also reported that the Bank of China in Singapore stopped financing deals with Russian oil companies.

Other banks with partial Chinese state ownership have also been backing out of Russia. The Asian Infrastructure Investment Bank, which counts multiple Asian governments among its shareholders, also suspended its business in both Russia and Belarus after the invasion. Similarly, the New Development Bank, which is based in Shanghai and China among its founding members, also ended its business with Russia.

In the past, China’s largest banks have complied with American sanctions against Iran and North Korea because of the importance of the U.S. dollar clearing system. The Chinese divestments and distancing from Russian investments make it clear that Beijing intends to continue complying with Western demands.

Nevertheless, many in Russia are looking to China as a lifeline in the midst of these crippling economic sanctions. And the Chinese government will provide some help. China’s UnionPay card service will serve as a critical alternative for credit and debit card holders as Mastercard and Visa end the ability for Russian citizens to use their cards abroad this Thursday. UnionPay is accepted in 180 countries.

China has also been developing an alternative banking system network to SWIFT. While the system isn’t fully independent and still depends on SWIFT for most of its transactions, it is a reminder that China can offer powerful alternatives to an isolated Russia.

China is Choosing the West

But while China will provide some help, it’s shying away from a full-on rescue.

“China can essentially do one thing here, which is to buy more Russian goods, but they don’t seem to be willing to do that,” said former U.S. Treasury official Peter Piatetsky in an interview with RadioFreeEurope. “Russia doesn’t have that many different goods that China is willing to buy.”

China could buy up Russia’s excess oil that is no longer going to Europe if it wanted but it doesn’t appear to be doing so.

“The relationship between Russia and China is very transactional,” said Piatetsky. “They both dislike the United States and dislike the U.S.-led world order, but aside from that, I don’t think there’s much there.”

The most important thing to take away from this is that while China could help Russia more if it wanted to, it is choosing not to.

According to Jiang, ultimately the West has much more to offer China economically, particularly the United States.

“Investing in the West is much simpler and more secure. No more unnecessary economic risk, not many political factors, and more transparent,” said Jiang.

But even more importantly, the United States is China’s largest trading partner when ranked by exports. The U.S. alone buys 16.75% of all Chinese exports produced, creating the kind of relationship that the Chinese government cannot afford to lose. Although ideological differences might dominate headlines about the U.S. and China, the partnership is strategic for both.

“In my view, as long as the West is OK with the legitimacy of the Chinese Communist Party, the West can still criticize whatever they want to condemn,” said Jiang. “Behind the scenes, they will still pragmatically cooperate with each other. In this scenario, the West has benefited China more.”

However, it’s likely China will continue to keep Russia close as a strategic backup option should relations with the West ever turn sour.

“I think Beijing may be more inclined towards the West. But this doesn’t mean Beijing will dump Russia,” said Jiang. “That said, once the West views Beijing as ideological enemies, Beijing will pick Russia to keep Beijing secure.”

In Jiang’s view, it is still important to the Chinese government that Russian President Vladimir Putin maintains his power.. With Western politicians like Lindsey Graham openly calling for Putin’s assassination on Twitter, and harsh sanctions that seemed designed to push both Russian oligarchs and citizens against their leader, China could be worrying that it is next.

“Once Putin fails, Beijing may feel they are the next target of the West,” said Jiang.

Jiang said that Beijing is particularly afraid of a potential series of “colored revolutions,” a phenomenon in which popular ideological uprisings across the globe result in regime changes. In an academic book analyzing China and Russia’s political strategies in 2018, experts Paul J. Bolt and Sharyl N. Cross explain China’s unity with Russia on the fear of color revolutions.

“Moscow and Beijing share almost indistinguishable views on the potential domestic and international security threats posed by colored revolutions, and both nations view these revolutionary movements as being orchestrated by the United States and its Western democratic partners to advance geopolitical ambitions.”

China is Less Likely to Invade Taiwan

While Western sanctions against Russia might seem to have had an underwhelming effect when it comes to reining in the war in Ukraine, there does seem to be one positive effect for the world economy: The harsh sanctions will likely serve as a strong deterrent against a Chinese invasion of Taiwan. 

The potential for the invasion of Taiwan has kept many investors up at night, especially as Taiwan has risen to prominence as the world’s largest semiconductor manufacturer. Semiconductor chips are essential to produce all kinds of technological products, ranging from cell phones to washing machines to automobiles.

With public opinion in Taiwan strongly in favor of independence and the West strongly supporting the island, Chinese leadership has always known that retaking the island will not be easy. But now, after watching an unexpectedly strong global reaction against Russia, the calculus seems to be even less in favor of an invasion, said Bill Browder, CEO of Hermitage Capital Management, in an interview with Yahoo News.

“The coordinated financial attack that the West has executed against Russia—I think it’s so scary that the Chinese probably won’t, if they were eyeing up Taiwan to do something similar, I think they put that on the back burner,” said Browder.

The Takeaways for Institutional Investors

Despite the havoc the war in Ukraine has wreaked on the financial system, institutional investors can at least take comfort in the fact that the Chinese economic relationship with the West will not collapse anytime soon. If anything, this war has shown just how much China relies on the West for its economic health. 

China and the United States are particularly intertwined financially, and the Chinese government has shown that regardless of ideological differences, it will continue to prioritize this financial relationship. Institutional investors should rest assured that their investments in China are significantly safer than those in Russia, since China has repeatedly demonstrated it will toe the Western line to maintain its trading relationship with the United States.


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