How the Russia-Ukraine war could affect Chinese trade

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How the Russia-Ukraine war could affect Chinese trade

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Merchant ships load and unload containers at the Qingdao Port Foreign Trade Container Terminal in Qingdao, Shandong Province, east China, November 11, 2021.

Yu Fanping | Cost photo | Barcroft Media | Getty Images

China’s trade surplus soared to all-time highs during the pandemic as people consumed more goods than before, but analysts say the Russia-Ukraine war is set to change that.

The Asian manufacturing giant’s trade surplus could shrink to $ 238 billion this year, about 35 percent of its historic $ 676 billion last year, according to ANZ Research estimates.

“The war in Ukraine will soon begin to weigh on net trade due to weaker foreign demand and rising import invoices,” said Julian Evans-Pritchard, senior Chinese economist at research firm Capital Economics.

Growth shock in China’s major trading partners

The war could cause a broader slowdown in the global economy, especially in Europe, said Betty Wang, senior Chinese economist at ANZ Research.

The European Union is China’s second largest trading partner, accounting for about 15% of the Asian country’s total exports. According to ANZ Research, exports to the EU increased further last year, accounting for 16% of China’s export growth of 30%.

“Statistically, EU economic growth has a high correlation with total Chinese export growth,” Wang said, adding that for every 1 percentage point drop in EU GDP growth, total Chinese export growth will decrease by 0.3 percentage points.

The big chip break, the nickel fears

The semiconductor shortage was already severe, but Russia’s war in Ukraine is set to further disrupt supply chains.

ANZ Research said the conflict has exacerbated the global chip shortage, on which China depends heavily for its electronic exports. Exports of electronic items contributed 17.1 percentage points to China’s export growth of 30 percent in 2021, the research firm said.

Analysts noted that both Ukraine and Russia play important roles in global semiconductor supply chains.

Ukraine supplies purified rare gases such as neon and krypton, both of which are essential in semiconductor manufacturing, according to ANZ. It also produces precious metals used to make chips, smartphones and electric vehicles.

China is among emerging markets vulnerable to war-induced commodity shortages, according to a report by TS Lombard released Monday. In particular, China is sensitive to disruptions in nickel supplies, the report said.

Last week, the London Metal Exchange stopped trading in nickel after prices more than doubled due to fears of supply disruption due to the war. Russia is the world’s third largest producer of nickel.

Nickel is a key raw material in electric vehicle batteries and China is the largest producer of electric vehicles globally. The number of EVs exporting to other countries jumped 2.6 times to nearly 500,000 last year, more than any other country in the world, Nikkei reported last week.

According to a study, Chinese-made electric vehicles accounted for about 44% of electric vehicles produced from 2010 to 2020.

High energy prices

The Ukrainian crisis has also led to volatility in oil prices, which rose to all-time highs last week before plummeting by more than 20%. This is bound to hit China, the world’s largest oil importer.

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China imported energy products worth $ 423 billion last year, said Nathan Chow and Samuel Tse, economists at Singapore-based bank DBS. Of that, $ 253 billion was crude oil.

Economists wrote that China’s nominal GDP would be reduced by 0.8% if average oil prices rose from $ 71 a barrel to $ 110 this year.

Oil prices have been volatile, falling below $ 100 a barrel earlier this week after hitting highs of over $ 130 last week. On Thursday, they again broke above $ 100, well above the $ 70 to $ 80 level of crude oil trading earlier in the year.

China, however, could find some relief if it leaned on Russia.

“Given its neutrality with respect to sanctions against Russia, China can partially offset the rise in energy prices with cheaper imports from Russia,” DBS economists wrote.

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