China-Russia: the Next Financial Shock might be in the Xi-Putin Axis?

21 March 2023 - 17:46

twitter whatsapp

Traders’ attention shifts to China-Russia relations, strengthened by Xi’s visit to Moscow: because the ties are undervalued and could trigger financial as well as political shocks.

China-Russia: the Next Financial Shock might be in the Xi-Putin Axis?

China-Russia: increasingly strong and dangerous relationship between the two most monitored countries at the moment. And the markets are watching.

Chinese President Xi Jinping goes to Moscow, seeking both to deepen economic ties with an ally he sees as a useful counterweight to the West, and to promote Beijing’s role as a potential war broker in Ukraine.

Xi is the first leader to meet with Putin since the International Criminal Court (ICC) issued an arrest warrant on him on Friday for deporting Ukrainian children to Russia during its invasion of Ukraine.

For Moscow, the meeting is tangible proof before the world that it has a powerful friend in its stalemate with a hostile Europe and the USA.

In the background, markets shaken by the waters of bank failures are also looking with some concern at the system of alliances that operates in an increasingly less secure world.

A week ago, an MLIV Pulse poll by Bloomberg probing trader sentiment towards the dragon expressed geopolitical concerns over President Xi Jinping’s growing power, which are casting a shadow on optimism among professional investors, a third of whom still plan to increase their exposure to China in the next 12 months.

The framework that frames the current situation of the Chinese nation is rather complicated: the third term of Xi Jinping, the reduced economic growth objectives, the real estate crisis, the tension with the USA, the precarious relationship with Taiwan are all reasons that drive investors to be cautious.

And then there is the China-Russia relationship. The axle has never broken. And this is something that can really destabilize traders and global markets.

China-Russia: the alliance can be a shock

Many of the 284 readers who participated in Bloomberg’s poll cited numerous potential dragon crises that could rock world markets.

The worst-case scenarios are those in which China is seen arming the Russian military in Ukraine or a military confrontation over Taiwan. A political blunder in Beijing, worsening ties with the United States and a slowdown in the real estate market are among other serious risks that need to be wary of.

There are many reasons for the nervousness, but certainly the Beijing-Moscow approach is causing a lot of concern. US intelligence chiefs expect China to maintain its economic and political cooperation with Russia.

In his inaugural news conference as China’s new foreign minister, Qin Gang praised his country’s partnership with Russia and said these ties could become increasingly important as the world becomes more unstable.

The latest news is that Chinese President Xi Jinping and Ukrainian leader Volodymyr Zelenskiy are planning to speak via video link in what would be their first conversation since the invasion of Russia. Xi’s diplomatic foray into the Ukrainian conflict would come as the US and China remain at odds on a wide range of issues. Washington and Kiev have warned Beijing against providing lethal aid to Moscow, something China so far says it has no plans to do.

In this climate, therefore, it was not so absurd that among the respondents’ answers in the MLIV Pulse survey on which "wild card" risk on China that investors are not focusing on, the following emerged:

“A significant escalation in the Russia-Ukraine war that could force China to support Russia more clearly and strengthening economic ties with Saudi Arabia and Russia.”

Not to be underestimated, China scored a major diplomatic victory late last week when it helped facilitate a deal between Saudi Arabia and Iran to restore diplomatic ties.

Moreover, at the G20 meeting in New Delhi in early March, Russia and China rejected words on the war that had been agreed at the leaders’ summit in Indonesia less than six months earlier. They have united to prevent India, the host country, from negotiating a compromise.

This means that more and more the geopolitics dimension plays a huge role on the markets. If China and Russia become military allies in the war, the US will fight back. With all the consequences for markets and beyond.

Xi-Putin: what to know about the alliance feared by all

China’s position is very complex and delicate in this historical moment. By many, the dragon is seen as the balance on which another global financial and political shock may currently depend.

The challenge for Xi is to find a balance between the advantages of closer ties with Moscow, without destroying commercial relations with other partners, Europe first and foremost.

“The war in Ukraine has intensified the great power rivalry and made the geopolitical fault lines between the US and China even more pronounced, and in response China and Russia are now really solidifying their alignment”, said Alexander Korolev, China-Russia relations expert at the University of New South Wales in Sydney.

China will need Russia for its upcoming confrontation with the United States, which is becoming very real, he added, pointing to closer military relations between the two countries and the need for Beijing to prepare alternative energy supply routes in the event that seaborne oil imports from the Middle East are stalled in a confrontation with the United States over Taiwan.

Remember: China’s trading volume with its neighbor has soared over the past year, jumping 34.3% to a record Rmb1.28 trillion ($186 billion), according to Chinese media controlled by the state. This year, natural gas imports from Russia are expected to increase by a third.

Trade with Beijing has given Russia an anchor of economic salvation, offsetting some lost oil sales to the US and Europe and providing replacements for crucial Western-made components such as microchips, 5G equipment and industrial machinery.

Coal sales have increased and the first railway bridge over the Amur River will help, easing transport bottlenecks on the internal Trans-Siberia network. China’s importance is also growing in metals.

Russia’s Norilsk Nickel, a major source of nickel, has entered into negotiations with its Chinese customers to sign long-term contracts based on Shanghai prices. Rusal, the world’s largest producer of aluminum outside of China, ramped up sales in Asia last year, but is also increasingly relying on China as a source of alumina.

In summary, the commercial and political ties between Beijing and Moscow - as the US suspects a prelude to a military alliance - are real and strong. Xi probably won’t go too far to risk losing Western business. However, excessive steps towards Putin could explode into a new financial shock and political.

Original article published on Italy 2023-03-20 15:26:00. Original title: Cina-Russia: il prossimo shock finanziario è nell’asse Xi-Putin?

Trading online

Fai Trading Online senza rischi con un conto demo gratuito: puoi operare su Forex, Borsa, Indici, Materie prime e Criptovalute.