TETSUSHI TAKAHASHI, Editor, Economic News Group
TOKYO — With a border spanning thousands of kilometers, China and Russia have a long history of territorial disputes. But the two giants are now closer than ever as they challenge the U.S.-led democratic order.
Even so, Chinese President Xi Jinping likely sees the risk in aligning with Russian President Vladimir Putin.
The far-reaching economic sanctions imposed on Russia by the U.S., Europe and Japan seem to have caught China off guard. In particular, the decision to freeze foreign-exchange reserves held by the Central Bank of Russia must have come as a shock for Beijing.
The asset freeze means Russia’s central bank could no longer use those reserves to intervene in the currency market, leaving it helpless to stop a plunging ruble.
The bank has since raised its key interest rate to 20% to help shore up the currency, but such drastic hikes cool the economy as a whole. Russia is now grappling with serious stagflation — a painful combination of rising consumer prices and a shrinking economy.
China is no idle spectator to the Ukraine crisis.
U.S. national security adviser Jake Sullivan on Monday raised deep concerns over Chinese assistance to Russia in a meeting with China’s top diplomat, Yang Jiechi, in Rome. China now faces a West united against Russian aggression.
Xi and the Chinese leadership are “a little bit unsettled by the way in which Vladimir Putin has driven Europeans and Americans much closer together,” CIA Director William Burns told a House Intelligence Committee on March 8.
Watching Russia being hit with Western economic sanctions, Xi’s likely biggest concern is how this could impact his long-standing ambition of unifying Taiwan with mainland China.
China sits on by far the world’s biggest pile of foreign-exchange reserves. The People’s Bank of China held $3.2 trillion in reserves as of the end of February, more than double as much as Japan, which has the second-largest amount.
Nearly 60% of the Chinese reserves are believed to be in U.S. government bonds and other dollar-denominated assets. China stands to suffer far more than Russia if the PBOC’s overseas assets are frozen.
If China were to take military action on Taiwan, asset freezes and other “financial weapons” by the U.S., Europe and Japan could plunge the Chinese economy into a crisis. This risk is partly due to China’s failure to elevate the yuan to a truly global currency.
“In the short term, the likelihood of China unifying Taiwan by force may have receded,” said Takashi Suzuki, an associate professor at Japan’s Aichi Prefectural University specializing in Chinese politics.
With Putin increasingly isolated from the rest of the world, Xi must now assess how long he will support the Russian leader as China’s president prepares for the twice-a-decade Communist Party congress this fall.
