Home NewsEconomy News How the Russia-Ukraine crisis could hit China’s trade

How the Russia-Ukraine crisis could hit China’s trade

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How the Russia-Ukraine crisis could hit China's trade

Cargo ships load and unload containers at the Qingdao Port Foreign Trade Container Terminal in Qingdao city, east China’s Shandong province, November 11, 2021.

Yu Fangping | Cost Photo | Barcroft Media | Getty Images

China’s trade surplus has soared to an all-time high during the pandemic as people consume more goods than before, but analysts say the Russian-Ukrainian war will change that.

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

“The Ukraine war could soon start weighing on net trade due to weak foreign demand and higher import bills,” said Julian Evans-Pritchard, senior China economist at research firm Capital Economics.

Growth shocks to China’s major trading partners

ANZ Research senior China economist Betty Wang said the war could lead to a broader slowdown in the global economy, especially in Europe.

The EU is China’s second-largest trading partner, accounting for about 15 percent of the Asian country’s total exports. Exports to the EU rose further last year, accounting for 16% of China’s 30% increase in exports, according to ANZ Research.

“Statistically, there is a high correlation between EU economic growth and China’s total export growth.” Wang said that for every 1 percentage point drop in EU GDP growth, China’s total export growth rate will drop by 0.3 percentage points.

Big Chip Disruption, Nickel Concerns

Semiconductor shortages are already severe, but Russia’s war in Ukraine will further disrupt supply chains.

ANZ Research said the conflict had exacerbated a global shortage of chips, which China relies heavily on for its electronics exports. Electronics exports contributed 17.1 percentage points to China’s 30 percent export growth in 2021, the research firm said.

Analysts pointed out that both Ukraine and Russia play an important role in the global semiconductor supply chain.

According to ANZ, Ukraine supplies purified noble gases such as neon and krypton, both of which are necessary to make semiconductors. It also produces precious metals used to make chips, smartphones and electric vehicles.

China is one of the emerging markets vulnerable to war-induced commodity shortages, according to a TS Lombard report released Monday. China is particularly sensitive to nickel supply disruptions, the report said.

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

Nickel is a key raw material for electric vehicle batteries, and China is the world’s largest producer of electric vehicles. The number of electric vehicles it exported to other countries rose 2.6-fold last year to nearly 500,000 — more than any other country in the world, the Nikkei reported last week.

One study found that EVs made in China accounted for about 44 percent of EVs produced between 2010 and 2020.

Energy prices rise

The Ukraine crisis has also caused volatility in oil prices, which surged to record highs last week before plunging more than 20%. This will hit China, the world’s largest oil importer.

Read more about China from CNBC Pro

China imported $423 billion worth of energy products last year, according to Nathan Chow and Samuel Tse, economists at DBS Bank in Singapore. Of that, $253 billion was in crude oil.

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

Oil prices have been volatile, falling below $100 a barrel earlier this week after surging to highs above $130 last week. They crossed $100 again on Thursday, well above the $70-$80 where crude oil traded at the beginning of the year.

However, if China relies on Russia, it may get some relief.

“Given the neutrality of sanctions against Russia, China could partially offset the impact of higher energy prices by importing cheaper products from Russia,” the DBS economists wrote.

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