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Russian Invasion of Ukraine Poses Some Headwinds to China's Economy

China's direct trade exposure to Russia and Ukraine is limited, but the global repercussions of the Russian invasion poses an additional risk to China's economy. Following a strong recovery post the initial wave of the pandemic, China’s growth momentum had begun to wane in H2 2021, driven by both demand and supply shocks. Recurring waves of widespread COVID-19 infections and China’s ‘zero tolerance' COVID strategy; weakness in China’s property markets; and enforcement of policies to cut carbon emissions have all contributed to slowing growth. In addition, U.S.-China tensions remain elevated. This commentary explores the direct and indirect channels by which the Russian invasion of Ukraine, and the subsequent sanctions placed on Russia, could impact China's economic recovery.

Key Highlights:

-- Although China's overall trade with Russia is limited, China is reliant on certain key imports from Russia such as oil, fertilizer and key metal inputs.

-- China continues to trade with Russia, but trade relations are unlikely to deepen in the near future as such actions could pose a risk to some of China's far more significant trade and investment relationships with the EU and United States.

-- China's economic recovery had begun to wane prior to the invasion of Ukraine, driven by both demand and supply shocks.

-- The Russian invasion of Ukraine exacerbates the problems in the external environment. Rising global commodity prices and supply chain disruptions, could impact global demand for Chinese exports.

“China's direct trade exposure to Russia and Ukraine is limited but the global repercussions of the Russian invasion poses an additional risk to China's economy” says Rohini Malkani, Senior Vice President DBRS Morningstar. “Trade relations are unlikely to deepen in the near future as such actions could pose a risk to some of China's far more significant trade and investment relationships with the EU and United States.”