Prevention Is Better Than Cure – China Wants to Build an Anti-Sanctions Shield From the Western World.
But China's best weapon is probably elsewhere.
Heavily handicapped by American sanctions for several years, Huawei has seen its phone sales soar in Moscow since the outbreak of the war in Ukraine. However, the Shenzhen-based group will now face a dilemma.
Huawei tripled its sales in the first two weeks of March 2022, taking advantage of the panic triggered by the fall of the ruble, as well as Apple's withdrawal from the Russian market. The withdrawal of Westerners offers a boulevard to Chinese brands, but Huawei is cautious, fearing being targeted in turn, while many components of the phones remain under American license.
Already blacklisted by the United States and accused of circumventing sanctions against Iran, the world's leading telecom equipment manufacturer must navigate carefully in the heart of the new Cold War, still dependent on Western technologies.
China wants to refocus its economy
Huawei's dilemma illustrates the dilemma of Xi Jinping's China, torn between autarkic will and dependence on globalization, sharpened as never before by the Ukrainian conflict triggered by his great friend Vladimir Putin. How to support its Russian ally without jeopardizing its relations with Western investors, still essential to the growth of “the world’s factory”? And above all, how can we prevent possible massive sanctions in the future, in the event of a conflict off the coast of Taiwan?
The scale of the measures unleashed by the United States and the EU against Moscow has taken the Red strategists by surprise, sounding the alarm. The crisis in Ukraine poses new challenges for China, which has no interest in a closed world divided by a new Cold War. Alignment with Moscow is making investors nervous, as illustrated by a spectacular capital flight in February, to the tune of $32 billion, unprecedented since March 2020.
Any direct aid to Russia could weigh on future European investment, threatened European Commission President Ursula von der Leyen at the EU-China summit on April 1, 2022.
The Western surge reinforces President Xi's long-standing determination to build a technologically sovereign China with an anti-sanctions shield under the banner of a national renaissance. “A great country like ours must rely on itself,” the Party General Secretary reaffirmed on March 6, 2022, reemphasizing his “dual circulation” concept remembered in 2020 at the heart of the pandemic.
This concept aims to refocus the Chinese economy on its domestic market by reducing its dependence on world trade, turning its back on four decades of “opening up” centered on attracting foreign capital and technology, launched by Deng Xiaoping.
Dual circulation was intended to cushion the shock of Donald Trump's sanctions. The Ukrainian crisis offers a new justification. The new helmsman is relying on his “China 2035” strategy to move upmarket, spurred on by the specter of American encirclement. “Adversity makes you live, enjoyment leads to death,” added Xi Jinping, champion of pure and frugal communism. But the challenge is long-term, as illustrated by the still strong dependence of the giant in key sectors, such as semiconductors, still dominated by Western patents, and Taiwanese and South Korean manufacturers.
Beijing wishes to rely on the BRICS and the developing world, often left behind by the West
Beijing is banking on the geographical diversification of its economic relations, particularly with the emerging “South”, to shelter itself from possible sanctions. In particular, the BRICS (Brazil, Russia, India, China, South Africa), as illustrated by the visit of Foreign Minister Wang Yi to India, in the hope of convincing Prime Minister Narendra Modi to participate in the group's summit to be held in China this year.
An offensive to counter the rapprochement between New Delhi and Washington, marked by the revival of the Quad (India, Japan, Australia, United States) in the Indo-Pacific, a crucial battle for influence between the two leading world powers. Beijing can rely on its unavoidable commercial role with the countries of Southeast Asia, enshrined in the Regional Comprehensive Economic Partnership (RCEP), a gigantic free trade zone that came into effect in 2022, taking advantage of American reluctance on the commercial front.
ASEAN became China's largest trading partner in 2020, dethroning Europe, signaling the growing integration of the zone into China's orbit, which is also extending to the Middle East and Africa via the Belt and Road Initiative (BRI). So many countries are in full take-off, open to Chinese investments, without ideological prejudices, and many of which display pragmatic neutrality in the face of the arm-wrestling match between Moscow and the West.
The preponderance of the US dollar is a problem for China
Russia also provides valuable energy security insurance in the event of an escalation, partly explaining the continued support for the Kremlin. If China is ever subject to a Western oil embargo over Taiwan or the South China Sea, Russia will be crucial to China's ability to break the sanctions of America and the European Union.
Pipelines from Siberia offer secure, favorably priced onshore supplies from an increasingly dependent partner. Russia, on the other hand, is in economic decline and offers limited outlets for Chinese exporters, indicating the limits of a partnership that is increasingly unbalanced in favor of the world's second-largest economy, which is aiming to become the world's largest economy ahead of America.
However, Beijing will remain vulnerable to financial sanctions for a long time because of the preponderance of the US dollar in trade, despite the gradual internationalization of the yuan, which accounts for only 3.2% of SWIFT transactions. The implementation of an alternative to this international financial payment system is also a long-term project that is still in its infancy, symbolized by the launch of the Chinese equivalent, CIPS, in 2015.
The Chinese interbank payment system affirms the ambitions of the giant but is not able to bypass the sanctions against Russia due to the lack of an alternative messaging system. Nevertheless, specific banks with little exposure to Western markets could serve as financial vehicles, like those working with North Korea.
Technological and financial independence is likely to be a long, decades-long process, and could postpone the need for a risky reunification of Taiwan. But the size and attractiveness of the Chinese market remain China's best assets to deter Westerners. China has a GDP ten times that of Russia, and many Western investors want to be there. This will put limits on any sanctions, most economists believe.
Western dependence on “the world’s factory” ultimately remains the best anti-sanctions shield against the West for Xi Jinping's China.
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