Will sanctions be able to restrain China?

Will economic restrictions be an effective tool against possible Beijing aggression?

The military adventure of Putin's dictatorial regime met with resistance from Ukraine and the West. The biggest sanctions in world history have been imposed on Russia. However, economic constraints have not yet forced the aggressor to give up the war, which may give determination to other authoritarian countries. China also has global ambitions and territorial pretensions in the Pacific, so the country adheres to "pro-Russian neutrality" in the Russian-Ukrainian war.
There is a risk that China is preparing for its own "military operation". Taiwan, a high-tech country backed by the United States, could be affected.

The conflict between China and the United States is called a new "cold war" that could escalate into a global conflict. At the same time, Beijing has close business ties with the West, so this factor could be the deciding factor in preventing a new war. Will economic restrictions be an effective means against possible Chinese aggression?

The Taiwan issue

Taiwan's CTS channel reported a military invasion of China on April 20.
"New Taipei was hit by communist missiles, the port of Taipei (the capital of Taiwan) exploded, and facilities and ships were damaged or destroyed," the TV channel reported.
Within hours, it turned out to be “educational” news that was accidentally broadcast. Despite the apology of the editors, this story once again pointed to the high level of tensions in the region, which have lasted for more than a year.
The fact is that China regularly conducts military exercises near Taiwan, and considers some political forces on the island separatist. The last such exercise was conducted by the Chinese Ministry of Defense on April 15.
China calls the return of the island under its control a "Taiwanese issue." Beijing's rhetoric is reminiscent of the pre-war statements of the Russian dictator about Ukraine. The only difference is that Taiwan's sovereignty is not internationally recognized, even Western countries de jure consider it part of China.
The "Taiwan issue" can be resolved peacefully or militarily.
At the end of the 20th century, when China had warm relations with the United States, the Communist Party was inclined to peaceful integration. However, as relations with Washington deteriorated and the subject of Taiwan became the subject of speculation, signals began to arrive about the possibility of a military scenario.
Controlling the island is an important strategic goal for China. The Communist Party is calling for China's ideological unification, control of Taiwan's ports and high-tech industries.
Most of all, Beijing wants to take control of TCMS, the world's leading semiconductor company. This will allow China to concentrate more technology chains and increase global influence.
Taiwan does not want integration with China. The island government is backed by the United States, which supplies it with weapons and military equipment worth billions of dollars. The recent decisions of the Americans concerned the Patriot air defense system.
The United States even has a law on relations with Taiwan, according to which the Americans will respond to all "peaceful" attempts to return the island to Chinese control. This means that a potential military operation in Taiwan will provoke a sharp reaction from the countries of the liberal-democratic camp.
U.S. Treasury Secretary Janet Yellen has already said the United States is ready to impose all possible economic sanctions on Beijing if it deploys troops to Taiwan, alluding to the Russian experience. Is China scared?

Technological blockade

Unlike Russia, the Chinese economy is larger and highly integrated with the world. China's trade turnover with the United States and the EU exceeds $ 1.3 trillion. Chinese companies supply the West with all kinds of goods, from shoes to cars.
Technological development and preservation of millions of jobs in China depend on stable exports. Chinese exports will be affected in the event of an escalation in Asia. The high-tech sector will be the first to feel it.
"The standard population in Western countries is creating demand for technology products. This is encouraging companies to innovate. Electronics as the most technological industry concentrates scientific and technological progress and helps develop related sectors. China and Western countries have long competed in the technology market exposed to the risk of sanctions ", said Dmitro Jefremov, an expert of the Ukrainian Association of Chinese Studies.
China has already felt the impact of such restrictions in 2018. Then, for a number of political reasons, US President Donald Trump imposed additional tariffs on Chinese goods. In just one year of the "customs war", China's GDP growth has slowed by 0.8 percent.
China is currently experiencing a debt crisis caused by a large number of non-performing loans and an inflated shadow banking sector. The country's total debt exceeds $ 35 trillion or 265 percent of GDP. The economy can service such debts only if the financial sector grows and recovers.
In 2019, the National Bank of China conducted a stress test of the banking system. He showed that if the economy grows by less than 4.15 percent a year, half of the banks will be on the verge of default. Sanctions could cause a shock that would bring the country's economy closer to such a sensitive level.
After the crisis in 2020, a number of Chinese companies have already paid taxes. According to S&P, this can be announced by 20 to 40 percent of companies in the country. The fate of Evergrande, the largest developer in the country, which owes $ 300 billion and is on the verge of bankruptcy for six months, is unclear.
Trump's tariffs on Chinese goods have recently been eased, but the threat of renewed trade conflict remains. If US President Joe Biden decides to return previous tariffs, the consequences for Beijing will be severe.
Chinese exports are based on high value-added goods, whose production often depends on imported components. China cannot allow them to be lost because of sanctions. For example, Chinese semiconductor giant SMIC uses American software and equipment to make chips.
The Biden administration has already threatened to cut off the company from its technology as part of sanctions, as it once did with Huawei.
In addition, more than a million foreign companies are registered in China, accounting for 50 percent of China's foreign trade and 20 percent of budget revenues. Geopolitical tensions and the continuation of the tariff war will stimulate their access to neutral countries in the region with cheap labor.
In part, this process began under President Trump. Giant companies are withdrawing production plants from China or are planning to do so: Nike, Puma, Adidas, Samsung, LG, Sharp, Hasbro, Kia, Dell, HP.
Economically, China is not in a position to risk its financial stability and escalate the conflict with the United States, threatening its precious technological exports. Its limitations can not only affect trade, but also slow down the development of technology in other sectors.

Freezing of reserves

The freezing of $ 300 billion in gold and foreign exchange reserves of the Central Bank of Russia was an unexpected blow to the West, in response to the war against Ukraine. This has severely limited the Putin regime's ability to overcome the effects of sanctions.
China risks the same sanctions in case of escalation in Taiwan. According to the Financial Times, the Chinese government is concerned about the threat of freezing assets in Western countries and is holding meetings with bankers. The source of the paper admits that China is not ready to freeze its reserves.

Officially, Beijing holds more than a billion dollars in US Treasury securities. According to Yefremov, the actual amount of Chinese property in the United States is higher. The fact is that Beijing has also invested in securities of American mortgage agencies and could conclude contracts through third countries.
This mutually beneficial scheme has been working for a long time. China is investing in the United States and getting a safe place to invest and finance the demand for its goods. As China uses the dollar and the SWIFT system in international trade, blocking dollar funds could make the cost of invading Taiwan too high.
The Chinese authorities are well aware of these risks. China is looking for ways to "dedollarize" and is trying to make the yuan a strong reserve currency, depriving the United States of its political trump card in the form of financial sanctions.
China is in talks with Saudi Arabia to pay for oil in yuan and is forcing Russia and Indonesia to trade its currency. However, the status of the world's reserve currency, the yuan, is still a long way off. The Chinese currency makes up only 2.5 percent of world reserves and three percent of all international payments.
"Dedollarization will not happen in the next five to seven years. The yuan has limited conversion: the Chinese monetary authority controls the inflow and outflow of currency into the country. It is important for foreign investors to be able to move capital freely, convert it into different currencies and unlimited amounts. "Liberalization of capital movements and foreign exchange transactions carries the risk of uncontrolled outflow of funds from the economy," Jefremov said.
For the yuan to become a global currency, China must implement liberal central bank reforms that the government does not dare. Therefore, the instrument of freezing Chinese assets will remain in force.
However, Beijing could respond with counter-sanctions. For example, stop paying $ 2.7 trillion in external debt to “enemy countries” or freeze a portion of $ 1.2 trillion in shares of domestic foreign-owned companies. The consequences of such mutual sanctions will be felt by the entire world economy.

Energy crisis

During 2022, the world will face a food and energy crisis. Russia is one of the largest exporters of oil, gas and cereals, so it is easier for the occupiers to dictate their terms to the European Union. The situation is the opposite of China: the country is one of the world's largest importers of oil, gas and food, making it more vulnerable to energy and food security.
China cannot feed itself, so it imports $ 100 billion worth of food every year. However, China has prepared for the food crisis by concentrating half of the world's grain reserves and diversifying imports.
The energy situation is more complex. China imports more than 100 billion cubic meters of gas a year. About 65 percent is liquefied natural gas (LNG) supplied to tankers.
The two largest suppliers of LNG to Asia are Australia and the United States, which account for about half of China's imports. At the same time, these countries are direct political rivals of China in the region and may limit supplies in the event of an escalation of the conflict in Taiwan.
Gas accounts for only eight percent of China's energy supply, but that share will gradually increase as China sets a course for a "green" economy and abandoning coal. By 2030, China could increase gas consumption by 55 percent, and dependence on external suppliers will increase from 27.9 percent to 43.2 percent.
China will be able to reduce its dependence on LNG imports from Australia and the United States by putting into operation the Russian gas pipeline Power Siberia-2, whose declared capacity is 50 billion cubic meters per year. However, this will not happen before 2028, and by then the demand for gas will grow.
Oil supplies to China mainly come from neutral or allied countries (Saudi Arabia, Russia, Iraq, Angola, Brazil), so the oil embargo is not too dangerous for the Chinese economy.

 


The game is not worth the candle

The pillar of the Russian economy is the export of raw materials. In the short term, nothing will change, because the sanctions have not yet affected the purchase of energy from the occupiers. The Chinese economy is in close business contacts with the West, with complex production chains and exports of value-added goods.
This means that in case of escalation, it is easier to shake the Chinese economy. However, the whole world will suffer from this. China generates 18.6 percent of world GDP. Unlike Russia, a complete severance of business contacts with Beijing will boost inflation and destroy supply chains and millions of jobs.
Military adventures would be much easier if China and Russia managed to undermine the EU's solidarity with the United States by convincing Europeans not to get involved in conflicts. But the example of Ukraine shows that the West remains united in imposing sanctions and combating geopolitical threats.
The difficult economic situation, dependence on ties with Western countries and the solidarity of the latter, make the resolving of the conflict over Taiwan an unfavorable history for China for at least the next five to seven years.
If the experience of the Russian invasion of Ukraine and the threat of sanctions do not convince the Chinese government to resolve territorial issues peacefully, China and the entire Western world could quickly find themselves in a new economic reality.