China Policy Institute: Analysis


International Relations

Putting Britain First: The Sino-UK ‘Golden Era’ with Theresa May Characteristics

Written by Winnie King

“The golden era of British-Chinese relations will continue,” Prime Minister Theresa May stated September 2nd on her way to the G20 in Hangzhou, China. Will it however, be the 24 carat of the days of Cameron and Osborne? Or have delays linked to Hinkley Point irrevocably tarnished the gleam of relations? If President Xi Jinping’s statement during the G20 Summit is any indication, he is willing to ‘show patience,’ giving Mrs. May time to frame and launch her vision of British foreign policy and economic relations. Continue reading “Putting Britain First: The Sino-UK ‘Golden Era’ with Theresa May Characteristics”

Brexit’s impact on Chinese investments in the UK

Written by Agatha Kratz.

The fact that both China’s President Xi Jinping and Premier Li Keqiang clearly advocated for the UK to remain in the European Union indicates that they believed such an event would bring about important and potentially negative changes in the EU-China dynamic and UK-China relations. There is certainly no denying that quitting the EU-28 block will cost the UK its spot as one of China’s main economic partners. From now on, the UK will represent a mere 2% of China’s total trade, and will rank much lower on Beijing’s lengthy list of international trade partners. But what about investment? Could Brexit could make the UK less attractive as a destination for Chinese outward foreign direct investment (OFDI)? What picture is likely to emerge from the rubble of the Leave vote?

Continue reading “Brexit’s impact on Chinese investments in the UK”

Can Japan tempt Russia into an alliance against China?

Written by Dmitry Filippov.

Russia, and the Soviet Union before it, has traditionally been on Japan’s diplomatic radar mostly by virtue of its proximity and sheer influence. The two countries’ bilateral ties have been frosty at best, however, thanks to a decades-old territorial dispute over the South Kuril islands, referred to in Japan as the Northern Territories.

But all that is changing. Ever since Shinzo Abe began his second stint as prime minister in December 2012, Japan has been on something of a charm offensive, and it has made Russia a key part of its strategy towards a rising and increasingly assertive China. Continue reading “Can Japan tempt Russia into an alliance against China?”

Britain and China: A One Track Relationship after Brexit

Written by Kerry Brown.

The June 23rd referendum which resulted in a decision to leave the EU happened barely six months into the so-called `golden age’ ushered in between the Britain and China during President Xi Jinping’s visit last October. This is one bilateral relationship where the impact of Brexit is likely to be very profound. It is no surprise therefore that new Chancellor of the Exchequer Philip Hammond made Beijing his first major foreign visit.

The UK faces two starkly different aspects to relations with China after 23rd June. On the one hand, with access to the European single market for the UK likely to either become harder, or even to partially close up, the need to open a new kind of trading and investment relationship with a vast emerging market like the People’s Republic has grown more urgent. As never before, British companies, services providers and manufacturers will have to consider working with Chinese partners, inside and outside of China. They will need language skills, cultural understanding, and strategic engagement most of them currently don’t have. Continue reading “Britain and China: A One Track Relationship after Brexit”

China in Qatar

Written by Muhammad Zulfikar Rakhmat.

The use of soft power has become an important element of China’s foreign policy. In its pivot to the Gulf ,China has used soft-power resources to strengthen its foothold in the region. Qatar is a good case in point.

Educational partnership is perhaps the most apparent element of Chinese soft-power initiatives around the world, including Qatar. As Rasmus Bertelsen argues, educational institutions have become important soft-power sources as they function as bridges between individuals, financial resources and information in their society of origin and their host society. Acknowledging this, China has exerted various efforts to bolster its educational soft-power in Qatar by tethering its aspirations to the worldwide popularity of its language and culture. The Translation and Interpreting Studies (TII) of Hamad bin Khalifa University (HBKU) signed an MoU with Chinese Embassy in Qatar to collaborate in the areas of language teaching and cultural activities. Today, Chinese courses are being offered at the institution. Continue reading “China in Qatar”

Did Western Sanctions Affect Sino-Russian Economic Ties?

Written by Alexander Gabuev.

In the wake of Ukraine crisis, Russia hoped that closer ties to China would offset the negative impact of Western sanctions. To their surprise, Kremlin leaders have discovered that Western sanctions work in China too – despite Beijing’s official assurances that they don’t. As interviews with officials and bankers on both sides reveal, the cautious approach of Chinese financial institutions to the sanctions regime can be explained by three factors: the relative importance of American and European markets to their business compared to Russian market; insufficient expertise on Russia in leading Chinese banks; low appetite for investment in Russian projects due to the overall negative situation in the national economy.

Long Live the Sanctions

“I want to make it clear that China categorically opposes the sanctions the United States and Western countries have taken against Russia,” Zhang Gaoli, China’s Vice Premier and a member of powerful Politburo Standing Committee, said to Vladimir Putin on September 1, 2014. Both were attending a ceremony in Yakutsk celebrating construction of the first section of Power of Siberia, a pipeline crowning the $400-billion gas deal between Russia and China that was signed earlier in May and soon after Crimea annexation.

After Moscow’s meddling in eastern Ukraine and particularly after the downing of MH-17, the U.S. and EU have moved from individual travel bans and asset freezes to sectoral sanctions targeting state-owned banks and some industries vital for the Russian economy. Despite sanctions being constructed in a surgical way so as not to disrupt the global economy, they did hurt. For decades, Russian corporate players, both state-owned and private, used London, New York and Frankfurt as platforms to raise capital. As early as April 2014, the Kremlin has started to send high-level officials from the cabinet led by First Vice Premier Igor Shuvalov to explore whether Asian capital markets could provide alternatives (traces of this mission can be found in publicly available documents like the May 2014 speech of Prime Minister Dmitry Medvedev). The big hope in Moscow was that China could replace traditional locations by listing Russian shares in Hong Kong and Shanghai, providing access to local bond markets, and providing loans for sanctioned companies or buying stakes in them. But these hopes have been dashed.

In September 2015, when giving an interview to TASS and Xinhua news agencies before embarking on trip to China, Putin was asserting that the Western sanctions have only strengthened the cooperation between Moscow and Beijing. When one of the journalist stated that “Western anti-Russian sanctions negatively affect the bilateral trade”, the President has rebuffed him: “I would not agree that the illegitimate restrictions imposed by certain Western countries against Russia have a negative impact on Russian-Chinese economic cooperation. On the contrary, this encourages our domestic business to develop stable business ties with China”. This is the line Russian government sticks too even now, as an interview by Russian Deputy Minister of Finance Alexey Moiseev with the Financial Times shows.

These statements contradict mounting evidence that sanctions did negatively affect the economic side of Sino-Russian relations. At least, Putin’s bankers were already publicly complaining about Chinese partners’ “ambiguous position regarding Russian banks in the wake of US and EU sanctions”. These words were used by Yuri Soloviev, First Deputy Chairman of VTB Bank, in June 16, 2015 op-ed for Finance Asia. “Most Chinese banks will currently not execute interbank transactions with their Russian peers. In addition, Chinese banks have significantly curtailed their involvement in interbank trade deals, such as providing trade finance”, he wrote. Later in September 2015 Soloviev’s colleague at VTB, Vasily Titov, complained that Chinese banks are “too rigorous” in observing Western sanctions and that it takes two weeks to clear the payments through Chinese banks where it took just three days before the sanctions.

Available public data supports the view, that sanctions had a negative effect. Throughout 2014 and 2015, not a single Russian company has managed to raise debt or equity in any of the Chinese stock exchanges including Hong Kong. Credit lines amounting to 9 billion yuan signed in May between Russia’s Sberbank and VTB Group and Chinese lenders are barely used because there is no demand in Russia for loans in yuan, Bloomberg reported quoting Maxim Poletaev, first deputy CEO at Sberbank. At the same time Chinese banks were reluctant to provide loans in much-needed US dollars or Euros.

Who is afraid of OFAC?

What motivated Chinese financiers’ behaviour? At the end of the day, Beijing didn’t support the sanctions and was vocal in opposing them. The interviews with Chinese and Russian bankers and officials, as well as corporate executives, reveal some of the motives. These can be put into three categories.

First, it was the importance of Western markets that prevented Chinese banks from using the opportunity to tap deeper into the Russian markets facing decreased competition from international banks. The relevant significance of the markets can be seen through trade figures. In 2016, China’s trade with the U.S. was close to hitting the $600 billion mark, nearly equal to its trade with Europe ($593.4b). At the same time Sino-Russian trade accounted for just $64.2b, falling by 28.6% year-on-year due to the collapse in commodity prices. Chinese banks follow their customers abroad, clearing payments and providing trade financing, so good relations with the Western financial authorities have a huge price tag. Also, recently Chinese “big four” state-owned banks were allowed to buy stakes in American and European banks after years of suspicions and bans. In Russia, Chinese banks were never allowed to buy local players, and their expansion into retail sector was scrutinized on political reasons – at the time when French, British and Italian competitors were encouraged to do so by the Central Bank. So the choice between jeopardizing relationship with the regulators of large, profitable and prospective markets and going into shrinking, risky and overregulated Russian market was obvious.

The Second reason cited in every conversation with Chinese or Hong Kong banks is lack of detailed expertise on Russia. “We know well Chinese companies whose business we support in Russia, we know some of their Russian counterparts, but we are not naïve to think that we understand Russia. It’s expensive”, one of the bankers told me. Despite having capable teams on the ground in Moscow or in the Far East, these teams can be no match for the pool of talent European and American banks have on Russia. As risk compliance became key part of navigating the sanctions and moving around toxic “grey areas” of OFAC’s or European Commission’s orders, this became too expensive for many Chinese banks. The first banks to react were smaller banks like Ping An, Bank of Communications and China Merchants Bank, which were servicing the accounts of companies from offshore jurisdictions used to clear payments with Russia. The banks have asked customers to shut the accounts down, because they “were engaged in some activities with Russia”. According to interviews, there was the same situation in Hong Kong, where local banks stopped opening bank accounts for all Russian citizens (as well as citizens in Ukraine as some Ukrainian politicians connected to Yanukovich regime were also sanctioned).

Last but not least, it was the environment around state-owned banks in China in the wake of anti-corruption campaigns that has significantly decreased appetite for risk. Decisions at the November 2013 Third Plenum set more demands for performance of state-owned companies. As anti-corruption campaigns have cleaned up the energy sector purging people associated with former Politburo Standing Committee member Zhou Yongkang, the commodities prices started to collapse, so the interest of Chinese financial institutions to lend money to projects in Russia has fallen significantly.

Good To Be Disconnected

Still, there were many deals and loans provided to Russia by Chinese financial institutions despite the sanctions. The most illustrative one was finalized on March 15, 2016 between Yamal LNG and the Silk Road Fund (SRF). According to a Yamal LNG statement, the SRF has acquired a 9.9% stake in the Arctic gas producing project paying 1.087 billion. Yamal LNG was one of the least obvious targets for the Chinese investors because of difficulties for business models under current oil prices, and also because one of the stakeholders, Putin’s old friend Gennady Timchenko, was under sanctions. But as special as the project was, so was the buyer – a $30 billion special purpose vehicle that was established in 2014 to support Xi Jinping’s call to create the “Silk Road Economic Belt”. Without having a clear strategy, SRF has invested in random projects including Italian tyre maker Pirelli and hydropower plants in Pakistan. A stake in Yamal LNG was SRF’s second purchase. One simple reason which allowed SRF to go for the Yamal deal was that the fund was merely a pocket of the Chinese government not connected to the international financial markets and without the need to raise funds publicly.

This seemed to be a general pattern of the Chinese way to support Russian companies. Since 2014, most of the MOUs signed and deals Russian companies and banks have executed with the Chinese counterparts were with policy banks like Exim Bank of China or the China Development Bank. These two are special policy banks that have no retail operations either in China or overseas and no “banking business” in a conventional sense, so it is difficult to hurt them.

The future of Sino-Russian finance cooperation is difficult to predict, as is the trajectory of these two large countries. If the current fundamentals are still there (sanctions against Russia are in place, China slows down but continues to grow under the leadership of the CPC) we may expect to see deepening partnership. Moscow and Beijing may develop a whole infrastructure of SPVs disconnected from the international financial system to support joint projects, just like China did with Iran in the wake of sanctions related to Teheran’s nuclear program. Chinese banks may also strengthen their expertise on Russia and learn from European peers how to navigate troubled sanctions water – particularly if Russians become more concessive to selling assets to China on knockout prices as they have nowhere else to go.

Alexander Gabuev is a Senior Associate and Chair of the Russia in Asia-Pacific Program at the Carnegie Moscow Centre. His research is focused on Russia’s policy toward East and Southeast Asia, political and ideological trends in China, and China’s relations with its neighbours—especially those in Central Asia. Image credit: European Commission representation in Ireland.

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