The economic war reaches China

Russia's invasion of Ukraine has implications for China’s relationship with the global economy, with likely disruptive economic consequences

The Russian invasion of Ukraine is already a major global economic shock, in addition to the brutal military costs and humanitarian disaster.  The immediate economic costs in terms of higher energy, food, and commodity prices are evident.  And massive economic sanctions on Russia have been implemented.

Last week, the OECD estimated that world GDP would be ~1% lower than baseline over the next year, and inflation ~2.5% higher, as a consequence of the Russian invasion and accompanying economic sanctions.  The economic hit is particularly acute in Europe.

But these global economic costs – and particularly the economic costs in Asia – could escalate substantially if China gets drawn into the economic war.  China was 18% of global GDP in 2021 in USD terms, the second largest in the world, whereas Russia and Ukraine combined are 2%.

This note reflects on China’s various exposures to Russia’s invasion of Ukraine, and the likely impacts on the global economy.

A friendship with no limits?

Mr Putin …