China's economic decline: the impact of Russia's support in the war with Ukraine and the role of sanctions

China's decision to offer diplomatic and economic support to Russia during its war in Ukraine led to severe consequences, the consequences of which were felt by the Chinese economy. As global sanctions targeting Russia indirectly affect China's own economy, Beijing is facing increasing pressure to mitigate the downturn with aggressive fiscal measures. China's banks have responded by cutting lending rates, but is that enough to stop the country's economy from going deeper into recession?

The weight of sanctions on China's economy

Although China is not a primary target of Western sanctions, China's close trade ties with Russia have put its economy in a precarious position. Sanctions imposed on Russia, particularly in the energy, financial and technology sectors, have trickled down to China through their economic partnerships. Many Chinese companies doing business with Russia now face disruptions in global supply chains, shrinking export markets and increased scrutiny from Western financial institutions.

According to the US Treasury Department, Chinese firms that provide material support to Russia have been blacklisted, which has led to restrictions on access to Western financial systems. This has increased uncertainty among Chinese investors and traders, who are now reluctant to cooperate with their Russian counterparts for fear of secondary sanctions.

China's response: lower lending rates

To deal with economic stress, China has introduced a series of rate cuts, led by the People's Bank of China. Chinese banks cut lending rates in mid-2024 to stimulate the economy, hoping to ease pressure on the property market, boost consumption and support struggling industries.

However, these measures can only offer temporary relief. Economists suggest that while interest rate cuts may stimulate more borrowing and spending in the short term, they are unlikely to solve the larger structural problems facing China. The country's dependence on exports, which have declined due to the shrinking world market and reduced demand from the sanctioned Russian markets, continues to be a serious problem.

The price of supporting Russia

China's strategic partnership with Russia has strengthened since the start of the war, and Beijing plays a crucial role in protecting Russia from complete diplomatic isolation. However, this partnership comes at a price. Western countries are increasingly wary of China's ambivalent stance, applying pressure through sanctions and trade restrictions targeting sectors important to China's growth, such as technology and manufacturing.

Chinese exports to Western markets have also slowed, making it harder for companies to compete as they face higher tariffs and restrictions over concerns about their ties to Russia. Analysts warn that China's decision to support Russia could further isolate it from global markets, exacerbating its economic problems.

Long-term economic risks

If China continues on its current path of supporting Russia, the long-term economic risks will be significant. Western investors could leave, trade relations with key partners could deteriorate, and China's position in global financial markets could suffer. China's big tech companies and banks have already seen their share prices fall as foreign capital has fled in response to rising geopolitical risk.

The International Monetary Fund (IMF) downgraded China's growth forecasts for 2024, citing geopolitical tensions and the effects of sanctions as the main reasons for the slowdown. In addition, the real estate crisis in China and the downturn in the manufacturing sector could deepen if the global economic environment continues to deteriorate.

China is facing one of its most serious economic problems in decades as its support for Russia complicates its relationship with the West and threatens to further weaken its economy. While lower lending rates may offer short-term relief, it's unclear whether it will be enough to reverse the broader downturn. Beijing's path forward will require a careful balancing of its geopolitical interests and domestic economic stability.

Sources:

US Department of the Treasury. "Sanctions Programs and Information: Russia-Related Sanctions." 2024 year.

International Monetary Fund (IMF).