Kevin Yao, Tom Westbrook

SINGAPORE/BEIJING, (Reuters) – Investors believe that China’s stance regarding Russia’s invasion of Ukraine in the coming months will reshape the global flow of money and trade.

Last month, just before Russian President Vladimir Putin deployed his troops into Ukraine, he declared in Beijing a partnership “without limits”, with a pledge to work more closely against the West.

Beijing declined to condemn the “special military operation” called by Moscow, while calling for restraint from all sides.

China customs data shows that Sino-Russian trade jumped 35% to $146.9 million in 2021, an increase of 35% compared to the previous year. This trend is likely to be accelerated by new, severe sanctions against Russia.

A shift in trade flows has been brewing since Russia’s annexation of Crimea from Ukraine in 2014, said Tom James, chief executive of TradeFlow Capital Management in Singapore, a trade finance fund.

Russia already trades in renminbi to China,” he stated, noting that outside of the SWIFT network, banks could deal with one another. Moscow has been blocked from this system, so Beijing may be able to benefit, but with some risks.

As both China and Russia seek to reduce their dependence on the dollar, just over 25% of Chinese exports to Russia in 2021 were settled in Yuan. This is a significant increase from 2% in 2013.

James stated that the X factor is tariffs or sanctions, if placed, on Russian producers countries willing to accept them. It’s already creating a protectionionism among countries concerned about food security.

PRESSURE

Fears that Russia and China could create a retaliatory bloc have caused financial markets to sway. Chinese equities are among the worst-performing since February 24, when the invasion of Ukraine started.

Each country’s offshore index has lost approximately 6 percent since the outbreak of World War II. Hong Kong’s is down about the same as China’s. Comparatively, global equities have gained about 1% while the has gained 1.6%.

China’s stable currency, which was previously steady, has started to exhibit volatility flashes and vulnerability. It hit a three month low on Tuesday.

One Chinese adviser to the government said that “the pressure is very high at the moment,” Reuters was told by him under anonymity.

He said, “It is pragmatic to purchase some oil and gasoline from Russia. But everybody is watching.” “We don’t want to upset Russia, but at the same time it’s difficult not to side with the majority of countries.”

China’s trade relationship with Russia dwarfs its relations with Western countries. China trades with Russia for $137 billion last month with the European Union. It also traded with $123.3 billion the United States. But, it only did business with Russia for $26.4 billion.

China’s foreign minister said that Russia and China will continue their normal economic cooperation.

However, the effects of war on global trade are already evident in bans on exports and supply chains snarls.

Foreign sale of materials ranging from Indonesian coal, Egyptian pulses and Vegoils is not possible.

As the world loses its Russian potash, food buyers have to scramble for Russian rice. This is a major problem. There seems little hope of repairing the globalized system.

There are now hints that a new arrangement is possible where Russia’s commodities and energy exports will find markets in China, India and Europe while Australian minerals or gas will end up in Europe.

AVOID!

Morgan Stanley Jonathan Garner, (NYSE:) strategy said that he is more careful about India and China in his podcast and wanted to get exposure to Australia because it was an export market aligned to sources of capital worldwide and less susceptible to withdrawal.

India is currently a buyer for Russian military hardware and is considering an offer for Russian crude oil at a low price. According to sources in banking, India is also exploring the possibility of setting up a rupee-rouble payment system.

China’s largest exporter has the potential to generate large flows of goods and money outside of a dollar-dominated system. This is something Beijing has been trying to achieve for over a decade.

George Boubouras is the head of research for K2 Asset Management, which makes global investments from Melbourne.

According to the Wall Street Journal, talks between China (and Saudi Arabia) about oil trading for dollars and yuan has accelerated. It may be an important step towards promoting the yuan’s role as reserve currency and trade currency.

Reuters could not confirm this report.

China is keeping a close eye on the Yuan, and it remains modestly accepted as a reserve.

Many market participants doubt China’s sudden withdrawal from Western markets. However, there are distinct hints of an epochal shift in the market commentary.

“When the crisis and war are over, the U.S. dollars should be weaker, while the renminbi should be stronger,” Credit Suisse (SIX) Zoltan Possar, a strategist said that China is buying Russian commodities and that a regime shift has occurred.

Quadriga Igneo’s manager Diego Parrilla is a different person. He believes that China will print or borrow more money to help its economy and the yuan will fall as trade fragments.

There is no way out of here. Russia is moving East, and not West. He said that he believes globalization as we know is over and Russia has entered the East.