CRG Weekly: LME's nickel crisis and China's 'benevolent neutrality' towards Russia

News from the China Research Group

Podcast: Three leading Sino-Russian experts - Bonny Lin, Sergey Radchenko and Maria Repnikova joined us to discuss the early impacts of Russia’s invasion on Ukraine on the Sino-Russian relationship. Watch here or read the transcript. 

The stories driving the week

1. Chinese leaders maintain a Ukraine balancing act

• Europe is expending significant diplomatic effort in trying to persuade China to pressure Russia to halt its invasion of Ukraine. In a noteworthy piece in The Times, William Hague argued that Xi is the only leader who can stop the war in Ukraine.

• Those efforts are not yet having much of a visible effect. Foreign minister Wang Yi did refer to a ‘war’ for the first time, and Beijing on Wednesday pledged to provide Ukraine with humanitarian assistance - but that was £600,000 to Red Cross.

• Elsewhere, President Xi Jinping warned French president Macron and German chancellor Scholz in a Tuesday video call that sanctions could “drag down” the global economy.

• An FT long read notes that argued the intensification of Russia’s “bombardment” of urban areas has raised the costs of China’s close friendship with Russia to a point never imagined by Xi, who now faces two potential interlocking crises: a damaged economy and diplomatic backlash.

• China did made one diplomatic concession to the West this week: Beijing reached an agreement for the UN human rights chief Michelle Bachelet to visit Xinjiang. The UK and allies have been pushing for this for several months.

2. There is still limited evidence of China helping Russia to circumvent sanctions…

• China has refused to supply Russian airlines with aircraft parts, according to an official at Russia's aviation authority. And Janet Yellen commented that she had “not seen evidence that China is providing Russia with any significant workaround for our [US] sanctions”.

• Russian banks have turned to the Chinese payments system CIPS after Visa and Mastercard suspended operations after sanctions. But as The Economist notes, China’s CIPS payment system currently runs through SWIFT so it is not clear this will work.

• There are also good systemic reasons to be sceptical of the potential internationalisation of the renminbi, as summarised in this thread by economist George Magnus.

• The US continues to dangle the threat of secondary sanctions, this week warning Chinese chip manufacturers such as SMIC about the consequences of violating US sanctions.

3. …But other ways to provide support

• However, as Bonny Lin argued in our event this week that China continuing business as usual with Russia gives Putin an economic lifeline, and therefore China’s ‘neutrality’ equates to a pro-Russia stance. Or as Sergey Radchenko put it, a form of ‘benevolent neutrality’.

• This NYT piece sets out some ways that China could provide financial assistance to Russia, such as buying up Western stakes in Russian oil and gas companies.

• Chinese state media and officials have been amplifying a new Russian disinformation campaign about US-funded bioweapons labs in Ukraine, seen as a possible pretext for chemical weapons attacks. Chinese diplomats have also frequently referenced NATO concerns as causes of the conflict in Ukraine, echoing Russian state narratives.

• Two UK Huawei directors, Andrew Cahn and Ken Olisa, quit their board positions after the company refused to publicly condemn Russia’s invasion.

4. London Metals Exchange chaos

• The London Metals Exchange (LME) made the rare decision to halt nickel trading from Tuesday to Friday, after the price of traded nickel doubled to $100,000.

• While speculation may have started with sanctions and the Ukraine crisis, Chinese metals giant Tsingshan Holdings quickly became centre of attention. Its owner, Xiang Guangda, had built up a a significant short position on nickel. When that short came under pressure, trading ground to a halt.

• As well as halting trading, the LME also cancelled $3.9 billion of trades. According to the FT, Chinese government officials, Tsingshan, its brokers and the LME are still scrambling to find a solution that will enable trading to resume next week.

• The whole affair raises questions about the independence and credibility of the LME, which is owned by the Hong Kong Exchange (HKEX). Expect more UK scrutiny next week.

5. China wraps up its annual ‘Two Sessions’, now faces Covid outbreak

• China wrapped up its annual legislative session, the final meeting before the crucial Party Congress in October. The top-line announcement is China’s economic growth target of 5.5%, which is both a) lower than usual for China but b) at the top end of projected Chinese growth this year.

• Other things to note: As Andrew Batson pointed out, ‘common prosperity’ was barely mentioned. Xi Jinping also made a speech emphasising the importance of coal in Inner Mongolia.

• The Two Sessions also emphasised the country’s commitment to a zero-Covid strategy. But China now has more than 1,500 local Covid cases - the most since 2020.

• People on the ground in Shanghai are reporting lockdowns of offices and residential compounds, with a ‘rapidly changing situation’. Schools have moved back online.

• The current Omicron wave in Hong Kong is fresh in the minds of CCP leaders. The city has experienced over 500,000 cases in recent weeks and, at present, the highest death rate in the developed world.

Weekend reads

• The National Bureau of Asian Research (NBR) has published a major new paper on China’s digital ambitions, starting from the CCP’s designation of data as a factor of production.

• Maria Repnikova and Wendy Zhou analyse what China’s social media is saying about Ukraine in The Atlantic, arguing that pro-Moscow comments are posturing for anti-US sentiment.