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Possible Outcomes of the Russo-Ukrainian War and China’s Choice
This is from Hu Wei, a Chinese political scientist and national political adviser. He is the vice-chairman of the Public Policy Research Center of the Counselor’s Office of the State Council, the chairman of Shanghai Public Policy Research Association, the chairman of the Academic Committee of the Chahar Institute, a professor, and a doctoral supervisor. He is also a member of the 13th National Committee of the Chinese People’s Political Consultative Conference.
This article was submitted on March 5 by the author to the Chinese-language edition of the US-China Perception Monitor.
The article was censored in China and Hu Wei’s WeChat account was suspended.
Yet, it is a rational analysis of Putin’s situation and of China’s seemingly only alternative.
The Russo-Ukrainian War is the most severe geopolitical conflict since World War II and will result in far greater global consequences than September 11 attacks. At this critical moment, China needs to accurately analyze and assess the direction of the war and its potential impact on the international landscape. At the same time, in order to strive for a relatively favorable external environment, China needs to respond flexibly and make strategic choices that conform to its long-term interests.
Russia’s ‘special military operation’ against Ukraine has caused great controversy in China, with its supporters and opponents being divided into two implacably opposing sides. This article does not represent any party and, for the judgment and reference of the highest decision-making level in China, this article conducts an objective analysis on the possible war consequences along with their corresponding countermeasure options.
I. Predicting the Future of the Russo-Ukrainian War
1. Vladimir Putin may be unable to achieve his expected goals, which puts Russia in a tight spot. The purpose of Putin’s attack was to completely solve the Ukrainian problem and divert attention from Russia’s domestic crisis by defeating Ukraine with a blitzkrieg, replacing its leadership, and cultivating a pro-Russian government. However, the blitzkrieg failed, and Russia is unable to support a protracted war and its associated high costs. Launching a nuclear war would put Russia on the opposite side of the whole world and is therefore unwinnable. The situations both at home and abroad are also increasingly unfavorable. Even if the Russian army were to occupy Ukraine’s capital Kyiv and set up a puppet government at a high cost, this would not mean final victory. At this point, Putin’s best option is to end the war decently through peace talks, which requires Ukraine to make substantial concessions. However, what is not attainable on the battlefield is also difficult to obtain at the negotiating table. In any case, this military action constitutes an irreversible mistake.
2. The conflict may escalate further, and the West’s eventual involvement in the war cannot be ruled out. While the escalation of the war would be costly, there is a high probability that Putin will not give up easily given his character and power. The Russo-Ukrainian war may escalate beyond the scope and region of Ukraine, and may even include the possibility of a nuclear strike. Once this happens, the U.S. and Europe cannot stay aloof from the conflict, thus triggering a world war or even a nuclear war. The result would be a catastrophe for humanity and a showdown between the United States and Russia. This final confrontation, given that Russia’s military power is no match for NATO’s, would be even worse for Putin.
3. Even if Russia manages to seize Ukraine in a desperate gamble, it is still a political hot potato. Russia would thereafter carry a heavy burden and become overwhelmed. Under such circumstances, no matter whether Volodymyr Zelensky is alive or not, Ukraine will most likely set up a government-in-exile to confront Russia in the long term. Russia will be subject both to Western sanctions and rebellion within the territory of Ukraine. The battle lines will be drawn very long. The domestic economy will be unsustainable and will eventually be dragged down. This period will not exceed a few years.
4. The political situation in Russia may change or be disintegrated at the hands of the West. After Putin’s blitzkrieg failed, the hope of Russia’s victory is slim and Western sanctions have reached an unprecedented degree. As people’s livelihoods are severely affected and as anti-war and anti-Putin forces gather, the possibility of a political mutiny in Russia cannot be ruled out. With Russia’s economy on the verge of collapse, it would be difficult for Putin to prop up the perilous situation even without the loss of the Russo-Ukrainian war. If Putin were to be ousted from power due to civil strife, coup d’état, or another reason, Russia would be even less likely to confront the West. It would surely succumb to the West, or even be further dismembered, and Russia’s status as a great power would come to an end.
II. Analysis of the Impact of Russo-Ukrainian war On International Landscape
1. The United States would regain leadership in the Western world, and the West would become more united. At present, public opinion believes that the Ukrainian war signifies a complete collapse of U.S. hegemony, but the war would in fact bring France and Germany, both of which wanted to break away from the U.S., back into the NATO defense framework, destroying Europe’s dream to achieve independent diplomacy and self-defense. Germany would greatly increase its military budget; Switzerland, Sweden, and other countries would abandon their neutrality. With Nord Stream 2 put on hold indefinitely, Europe’s reliance on US natural gas will inevitably increase. The US and Europe would form a closer community of shared future, and American leadership in the Western world will rebound.
2. The “Iron Curtain” would fall again not only from the Baltic Sea to the Black Sea, but also to the final confrontation between the Western-dominated camp and its competitors. The West will draw the line between democracies and authoritarian states, defining the divide with Russia as a struggle between democracy and dictatorship. The new Iron Curtain will no longer be drawn between the two camps of socialism and capitalism, nor will it be confined to the Cold War. It will be a life-and-death battle between those for and against Western democracy. The unity of the Western world under the Iron Curtain will have a siphon effect on other countries: the U.S. Indo-Pacific strategy will be consolidated, and other countries like Japan will stick even closer to the U.S., which will form an unprecedentedly broad democratic united front.
3. The power of the West will grow significantly, NATO will continue to expand, and U.S. influence in the non-Western world will increase. After the Russo-Ukrainian War, no matter how Russia achieves its political transformation, it will greatly weaken the anti-Western forces in the world. The scene after the 1991 Soviet and Eastern upheavals may repeat itself: theories on “the end of ideology” may reappear, the resurgence of the third wave of democratization will lose momentum, and more third world countries will embrace the West. The West will possess more “hegemony” both in terms of military power and in terms of values and institutions, its hard power and soft power will reach new heights.
4. China will become more isolated under the established framework. For the above reasons, if China does not take proactive measures to respond, it will encounter further containment from the US and the West. Once Putin falls, the U.S. will no longer face two strategic competitors but only have to lock China in strategic containment. Europe will further cut itself off from China; Japan will become the anti-China vanguard; South Korea will further fall to the U.S.; Taiwan will join the anti-China chorus, and the rest of the world will have to choose sides under herd mentality. China will not only be militarily encircled by the U.S., NATO, the QUAD, and AUKUS, but also be challenged by Western values and systems.
III. China’s Strategic Choice
1. China cannot be tied to Putin and needs to be cut off as soon as possible. In the sense that an escalation of conflict between Russia and the West helps divert U.S. attention from China, China should rejoice with and even support Putin, but only if Russia does not fall. Being in the same boat with Putin will impact China should he lose power. Unless Putin can secure victory with China’s backing, a prospect which looks bleak at the moment, China does not have the clout to back Russia. The law of international politics says that there are “no eternal allies nor perpetual enemies,” but “our interests are eternal and perpetual.” Under current international circumstances, China can only proceed by safeguarding its own best interests, choosing the lesser of two evils, and unloading the burden of Russia as soon as possible. At present, it is estimated that there is still a window period of one or two weeks before China loses its wiggle room. China must act decisively.
2. China should avoid playing both sides in the same boat, give up being neutral, and choose the mainstream position in the world. At present, China has tried not to offend either side and walked a middle ground in its international statements and choices, including abstaining from the UN Security Council and the UN General Assembly votes. However, this position does not meet Russia’s needs, and it has infuriated Ukraine and its supporters as well as sympathizers, putting China on the wrong side of much of the world. In some cases, apparent neutrality is a sensible choice, but it does not apply to this war, where China has nothing to gain. Given that China has always advocated respect for national sovereignty and territorial integrity, it can avoid further isolation only by standing with the majority of the countries in the world. This position is also conducive to the settlement of the Taiwan issue.
3. China should achieve the greatest possible strategic breakthrough and not be further isolated by the West. Cutting off from Putin and giving up neutrality will help build China’s international image and ease its relations with the U.S. and the West. Though difficult and requiring great wisdom, it is the best option for the future. The view that a geopolitical tussle in Europe triggered by the war in Ukraine will significantly delay the U.S. strategic shift from Europe to the Indo-Pacific region cannot be treated with excessive optimism. There are already voices in the U.S. that Europe is important, but China is more so, and the primary goal of the U.S. is to contain China from becoming the dominant power in the Indo-Pacific region. Under such circumstances, China’s top priority is to make appropriate strategic adjustments accordingly, to change the hostile American attitudes towards China, and to save itself from isolation. The bottom line is to prevent the U.S. and the West from imposing joint sanctions on China.
4. China should prevent the outbreak of world wars and nuclear wars and make irreplaceable contributions to world peace. As Putin has explicitly requested Russia’s strategic deterrent forces to enter a state of special combat readiness, the Russo-Ukrainian war may spiral out of control. A just cause attracts much support; an unjust one finds little. If Russia instigates a world war or even a nuclear war, it will surely risk the world’s turmoil. To demonstrate China’s role as a responsible major power, China not only cannot stand with Putin, but also should take concrete actions to prevent Putin’s possible adventures. China is the only country in the world with this capability, and it must give full play to this unique advantage. Putin’s departure from China’s support will most likely end the war, or at least not dare to escalate the war. As a result, China will surely win widespread international praise for maintaining world peace, which may help China prevent isolation but also find an opportunity to improve its relations with the United States and the West.
The only question is how long it will take China to sway Putin.
(…) The United States and its allies might be reluctant to have China play any role in this crisis, given that they view Beijing as a strategic rival. That’s foolish and shortsighted; the conflict’s immediate dangers far outweigh any competitive considerations. Ukraine itself sees the potential of Chinese-led conflict resolution.
So far, China has called for dialogue and says it supports humanitarian aid efforts. But Beijing’s interests in more proactive involvement are growing by the day.
China has a significant economic interest in a quick resolution to the Russian-Ukrainian war. China enjoys strong ties with Russia and Ukraine and is both countries’ largest single trading partner, though each trades more with the E.U. bloc than with China. Russia and Ukraine are crucial components of the Belt and Road infrastructure program as well as conduits for China’s trade with Europe. China-Europe rail transports have experienced a hundredfold increase since the beginning of the 2010s, but the ongoing conflict threatens to disrupt these trade flows.
China is also uniquely positioned to act as a neutral mediator between a Western-supported Ukraine and Russia. (…)
It is not in Beijing’s interests to rely solely on an anti-Western alliance with Moscow. Russia may possess a mighty military, but its economy is in long-term structural decline, with a G.D.P. not much larger than that of Spain. For all the talk of ties with Moscow, it is worth remembering that China’s economic interests with Russia are dwarfed by those it shares with the West. In 2021, trade between China and Russia may have jumped by 36 percent compared to the prior year, to $147 billion — but that’s still less than a tenth of the combined trade with the United States ($657 billion) and European Union ($828 billion). (…)
As Russia becomes isolated from the world economy, China will not want to shoulder Russia’s economic burden alone.
(…) from Mr. Putin’s perspective, (…) {as] he and his country face increasing isolation, he can’t afford to lose China, too.
There are also political reasons China wants this conflict to end in a way that is appealing to all involved. The longer the war lasts, the more it will reinvigorate the Western alliance around the idea of a values-based confrontation between East and West, bringing the United States and the European Union into even closer alignment while driving military budgets up around the globe. That is not good for China, which would prefer to maintain lucrative economic ties with the West and focus its resources on domestic development.
(…) Beijing has long striven to convince political and business elites in Europe and America that the rise of China does not present a threat. Support for Russian aggression — even perceived support — threatens to undermine that assertion. By contrast, playing a constructive role in ending the war could help cast China as a strategic and not just economic partner.
Ideologically, China has common ground with both Ukraine and Russia. China deeply values the principle of state sovereignty and has long opposed outside interference in what it considers internal affairs such as Taiwan. Last month, Foreign Minister Wang Yi of China once again called for a global respect of territorial integrity, saying, “Ukraine is no exception.” In this way, at least, Mr. Putin’s invasion directly undercuts one of China’s key values. (…)
The longer the war goes on, though, China may find itself in a position of diminishing returns in its close relationship with Russia. This makes the argument for Beijing to take on an active mediation role even more compelling.
What form could mediation take? Any serious resolution would have to involve the United States and the European Union as key actors in European security arrangements. Beijing could help to broker an immediate cease-fire as a prelude to talks among Russia, Ukraine, the United States, the European Union and China.
Beijing’s goal would be to find a solution that gives Mr. Putin sufficient security assurances that can be presented as a win to his domestic audience while protecting Ukraine’s core sovereignty and NATO’s open-door policy. Finding a landing zone for such an agreement is challenging but not impossible. Some creative diplomacy could solve this, such as a formula for NATO expansion that rules out Ukrainian membership in practice while preserving its sovereignty and NATO principles in theory.
Securing a multilateral resolution to the crisis in Ukraine will be a tough and risky challenge, but there is no country better placed to do so than China.
In today’s WSJ:
Beijing’s foreign-policy advisers say the fact that Mr. Xi, whose joint statement with Mr. Putin just a month ago brought the China-Russia relationship to its closest point in seven decades, dispatched his top diplomat for a meeting that would focus heavily on Ukraine showed Beijing’s growing interest in taking a more proactive role in de-escalating the crisis.
The advisers also point to recent remarks by Mr. Xi and other senior officials during phone calls with European leaders, in which they expressed desires to work with the international community for a cease-fire in Ukraine. (…)
“The U.S. needs to cut down bashing and sanctions on China,” said Wang Huiyao, an adviser to the Chinese government and president of the Center for China and Globalization, a Beijing think tank. “You can’t keep beating up China on one hand and then expect China to help.”
(…) “China is committed to promoting peace talks,” said Yang, a member of the Communist Party’s 25-seat Politburo. “And the international community should jointly support the Russia-Ukraine peace talks to achieve substantive results as soon as possible, and push the situation to cool down as soon as possible.”
During the “constructive” talks with Sullivan, Yang stressed Beijing’s opposition to Washington’s support for Taiwan, which “concerns China’s sovereignty and territorial integrity.” Beijing considers democratically ruled Taiwan to be part of its territory. (…)
George Friedman, who views the economic and financial sanctions winning it:
Saving Putin’s face in this situation is not a high priority. He gambled, he lost. Demonstrating what it means to lose, in a situation where the U.S. is involved, is more important because the next one who tries this should remember the lessons of Putin. (…) We have to force him backwards because we can’t give him what he wants, Ukraine.
CONSUMER WATCH
Goldman Sachs says that strong wage growth is now broad-based: “53% of (employment-weighted) industries saw annualized wage growth between 7% and 11% over the last six months (vs. 35% in July 2021), and the middle 60% of the wage distribution saw annualized wage growth averaging 7.4% (vs. 5.2% in July 2021).”
Employers are raising wages more aggressively to retain talent:
In the last 6 months, the middle 60% of the wage distribution saw annualized wage growth averaging 7.4%, up from 5.2% in July 2021. GS says that “the tightness of the labor market argues even more strongly for sustained strong wage growth than they did in the summer and fall.”
Yet, “we expect wage growth will remain very firm and only settle down to 5% by the end of the year.”
Why the settling down given that “the tightness of the labor market…”?
You’re too curious!
Consumer Spending Growth Expectations Spike, while Inflation Expectations Edge Back Up
- Median one-year-ahead inflation expectations increased to 6.0% in February from 5.8% in January, matching its November 2021 series’ high. (…)
- Median expectations about year-ahead price changes for food and gas increased by 3.3 and 1.5 percentage points to 9.2% and 8.8%, respectively. The median year-ahead expected change in the costs of medical care and college education increased to 9.6% and 9.0%, from 9.5% and 7.3%, respectively. The median expected one-year-ahead change in the price of rent increased to 10.1%, from 9.8%.
- Median one-year-ahead expected earnings growth was unchanged for the second consecutive month at 3.0% in February and remains above its 12-month trailing average of 2.6%.
- Median year-ahead household spending growth expectations increased sharply to 6.4% from 5.5% in January, reaching a new series high since the start of the series in June 2013. The increase was broad-based across age, income, and education groups.
Why Your Electric Bill Is Soaring—and Likely to Go Higher Surging natural-gas prices, stoked by the Ukraine crisis, are raising power costs for utilities, and in turn, customers: “My utility bill literally doubled overnight.”
(…) Already, the natural-gas supply crunch has made it substantially more expensive for utilities to purchase or produce electricity. As a result, some customers have seen winter power bills increase by 20% or more compared with the year before, in addition to seeing higher home-heating bills. (…)
U.S. Henry Hub gas prices on Friday reached about $4.73 per million British thermal units. That is up from about $2.66 per million British thermal units a year ago. (…)
Average retail electricity prices for residential customers rose 4.3% last year to 13.72 cents per kilowatt-hour, the largest annual increase since 2008, according to the Energy Information Administration. (…)
Eversource Energy, ES -0.70% a utility that serves 3.6 million electric and natural-gas customers in Connecticut, Massachusetts and New Hampshire, raised electricity rates at the start of January to account for higher wholesale prices. The company said an average residential customer could see bills increase by as much as 25% through the end of June. (…)
San Diego Gas & Electric, a unit of Sempra that serves about 1.5 million electric customers and 900,000 natural-gas customers, raised rates at the start of the year to account for higher supply costs. Average residential bills increased by 11.4%. (…)
Treasury Yields Rebound to New Multiyear Highs The yield on the 10-year Treasury note hit the highest close since June 2019 as investors worry the isolation of Russia will add to inflation by boosting commodity prices.
The yield on the benchmark 10-year U.S. Treasury note settled at 2.139%, up from 2.004% Friday and its highest close since June 2019. (…)
While some have thought that higher commodity prices could slow economic growth and therefore make the Fed cautious about raising interest rates, “our view is, that for the U.S., that the inflation impact will be higher than any negative impacts from growth,” she said. (…)
Rosenberg Research estimated the impact of food-and-energy-induced inflation for the U.S. using
a range of scenarios from agriculture price inflation staying right where it is at roughly 50% year-over-year (determined by underlying commodity food costs) and WTI oil prices increasing to $150 per barrel, to food prices doubling and oil prices increasing to $200 per barrel.
If the price shock were to persist, this would contribute anywhere from 2.6 to 4.4 percentage points to the year-over-year inflation print, and if core CPI were to sustain its current pace (6.4% YoY in February), then we could be looking at double-digit U.S. inflation figures in 2022.
RR estimates that GDP growth would be shaved between 1.1 to 1.7 percentage points as a result, getting the U.S. close to recession markers.
China’s Factories, Consumers Make High-Speed Start to Year Covid lockdowns and war in Ukraine threaten to slow growth
(…) Industrial output jumped 7.5% during the first two months from a year earlier, accelerating from December’s 4.3% pace and more than double the 3.5% expected by economists polled by The Wall Street Journal.
Retail sales, a gauge of household consumption, rose 6.7% during the same period from a year earlier, beating the 4.3% growth expected by the surveyed economists. Catering sales, including from restaurants, grew at a faster pace than goods sales for the first time since July.
China saw a strong recovery in fixed-asset investment, which rose 12.2% in the first two months from a year earlier, compared with 4.9% growth in the same period of last year. Economists surveyed had predicted a 5% gain.
Investment in infrastructure projects increased by 8.1% from a year earlier, an indicator that authorities plan to rely more on funded projects to drive growth as the contribution from exports wanes and the real-estate sector’s woes drag on. (…)
Broad credit expansion pulled back from 10.5% in January to 10.2% in February, slowing for the first time since September. In February, new medium- to long-term household loans, primarily mortgages, contracted for the first time since 2008, signaling that confidence remains weak even after authorities cut mortgage lending rates to spur demand.
Home sales by value slumped 22.1% in the first two months from a year earlier, the biggest decline since March 2020, when the initial eruption of the Covid-19 pandemic dealt a hammer blow to China’s economy. Real-estate investment during the first two months slowed to a 3.7% gain from a year ago, down from 4.4% growth in 2021.
China’s official unemployment rate edged up 0.4 percentage point to 5.5% in February from the end of 2021, while the youth jobless rate climbed to 15.3% in February from 14.3% in December. (…)
HALF A BEAR
From Horan Capital:
- For the S&P 500 Index, almost half of the stocks in the index are down greater than 20% from their most recent 52-week high, in fact 44.8% are down an average of 31.9%. Another 29.7% are down 15.1% from their one-year high. The average stock in the index is down 20.1%.
- The S&P 400 Mid Cap Index is showing 82% of the index holdings are down greater than 10% from their 52-week highs. Just over 50% are down an average of 33.9% and the average stock in the Mid Cap Index is down 22.8%.
- The S&P 600 Small Cap Index is exhibiting the greatest weakness among its holdings with 81.4% are down more than 10%. The small cap index has the largest number of stocks down more than 20% at 58.6%. The average stock in the small cap index is down 26.6% from their 52-week highs.
- In total, 778 stocks, 52% of the combined 1500 large, mid and small cap indices, are down more than 32% from their 52-week high. This while the average index was down 23.2%.
Market bottoms normally happen when investors capitulate.
(…) capitulation bottoms have characteristics where trading volume spikes and the number of stocks making now lows spikes. As the below chart shows, 52-week new lows appear elevated but not at extremes, The number of new 52-week highs has declined and would be indicative of the weakness seen this year. The mixed trading and sentiment data are a few factors clouding the anticipated future direction of the market. However, with a large number of stocks down a lot, there are opportunities in individual stocks that are beginning to surface.
SentimenTrader agrees:
Curiously, there have been no days with truly exhaustive selling pressure during this entire [10-week] stretch.
Despite the large (but not extreme) price swings, there have been zero days with more than 90% selling pressure. The NYSE Up Issues Ratio has remained above 10% the entire time, unlike the pandemic crash and its aftermath.
The suggestion is that investors are relatively complacent. Despite heavy and persistent losses, we haven’t yet seen a whoosh of panic selling pressure, something that always piques the interest of contrarians. While such behavior would certainly help more metrics reach compelling oversold levels, it’s not necessarily required. (…)
The persistent selling pressure is causing sentiment to stay weak. Or rather, weak sentiment is causing rally attempts to falter quickly: chicken and egg.
At least some investors seem to be stepping up. With commercial hedgers covering some of their historic short positions against major equity index futures, Smart Money Confidence has been able to rise. It has now surpassed the peak from the pandemic.
According to the Backtest Engine, the S&P 500 rallied during the next 2-4 weeks after 52 out of 57 days when the Smart Money was more than 85% confident in a rally.
As Jay recently noted, the spread between Smart and Dumb Money has been wide for a while, and the 20-day average just crossed above 47%. Again, the Backtest Engine shows excellent short- to medium-term returns after similar behavior. (…)
Basically, every metric I use to gauge the market environment is negative. For all intents and purposes, that requires truly extreme sentiment readings to have any confidence in a multi-week to multi-month rebound. There are always some outliers, but fewer than 10% of core indicators are in risk-on mode, and more than a third of a broader range of indicators have been in extreme pessimism territory. We’re seeing ample evidence of extremes, but not panic. Maybe we need that one final flush that finally triggers it. That would make a case for a sustained rebound easier from a contrary point of view. The tricky part is that a final flush is unnecessary for that rebound to occur.
BTW, the 13-34 EMA trend lines finally crossed yesterday:
Here’s the record since 2006:
