Mr Xi goes to Moscow/ Financial dominance & central banks/ Green industrial policy/ The economics of China’s reopening/ Switzerland

Mr Xi goes to Moscow

President Xi met with Mr Putin in Moscow this week: the meetings were heavy on symbolism, but lacking in apparent substance.  Despite text on the strength of the China/Russia relationship, the closing statements did not include meaningful agreements on specific issues. 

On economics, China wants cheap Russian energy and commodities as well as opportunities to sell into the Russian market.  Trade flows are already expanding rapidly.  But China has by far the stronger negotiating position, has more alternatives, and is in no rush to sign agreements on initiatives such as the proposed gas pipeline.  

Russia is becoming increasingly locked into China with few other options.  A Russian official was quoted by the FT: ‘The logic of events dictates that we fully become a Chinese resource colony… Our servers will be from Huawei. We will be China’s major suppliers of everything. They will get gas from Power of Siberia. By the end of 2023 the yuan will be our main trade currency’.

On the Chinese ‘peace deal’ (really just a statement of high level principles), Mr Putin has welcomed parts of it – but it is a non-starter to Ukraine and the West.  Indeed, Mr Xi has not spoken to Mr Zelenskyy since the start of the war; China is clearly not a neutral party.  China does not want Russia to lose to the West, even if China judges the Russian invasion to have been a strategic blunder.

A diplomatic breakthrough is not imminent – neither Russia nor Ukraine are currently in the market for a peace deal. But China is the only country (other than Ukraine) that can pressure Russia into meaningful concessions.  A negotiated settlement will likely require strong external pressure from the US and China, the key supporters of Ukraine and Russia. 

There is some upside to China from brokering peace: better relations with Europe for one, along with enhanced standing in many countries in the global south who have remained non-aligned.  Indeed, China surprised with its recent Iran/Saudi diplomacy. This idea is a stretch for many reasons, including the lack of US/China trust, but is worth watching.

Farewell to financial dominance?

As expected, the Fed raised rates by 25bp on Wednesday, down from the 50bp that had been consensus prior to the collapse of Silicon Valley Bank.  US inflation is reducing but remains well above target, and Governor Powell indicated that further monetary tightening may be needed – and suggested rate cuts this year are not appropriate.  

The full note is available at: https://davidskilling.substack.com/p/global-briefing-mr-xi-goes-to-moscow