If Beijing decided to pull a Putin on its neighbors, would the United States have any real options besides war?
- By Daniel AltmanDaniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business.
With the ruble in the dumps and the Russian economy in shambles, Vladimir Putin’s compatriots can easily count the cost of his territorial ambitions. Moscow depends on other countries for financing, capital investment, and export markets. Make those countries angry, and pillars of the Russian economy begin to collapse. Yet China, which has its own territorial claims, could be far more difficult to corral.
If Russia were not so reliant on the rest of the global economy, then the toll of its actions in Ukraine would be far less stark. Limits on Russian banks’ international activities, transactions with Russian energy countries, exports of energy-related products to Russia, financing to underpin Russian trade, and travel by Russian executives and officials are among the sanctions imposed by the United States, European Union, Japan, Australia, Canada, Switzerland, and Norway. The effect has been a huge exodus of foreign capital from Russia, the collapse of the ruble, and the possibility — only recently unimaginable — of another Russian default.
China, of course, is also exposed internationally. Its exports in 2013 were equivalent to roughly 26 percent of its gross domestic product, similar to Russia’s 28 percent. And foreign portfolio investment in China amounted to $775 billion in 2013, or 8.4 percent of GDP, versus $206 billion, or 9.8 percent of GDP, in Russia.
The exit of those billions would be a challenge to the renminbi, just as with the ruble in Russia. Tens of billions of dollars were already fleeing China last year, most likely because of fears of a bubble in local housing and financial markets, and long-term political uncertainty. The rush to invest abroad is set to continue this year, and illegal outflows may make the total much bigger than official figures.
But Beijing is in much a better position than Moscow to sustain a similar set of sanctions, and its resilience may be increasing.
For starters, the People’s Bank of China has well over $4 trillion in reserves of foreign currencies, or around five times the level of portfolio investment from abroad. At the end of 2013, Russia’s central bank had $456 billion in foreign exchange reserves, a little more than twice foreign holdings. By the end of November (the last month for which figures are available), that total was down to $374 billion as a result of money being pulled out of the country, and today the central bank is essentially unable to support the ruble.
For China, the consequences would hardly be as dire. Let’s say the entire decline in Russian reserves came from withdrawals of foreign holdings, to the tune of about 40 percent of the total. If withdrawals in the same proportions occurred in China, its central bank would still have about $4 trillion in foreign reserves left, more than enough to fight off a speculative attack on the renminbi.
China’s trade is also less vulnerable than Russia’s. The countries imposing sanctions on Moscow had a relatively simple task, since so much of the Russian economy depends on energy; squeeze the energy companies and the banks that provide their financing, and a quarter of the Russian economy suffers. Sanctions on Russian energy were especially convenient given the simultaneous fall in oil prices, which disguised any additional costs Russian oil might have incurred in coming to market.
By contrast, no single industry in China represents as big a share of national output and trade as energy does in Russia. Moreover, while oil is a fungible commodity whose production is rising around the world, there are few similarly priced and immediately available alternatives for China’s cheap manufactures. With each industry added to a slate of sanctions against China, more complications would arise for importers and consumers in the sanctioning countries.
Despite the integration of China into the global economy, the leverage that other powers might impose on it will probably weaken in the years to come. Beijing’s explicit policy is to shift its economy away from dependence on exports and towards domestic demand — that is, purchasing by its own consumers. It will still need to import raw materials and other goods from other countries, but its own exports will no longer be such a crucial source of employment and growth.
As a result, China may be able to act with more impunity as it pursues the tracts of land and sea that its government believes are within its domain. From the Indian states on its western border to the Senkaku/Diaoyu Islands off its eastern coastline — to say nothing of Taiwan — these claims are numerous and controversial. In some cases, regional bullying by China would risk a military response by its neighbors and their allies. Were it to come to that, and with Washington’s economic response increasingly likely to be toothless, violence might be even harder to avoid.