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China's Currency Could Come Out a Big Winner in the Ukraine War. Here's How.

China has a real dilemma on its hands over the Ukraine War: How to keep what it describes as its “no limits” friendship with Russia without pulling itself into the conflict—and getting slapped with financial sanctions itself.

If China figures out exactly how to walk this tightrope, it could eventually reap big economic benefits. Some investors already have this figured out and are looking at Chinese assets as a haven in a diversified portfolio.

The war, and the West’s harsh response, has accelerated the shift in the global world order that has been at play for years—centered on the U.S. and China. The relationship between China and the U.S. has frayed, raising concerns about the decoupling of the two countries, especially in areas like technology.

Now, because of the invasion and the strong ties between China and Russia, the decoupling—or deglobalization—probably will happen faster—and not just in technology but more broadly, including in commodities and in currencies. That could be a positive, encouraging China to keep reducing its reliance on the West’s dollar-based system and make Russia more reliant on it—and potentially its official currency, the renminbi.

The sanctions that froze Russia’s foreign reserves raises a key question for countries, especially those like China at risk of being on the wrong side of the West: Should they start diversifying those reserves away from the dollar?

On the margin, gold could be one beneficiary as countries—and investors—look to diversify—but so could the renminbi, which already benefits from real positive interest rates and a country with strong external accounts.

China has been pushing the renminbi’s use more widely and looking for ways to break its own reliance on the U.S.—the dollar system but also technology, especially after the U.S. slapped sanctions on its tech and telecom giant Huawei during the Trump administration.

Indeed, analysts note that China’s priority to widen the use of its currency coupled with its drive toward self-reliance has contributed to both a strong renminbi against the dollar and a decision by the People’s Bank of China, its central bank, not to ease monetary policy during the pandemic as much as the U.S. did. That has helped the renminbi become a haven, with many investors adding a small allocation to Chinese sovereign debt—for yield and diversification.

In a note to clients, Jefferies global strategist Sean Darby wrote that this war has been one of the few times that investors fleeing riskier assets have turned to the renminbi.

Darby noted that Russia appears to have “quasi” pegged the ruble to the renminbi since 2021 in what he describes as the “first real evidence of de-dollarization.” Digital payments between the countries have already been rising and China’s fintech sector, as Darby sees it, is well-placed to benefit as China’s digital currency goes mainstream.

But speculation about the demise of the dollar may be misplaced. Remember TINA—the “there is no other alternative” argument that drove investors to stocks because interest rates were so low that bonds were unpalatable?

A similar argument holds for the dollar now: There is no alternative to the depth and liquidity of the U.S. market, which makes it unlikely China can replace its $2.7 trillion in dollar reserves soon, said Aidan Garrib, head of global and macro strategy at PGM Global, who added that China could, though, allow some of its holdings to mature and invest proceeds elsewhere.

China also will get some buffer against the soaring commodity prices that threaten other economies. Cut off from much of the world, Russia will become increasingly dependent on China to buy its oil and agricultural commodities. That should give China the upper hand in pricing and terms—potentially helping it drive more trade away from the dollar to the renminbi.  

This comes against a backdrop of Beijing setting its lowest growth target ever—5.5% for 2022. Still, the target is ambitious and signals China may take a whatever-it-takes” approach to hit it—and that could mean further support and stimulus, wrote Rory Green, TS Lombard’s chief China and Asia economist.

But with consumption already dented by strict Covid-19 restrictions and now potential spillover from Ukraine crisis, Green told clients in a note that China will need more than an expansive fiscal package that includes infrastructure spending. To meet its target, Green stressed, China will need to provide more support for its property sector, which is crucial to turn around sales. Without a turnaround in housing demand, Beijing is unlikely to achieve the stable growth it is targeting.China’s focus on stability—and the chances it will need support to secure it—bodes well for onshore equities and the renminbi, Green wrote. Indeed, the iShares MSCI China A ETF (CNYA) is down less than 1% over the past month, while the iShares MSCI Emerging Markets ETF (EEM) is down 8% and the S&P 500 is down 4% over the same period.

Write to Reshma Kapadia at

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