If the Great Power competition between China and the US is a game of Go, China's recent moves demonstrate its effort in assembling a coalition to counter-surround the US semiconductor containment stranglehold. Before the deciding move (if any) is played, it would be wise to take a more panoramic view of the stones on the Go board and recalibrate strategies.
Xi Jinping, the first Chinese paramount leader to ever get a third term, visited Russian president Vladimir Putin recently and released a joint statement on "Deepening the Comprehensive Strategic Partnership of Coordination for the New Era and Stress Settling the Ukraine Crisis Through Dialogue." Since the joint statement only provided lip service without even mentioning any practical solutions for a truce between Russia and Ukraine, it is fair to say that the true focus of the Xi-Putin meeting was not settling the Ukraine crisis, but protecting their core interests.
With Russia under siege from the sanctions imposed by the US and its allies for invading Ukraine's territory, and China's trust in the US broken by the trade war and the COVID-19 pandemic, the two communist blood brothers have moved their political and economic ties up several steps over the past few years.
Russia has found the best outlet for its products in China. According to the data from the General Administration of Customs of China, in 2022 China's energy imports from Russia, including crude oil, coal, and natural gas, increased by 44%, 64%, and 151% respectively from 2021 before the Ukraine War. Meanwhile, Russia's defense, aerospace, semiconductor, and computer equipment imports, which cannot be bought elsewhere, were purchased from China. The total bilateral import and export trade between Russia and China reached a record high of US$190.3 billion, up 29% from 2021.
RMB's stealth growth
As a result of the RMB's role as a settlement currency for trade between Russia and China, RMB has gained the status of regional currency in northern Eurasia. According to Bloomberg, the percentage of Russian exports to China settled in RMB in January-September 2022 increased significantly to 14% from 0.4% in 2021, and the volume of RMB transactions on the Moscow Foreign Exchange exceeded that of USD for the first time in 2022, accounting for nearly 40% of all of its foreign exchange transactions. In addition, according to SWIFT statistics, the amount of RMB payments in Russia in 2022 increased significantly on year by 754.9% in 2022, reaching 3.4 trillion USD.
China is also forging a new coalition with countries that have the potential of becoming useful allies. It succeeded in brokering a resumption of diplomatic ties between Saudi Arabia and Iran while persuading Saudi Arabia to accept Renminbi to be a currency option for settling crude oil trade transactions. Meanwhile, Russia is also close to forging a peace deal between Syria and Saudi Arabia.
If Saudi Arabia falls in line with the coalition of China, Russia, Iran, North Korea, and Syria, the total oil production of this group of countries would account for nearly one-third of the world's total output. It would deal a huge impact on the dollar if one-third of the crude oil transactions were to be settled in Renminbi.
The economist Nouriel Roubini has predicted that the US dollar will lose its monopoly in the international currency within a decade, because in addition to China and Russia, countries such as Iran, North Korea, and Syria, which are engaged in a fierce geopolitical confrontation with the West, will accelerate the process of de-dollarization. Taiwan's central bank governor, Yang Chin-long, recently also pointed out that the weaponization of financial sanctions will also make central banks consider adjusting their foreign exchange reserve portfolios to prepare for the reduced influence of the dollar in the future. Although the U.S. dollar will remain at the core of major international payment and settlement systems in the short term, the dollar's dominance as a global currency will be threatened in the long run.
Once-in-a-lifetime changes?
According to an NBCNews report, Xi told Putin at the end of the meeting that the world is undergoing changes that it has never seen in 100 years, "and we are the ones driving those changes together." What are the "changes" that Xi has in mind?
Semiconductors are key to all industries, and the US appears to have won on all fronts in the semiconductor game. After all, the US Department of Commerce has just announced new chip guard rails and appears to have tightened all the screws in a Chip War to slow China's speed in developing its own semiconductor technologies.
Obviously, China is not ready to throw in the towel any time soon despite the fact that its semiconductor technologies are 3-4 generations behind. What can it do to counterstrike and loosen up the strangle?
The answer lies with the asymmetry of interdependence that China enjoys. Would a decoupled world favor the US more? Of course not, and that is why the US has denied it is trying to decouple from China.
China is the largest trading partner to many countries, and the world's most important producer of rare metals, the largest importer of semiconductors, and the world's factory with a highly concentrated information communication technology (ICT) manufacturing supply chain. Let's not forget China has a huge influence in Africa, Central and South America, and Southeast Asia. Since it enjoys disproportional power in the complex interdependence relationships with multinational enterprises, industries, and supply chains, one must beware of the ramifications if it is determined to decouple from the old-world system established by the US.
It is hardly surprising that China and Russia, which share the same ideology, are forming an alliance to protect their own interests. However, unlike the Soviet Union which was a "Big Brother" to China during the 1920s-1950s, China is taking the leadership role in the autocratic camp to exercise a full-fledged competition with the US and its allies, while Russia, which is deeply mired in the Ukraine War and dependent on China's supports, will have to settle for second fiddle.
If the world were to be divided into economic blocs that build on different ideologies, political systems, technical standards, cross-border payment systems, trade systems, etc., accelerated by the push of political agenda and technology decoupling, wars are more likely to occur because the cost of attacking the other is lower when they do not have investments or supply chains in that bloc too.
It could not have been more telling that Apple Inc. CEO Tim Cook and Samsung Electronics chairman Jay Lee visited Beijing to attend the high-profile China Development Forum to increase their presence and strengthen their legitimacy in operating in that market. After all, China contributes to one-fourth of Apple's revenues, and 16% to that of Samsung.
Those that are more depended on by others would gain power in the interdependence. China gets the trick, but the US needs to work on that more.
