(Wang Che-Jen, Assistant Researcher, Division of Cyber Security and Decision-Making Simulation, Institute for National Defense and Security Research)
The economic growth of Mainland China (hereafter referred to as “China”) and Russia has been relatively stable in 2024, but whether they can be maintained remains to be seen. Although China’s GDP grew by 5% in the first half of the year, with exports increasing by 6.9% over the first eight months and a noticeable surge in car exports, both the Producer Price Index for Industrial Products (PPI) and the Manufacturing Purchasing Managers’ Index (PMI) showed signs of weakness. This suggests that even amid high export levels, China’s manufacturing sector remains sluggish. Additionally, the Consumer Price Index (CPI) only slightly increased during this period, indicating that China’s current economic reliance on exports is significant, with domestic consumption dampened by the sluggish real estate market.
Although the People’s Bank of China implemented significant measures to lower reserve requirements and interest rates at the end of September in an attempt to stimulate the weak “internal circulation” economy, whether these monetary policies will effectively boost the real economy is still uncertain. In the future, due to US technology sanctions and deteriorating relations with the EU, China’s export industries, such as automobiles and electromechanical equipment, which are currently taking on a crucial role, may face challenges due to tariff barriers, potentially making it difficult for China’s economy to meet its 5% growth target.
Although the People’s Bank of China implemented significant measures to lower reserve requirements and interest rates at the end of September in an attempt to stimulate the weak “internal circulation” economy, whether these monetary policies will effectively boost the real economy is still uncertain. In the future, due to US technology sanctions and deteriorating relations with the EU, China’s export industries, such as automobiles and electromechanical equipment, which are currently taking on a crucial role, may face challenges due to tariff barriers, potentially making it difficult for China’s economy to meet its 5% growth target.
In contrast to China’s quiet domestic economy, Russia’s economy is overheating. Russia’s GDP growth reached 4.7% in the first half of 2024, a sharp increase from 3.6% in 2023. The overheated economy is a result of the war, with massive military expenditures, labor shortages, and extensive social welfare subsidies driving up demand and pushing prices higher. Economic sanctions have further increased import costs. To curb inflation, Russia’s central bank had to raise interest rates to nearly 20%.
Although previous economic sanctions had little impact on Russia, the country currently lacks solutions to US “secondary sanctions.” If the US expands secondary sanctions, it could sharply reduce Russia’s energy revenues, making it harder for Russia to sustain the war.
Since the Russo-Ukrainian war began in 2022, economic cooperation between China and Russia has deepened significantly. Their economies are inherently complementary, with Russia excelling in raw material supply and China in manufacturing. Bilateral trade reached $240 billion in 2023, with China exporting $111 billion worth of goods to Russia, a 67% increase compared to 2021. Russia’s exports to China in energy and agricultural products also grew substantially, and it is expected that bilateral trade will reach $300 billion by 2030.
With rising trade demand and the gap left by the withdrawal of Western firms from Russia, investment between the two countries is also increasing. In addition to energy investments, according to data from the Intergovernmental Russian-Chinese Commission on Investment Cooperation, more than 80 major investment projects are currently listed, with a total value of $200 billion. Moreover, by September 2024, 34% of newly registered companies involved Chinese entrepreneurs, twice the pre-war figure. Chinese investments in Russia are mainly concentrated in energy, transportation, and metallurgy, with less focus on technology and production. The following four areas are likely to be the key investment directions for the future:
1. Energy: Energy has always been an important component of China-Russia trade and economic cooperation. In addition to commodity trade, sanctions have led to increased supplies of energy extraction equipment and raw materials from China, compensating for the shortage of Western parts. The “Power of Siberia 2” pipeline is currently the most high-profile energy investment. President Vladimir Putin’s visit to China in May saw a delay in signing a price agreement due to China demanding Russia to sell at the same subsidized price offered domestically, in August, it was reported that Mongolia, a transit country, would only include this pipeline in its national plan by 2028, casting doubt on its investment prospects. However, on August 21, Russian Foreign Ministry spokesperson Maria Zakharova stated that the pipeline project had entered an advanced stage of preparation and would begin implementation once price and supply agreements were finalized, indicating that Russia has not abandoned the project. Nevertheless, reaching agreements on gas prices, pipeline construction, and China’s provision of equipment for Russian gas production remains a challenge.
2. Far East: The Far East is the region with the highest concentration of Chinese investments. By the end of 2023, Chinese investment in Russia’s Far East had reached 49 projects, totaling nearly $9 billion. At the Eastern Economic Forum in September, Putin expressed great interest in the international priority development area established by China in Primorsky Krai. In addition to the traditional focus on the area’s rich mineral resources, future projects might attract many Chinese manufacturers due to proposals for creative industries, big data, artificial intelligence infrastructure, and plans to establish civilian drone production bases in the region, where Chinese companies excel.
3. Financial cooperation: Due to Western financial sanctions on Russia, trade between China and Russia has gradually shifted to being conducted in RMB. Over 95% of trade finance is settled in RUB and RMB, with the RMB becoming the most traded foreign currency on the Moscow Exchange. Additionally, to circumvent Western financial sanctions, Moscow and Beijing are attempting to promote a non-dollar international financial system through BRICS mechanisms, including messaging and clearing systems. Although this cooperation is not part of traditional trade and investment, if successful, it could reshape the international financial order and limit the ability of Western countries to impose financial sanctions in the future.
4. Dual-use technology cooperation: Although China has denied supplying Russia with dual-use technology products, continued conflict in Ukraine and technological competition with the US suggest that cooperation in this area is likely. China and Russia have already begun interagency consultations on the military applications of AI technologies. In May, a new joint China-Russia statement expressed both countries’ intention to deepen cooperation in AI, software, and cybersecurity. Furthermore, China’s advantages in chips and AI technology, combined with Russia’s vast collection of battlefield data from the Russo-Ukrainian war, could enhance situational awareness and decision support in military contexts.
With the current contrasting economic situations in China and Russia—one cold, the other hot—China sees an alliance with Russia as helpful in countering US efforts to isolate it in international markets, providing China with a large market to offset export losses. Meanwhile, Russia, increasingly distanced from Western markets due to war sanctions, views China as a vital energy lifeline. Their mutually beneficial partnership has led to the deepening of their relationship, often described as “endless friendship and cooperation without boundaries.” However, this phenomenon is limited to areas where their interests do not conflict. As seen in the case of the “Power of Siberia 2” pipeline, this “limitless” partnership does not apply universally. Despite record-breaking trade volumes, the risk of sanctions and market uncertainties mean that investment cooperation between China and Russia may not always proceed smoothly. However, as long as the West remains hostile toward China and Russia, their strategic cooperation is expected to continue and thrive.
