张明 | 环境之力

注：本文发表于《中国日报》（China Daily）2022年3月18日，转载请务必注明出处。文中配图引用自China Daily原版文章，由CAI MENG绘制。

Force of circumstance

The Russia-Ukraine conflict has been a black swan event for most investors. So far, it has brought huge shocks to the global financial market. Generally speaking, the outbreak of unexpected events such as wars usually boosts risk aversion among investors in financial markets, leading to higher prices of safe-haven assets (such as gold, dollar and US Treasuries) and lower prices of risky assets (such as stocks and bulk commodities). However, considering that both Russia and Ukraine are important global commodity exporters (such as Russia's energy and Ukraine's agricultural products), the outcome of the Russia-Ukraine conflict will significantly impact the supply of key commodities in the world, leading to soaring prices of bulk commodities.

The US Dow Jones Industrial Average fell from 35131.86 to 33614.8 from Jan 31 to March 4, down 4.3 percent; the US Nasdaq Composite Index fell from 14239.88 to 13313.44, down 6.5 percent. Compared with the US stock market, the drop in the Russian stock market was much sharper. From Feb 22 to 25, Russia's dollar-denominated Russian Trading System index fell 23.6 percent, and the ruble-denominated Moscow Interbank Currency Exchange Russia index also fell 20 percent. In addition, the drop in the Russian stock index was also accompanied by a depreciation of the ruble. From Jan 31 to March 4, the exchange rate of the ruble against the dollar and the euro depreciated by 36 percent and 34.5 percent respectively.

As mentioned earlier, the biggest shock of the Russia-Ukraine conflict on the global financial market is that it may once again lead to a new round of global commodity price hikes. Of course, whether the price hikes are sustained depends on the evolution of the conflict. If the conflict ends in the short term, the rise in commodity prices may be a short-term disturbance. Once the conflict evolves into a medium-term confrontation, the rise in bulk commodity prices may become a new trending event.

The scenario that the Russia-Ukraine conflict is prolonged to the medium term would exacerbate the global economic slowdown, because intensified global geopolitical conflicts weaken the confidence of micro players and dampen international trade and investment. The growth rates of consumption, investment and imports and exports may all decline accordingly. Second, the continuous spike in bulk commodity prices will heighten the pressure on imported inflation for major importers of commodities, forcing the global economy to face severe stagflation again. Third, rising commodity prices will continue to drive US inflation higher, forcing the Federal Reserve to accelerate monetary tightening. The spillover effect of the Fed's tightening of monetary policy will accelerate the decline in global economic growth and the turmoil in the global financial markets.

For the Chinese economy, an intensified Russia-Ukraine conflict will also bring fresh external pressures. On the one hand, China is the world's largest importer of bulk commodities. The new round of commodity price hikes will lead to a deterioration in trading conditions, rising import costs and shrinking trade surpluses. It may not only result in a quicker rise in the producer price index, which gauges factory-gate prices, but also reduce the contribution from the industrial sector and imports and exports sectors to economic growth. On the other hand, if a new round of inflation is passed from the upstream to the middle and downstream of the industrial chains, it may push the consumer price index, a key gauge of inflation, up too quickly, which will reduce the room for the People's Bank of China to ease its monetary policy. In addition, with the recent adjustment of the global capital market, the Chinese stock market is also facing the pressure of large-scale investment outflows.

The Chinese government can respond to the negative influence caused by the Russia-Ukraine conflict through the following measures. First, it is important to actively seek alternative suppliers of bulk commodities. Ukraine has recently suspended its exports of agricultural products. Relevant Chinese enterprises should actively seek alternative third-party exporters. Second, let the market play a larger role in determining the exchange rate of the renminbi, fluctuations in renminbi's exchange rate can effectively alleviate the negative shocks from outside. Third, the nation can maintain the stability of the capital market through large domestic institutional investors, including the National Council for Social Security Fund, to avoid a continuous drop in the capital market as a result of investor panic. Fourth, over the medium to long-term, the Chinese government should actively promote a domestic energy revolution and green transition to reduce the dependence of the Chinese economy on traditional energy imports.

The author is deputy director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences and deputy director of the National Institution for Finance and Development. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.