China has much to gain to broker a ceasefire in Ukraine

With potentially deliberate Russian strikes on Ukraine’s large nuclear power plant escalating concerns about the war engulfing the rest of Europe, geopolitical risks have completely gripped the market. Energy prices are hitting multi-year highs as prospects of sanctioning Russia’s oil and gas seems more a formality now, especially given that financial sanctions have already made trade with Russia extremely difficult. All this have increased anxieties about a possible global stagflation that has made markets tough to navigate through beyond chasing commodity names and shorting everything else.  

To be sure, a deliberate release of radioactive materials into the atmosphere could be regarded as an act of war by NATO. Whether this was a warning, a bluff or just an accidental hit, the incident has raised the prospects of the conflict expanding beyond Ukraine’s borders. Our key concern remains that as Putin becomes increasingly cornered with no face-saving alternatives, he becomes more volatile. He is also aware that once he ceases hostilities, he will then be judged at home for consequences of his actions which have already notably impacted lives of ordinary Russians. So, a more drawn-out war seems likely unless Putin is either replaced as Russia’s leader or possibly allowed an exit strategy brokered by China. 

Given the televised atrocities taking place in Ukraine, China is starting to notably distancing itself from Russia’s aggressions. Although some hawks feel that China is too busy with its own plans for Taiwan, we think it has much to gain here by brokering a truce which will greatly improve China’s stature on the world stage. It will also demonstrate China’s importance as a balancing soft power, by using its sphere of influence to achieve global stability. This will also help with its ultimate plans of raising Yuan’s weighting as a reserve currency in world banks, something that China has struggled with despite the ongoing de-dollarisation of global trade.

One major concession that the Chinese are asking for to bring the Russians to the negotiation table, is for a NATO pledge that Ukraine will never be included in its treaty. Although this may seem a tough demand to swallow, it may be the price of peace worth paying, mostly for the sake of Ukrainians themselves. There are far worser alternatives at this stage than making Ukraine a demilitarised zone in Europe and making sure Russia follows by the same rules. If Putin can show that at least he has achieved that goal, it will give him a narrow passage out of this war, although he still faces the wrath of his own people.