Recent data illustrates that China is one of Ukraine’s main trading partners. Thus, there is a need to analyze the current picture of economic relations between Ukraine and China based on statistical data, showcasing current trends in cooperation between the two countries and taking into account the fact that the COVID-19 pandemic and “Motor Sich” case may have made adjustments to Ukraine and China’s foreign economic relations.
General developments
According to the IMF, the world economy will grow by 5.2% in 2021. The Asian region will demonstrate the leading growth: China`s GDP will grow by 8.2% and India`s GDP will grow by 8.8%. The forecast for Ukraine envisages a 3% growth. The current situation opens up certain opportunities for countries to occupy new niches in the world market. At the same time, restoring the positions of the world's economies, especially China, after the coronavirus pandemic may result in their more expansive trade policy and asymmetric relations with Ukraine.
Currently, China is the first among the countries to which Ukraine exports and from where it imports goods. In particular, China’s share in Ukraine’s exports was equal to 14.5% and its share in Ukraine’s imports amounte to 15.4% in 2020.
Geographical structure of foreign trade of Ukraine in goods in 2020
The statistics illustrates a nearly twofold increase in exports from Ukraine to China compared with the 2019 data. Nevertheless, despite this trend, the trade balance with China is -1193 million US dollars, and this negative gap between Ukraine's exports and imports is one of the most significant. Akin trade imbalances lead to an increase in the share of imported goods, which can slow down the dynamics of Ukrainian economic development, and create additional risks in the foreign exchange market.
By analyzing the main commodity items, Ukraine mostly exports ores, slag, and ashes (the share of exports is 35.2%), grain crops (26.1%), fats and oils of animal or vegetable origin (15.7 %) and ferrous metals (8,6%) to China. It must be said that, compared with 2019, the structure of Ukraine’s exports to China has changed significantly, and therefore, for some items, there is more than sixfold dynamics.
In turn, Ukraine mostly imported electric machines (the share of imports is 26.8%), nuclear reactors, boilers, machines (18.2%), means of land transport other than rail (4.1%), optical and photographic instruments and apparatus (3.7%) from China. Compared to previous year, the structure of imports remained rather “traditional”.
To conclude, Ukraine is becoming increasingly dependent on imported goods, especially on technological products.
Investment indicators are also important to analyze the cooperation between countries. According to the statistics, the share of Chinese investments in the Ukrainian economy is insignificant and amounts up to 0.11% of the total investments accumulated in the Ukrainian economy. The share of investments from Ukraine to China (compared with the total volume of Ukrainian investments) is generally not noticeable and is equal to 0.0095%.
The biggest share of Chinese investments is allocated in industry, agriculture, processing industry, professional, scientific and technical spheres of the Ukrainian economy. The analysis of concluded contracts indicates that there is a certain interest in energy (renewable energy), transport, agricultural, real estate, aircraft construction, education and IT sectors of Ukraine. In general, the reasons for that lie in a large potential market with high demand for Chinese products and logistical advantages of Ukraine, bordering with the EU. In addition, the renewable energy market investments are flexible and rapidly growing in Ukraine.
Problematic issues
However, the general picture showcases that Ukraine is currently out of the main investment focus of China. Only 1% of total Chinese investment was directed to the Ukrainian economy in recent years.
With this, Ukraine-China economic relations are still at the “minimum” level and are mainly focused on trade. In turn, China considers Ukraine a good platform for gaining access to the EU markets. However, cooperation developments are still without any concrete agreements and deadlines.
Additionally, the following issues in Sino-Ukrainian economic relations are rather problematic:
- An ambiguous marker for Chinese investors is the issue of “State Food Grain Corporation of Ukraine” (GPZKU). Particularly, on December 26, 2012, China provided $ 1.5 billion loan with a 15-year maturity. According to the related contract, GPZKU had to sell grain in volumes of 4-6 million tons per year for 15 years, and the Chinese National Corporation of the Machine Industry and General Contracts had to sell GPZKU agricultural equipment. However, the terms of the general agreement were not beneficial for the Ukrainian company and the Chinese company due to the technical nuances were not taken into account. As a result, it turned out that loan payments exceeded the possible incomes of GPZKU. In recent years, the interests and the body of the loan were paid; a debt restructuring plan has emerged.
- The recent case of “Motor Sich” has drastically worsened the Ukraine-China relations. The current official reasoning for the cancellation of acquirement of “Motor Sich” by the “Skyrizon” (a Chinese state-owned company) is that Ukraine should not sell a controlling stake in the management of strategic defense enterprises to any country. Later on, on January 29, 2021, the President of Ukraine Volodymyr Zelensky signed a decree, which applied sanctions against several Chinese state-owned companies, which made it an even more sensitive case. In turn, the Chinese party holds to the point that political reasoning dominates over the economic rationale for Ukraine. Such a situation leads to possible frozen economic relations between the countries.
Vague perspectives
Under basic scenario, economic cooperation with China likely will be “frozen” at the current level. In near future, except trade, other forms of cooperation will have a selective character. In turn, the Chinese capital may slowly exit the Ukrainian market. On the other hand, this process will not be rapid.
However, in contrast to the above-mentioned issues, long term presence of Chinese businesses, large Ukrainian markets, demand for technologies and close geographical position to the EU still makes Ukraine attractive for China. With the China`s need to increase the share of its goods and influence on the EU market, especially during the pandemic, there may be some room left for negotiations.
As for Ukraine, despite worsened relations, China is still the biggest trade partner for Ukraine. It is currently keeping the markets open for the Ukrainian products with low added value, thus giving the possibility for the Ukrainian exporters to earn additional profits, while there is growing protectionism on the other markets. Taking into account that China is rapidly recovering, it will guarantee stable profits for the Ukrainian business. Moreover, Ukraine is currently interested in the medical equipment from China.
Both sides are showing caution in building economic relationships. Of course, the reason is not only the geographical distance between the countries, but also the unpreparedness of state institutions and the Ukrainian economy for cooperation with economically powerful China. The visits of the officials from both countries may become a signal for the improvement of economic relations between Ukraine and China. Until then, there will be no significant progress in cooperation between the countries in near future.
Summarizing, the statistics illustrate positive trends in terms of trade cooperation between Ukraine and China. However, facts also indicate that there is a number of opportunities for deepening economic ties between the states due to the mutual interest in cooperation. In case of the deterioration of economic cooperation with China and improper support of Ukraine by other economic partners, an akin situation will require a thought-out, specific and targeted adaptation of Ukrainian policy focused on the defense of the internal market, as well as the diversification of critical exports and imports.