BEIJING – China’s factory activity expanded slightly in February as new orders improved, pointing to some resilience in the world’s second-largest economy even as downward pressure builds and Russia’s invasion of Ukraine heightens global uncertainty.

The official manufacturing Purchasing Manager’s Index (PMI) registered 50.2 in February, remaining above the 50-point mark, which separates growth from contraction, and picking up a touch from 50.1 in January, data from the National Bureau of Statistics (NBS) showed on Tuesday.

Analysts had expected the PMI to ease to 49.9.

China’s economy rebounded strongly from a pandemic-induced slump in 2020, though momentum started to flag in the summer of last year, as a debt crisis in the property market and strict anti-virus measures hit consumer confidence and spending.

Policymakers have vowed to stabilise growth this year and all eyes are on the annual meeting of its top legislative body that begins on March 5 during which the government will unveil economic targets for the year and likely more stimulus measures.

Russia’s invasion of Ukraine has raised fresh risks for the global economy, adding to months-long strains for China’s factories from worldwide supply chain snags.

“In February, PMI stayed above 50, reinforcing expectations that the economy is on track for a recovery, likely due to pro-growth policies rolled out by the government,” said Zhang Liqun, analyst at China Federation of Logistics & Purchasing.

Zhang said that demand was still weak and inflationary pressures are building. “China should continue to implement various policies to expand domestic demand and boost government investment… and to ensure the supply of raw materials and stabilise prices. ”

New orders grew for the first time since August last year, as demand improved following the Lunar New Year holidays. Sectors such as pharmaceutical, special equipment and auto industries expanded quickly last month.

However, the growth in production slowed, with a sub-index standing at 50.4, compared with 50.9 in January.

“New orders returned to the expansionary territory, suggesting that manufacturing market demand has been quickly released since the holiday,” said Zhao Qinghe, senior statistician at the NBS, in a statement accompanying the data release.

“After the Spring Festival, manufacturing activities have gradually returned to normal.”

INFLATION, SUPPLY CHAIN HEADWINDS

Inflationary pressures continued to build. A gauge for raw material prices stood at the highest in four months.

A separate private PMI survey also showed China’s factory activity returned to growth last month, buoyed by expanding new orders.

The property sector may provide some support this year.

A Reuters poll showed the property market will rebound later in the year as authorities loosen some of the financing curbs on property developers and some localities relax buying requirements, bolstering buyer sentiment. China’s new home prices rose for the first time in January since September

Indeed, an index of construction activity stood at 57.6 in February, up from 55.4 the previous month.

Still, the overall momentum is hostage to persistent headwinds from various sources, some analysts say.

“The latest surveys suggest that the pace of economic growth edged up slightly in February,” Julian Evans-Pritchard, senior China economist at Capital Economics.

“But it remains weak amid continued supply shortages, higher imported inflation and persistent disruption to services activity.”

China is still battling sporadic COVID-19 outbreaks across the country, while imported cases from Hong Kong surged. That had dented consumer sentiment.

A survey on China’s sprawling services sector on Tuesday showed growth picking up slightly in February.

China’s official composite PMI, which combined manufacturing and services, stood at 51.2 in February compared with 50.1 in January. – Reuters

LONDON – Shell SHEL.L will exit all its Russian operations, including a major liquefied natural gas plant, it said on Monday, becoming the latest major Western energy company to quit the oil-rich country following Moscow’s invasion of Ukraine.

The decision comes a day after rival BP BP.L abandoned its stake in Russian oil giant Rosneft ROSN.MM in a move that could cost the British company over $25 billion. Norway’s Equinor EQNR.OL also plans to exit Russia.

Shell said in a statement it will quit the flagship Sakhalin 2 LNG plant in which it holds a 27.5% stake, and which is 50% owned and operated by Russian gas giant Gazprom GAZP.MM.

Shell said the decision to exit Russian joint ventures will lead to impairments. Shell had around $3 billion in non-current assets in these ventures in Russia at the end of 2021, it said.

“We are shocked by the loss of life in Ukraine, which we deplore, resulting from a senseless act of military aggression which threatens European security,” Shell Chief Executive Ben van Beurden said in a statement.

Rival BP’s Chief Executive Bernard Looney called an urgent meeting with his leadership team on Thursday, just hours after the first Russian bombs fell on Ukrainian capital Kyiv last week, two BP sources told Reuters. Russia calls its actions in Ukraine a “special operation”.

During that previously unreported meeting, Looney made it clear the company’s investment in Rosneft had become untenable, the sources said.

“There was only one decision we could make,” one of the BP insiders said. “The exit was the only viable way.”

Looney held two more board meetings at the weekend, after which board members voted to immediately exit the Rosneft stake, the sources said.

Looney also spoke to British Business Secretary Kwasi Kwarteng on Friday, when Kwarteng expressed his concern about BP’s interests in Russia. Kwarteng welcomed BP’s decision to exit on Twitter on Sunday.

SHELL

Kwarteng had a similar message for Shell on Monday.

“Shell have made the right call to divest from Russia,” he said on Twitter, adding that he had spoken to van Beurden earlier on Monday.

The Sakhalin 2 project, located off Russia’s northeastern coast is huge, producing around 11.5 million tonnes of LNG per year, which is exported to major markets including China and Japan.

For Shell, the world’s largest LNG trader, leaving the project deals a blow to its plans to supply gas to fast-growing markets in the coming decades.

Shell said the Russia exit will not affect its plans to switch to low-carbon and renewables energy.

The company also plans to end its involvement in the Nord Stream 2 Baltic gas pipeline linking Russia to Germany, which it helped finance as a part of a consortium of companies. Germany last week halted the project.

Shell will also exit the Salym Petroleum Development, another joint venture with Gazprom.

Together, Salym and Sakhalin 2 contributed $700 million to Shell’s net earnings in 2021.

“Right decision by the Board of Shell to exit its Russian ventures,” Adam Matthews, chief responsible investment officer for the Church of England Pensions Board, which invests in Shell, said in a LinkedIn post.

“Following BP’s decision the focus is on those that have yet to take such a step,” Matthews said.

Japanese trading houses Mitsui & Co 8031.T and Mitsubishi Corp 8058.T, which own stakes of 12.5% and 10% in Sakhalin 2 respectively, said separately that they are examining Shell’s announcement. They said they would consider the situation with the Japanese government and partners for the project, without giving any further details.

Norway’s Equinor, majority owned by the Norwegian state, said earlier on Monday that it would start divesting from its joint ventures in Russia. That came after the country’s sovereign wealth fund, the world’s largest, said on Sunday it would divest its Russian assets.

Other Western companies including global bank HSBC and the world’s biggest aircraft leasing firm AerCap said they plan to exit Russia as Western governments ratchet up economic sanctions on Moscow. – Reuters

SHANGHAI – As western governments ratchet up sanctions against Russia over its invasion of Ukraine, Moscow’s emerging markets allies are exploring channels for trade and financing to continue.

The other members of the erstwhile BRICs group – Brazil, India and China – are treading cautiously for fear of tripping on the sanctions, but the beginnings of a parallel financial system centred on Beijing are becoming detectable.

The United States and Europe have banished big Russian banks from the main global payments system SWIFT and announced other measures to limit Moscow’s use of a $640 billion war chest.

So the willingness of the emerging market giants to sustain business relations with Russia highlights a deep rift over Europe’s biggest crisis since the World War II, and threatens to chip away the dominance of the U.S. dollar in global trade.

Chinese businesses and banks are now scrambling for ways to limit the impact of sanctions on their relations with Russia, with settlement of transactions in yuan seen rising at the expense of the dollar. The western curbs, which aim to cut Russia out of the global financial system, could also deepen commercial links between Moscow and Beijing.

In India, as concerns mount over sustaining supplies of Russian fertilizer, government and banking sources say there is a plan to get Russian banks and companies to open rupee accounts with a few state-run banks for trade settlement as part of a barter system.

Brazil’s President Jair Bolsonaro said his country will remain neutral in the conflict.

Deng Kaiyun, who heads Zhejiang’s chamber of commerce that represents Chinese private businesses that trade with Russia, said doing transactions without SWIFT was not a big issue, as the two countries both started de-dollarisation five years ago.

“Yuan-rouble settlement has become a normal business at major banks nowadays … We business people are already accustomed to that,” Deng said, adding yuan is increasingly popular with Russians.

SWIFT

The sanctions are prodding Russian and Chinese companies to open accounts at Chinese banks that have subsidiaries in Russia, said a Moscow-based lawyer who represents Chinese businesses.

“SWIFT is not the only payment system. If you block this channel, business people need to find alternatives,” said the lawyer, who declined to be named due to sensitivity of the topic.

A source at a Chinese state bank who declined to be identified says “exporters are now in favour of using yuan to settle their payments” with Russia. Some of those trades were settled in euros or dollars until last week.

A source at another state lender said that, given a lack of details in the Western sanctions, the bank is closely monitoring the situation while encouraging clients to use yuan in trade settlements with Russia.

Yuan settlements already accounted for 28% of Chinese exports to Russia in the first half of 2021, compared with just 2% in 2013, as both China and Russia step up efforts to reduce reliance on the dollar, while developing their own respective, cross-border payment systems.

The current crisis could accelerate the trend.

Dang Congyu, analyst at Founder Securities writes the SWIFT sanctions against Russia are “a milestone event that will accelerate the process of de-dollarisation.”

“Although it’s hard to replace SWIFT in the short term, this incident is very beneficial to yuan’s globalisation over the long run.”

DE-DOLLARIZATION

Efforts on de-dollarization are not limited to trade.

Investment firm Caderus Capital said it has been working to promote cross-border investment between Russia and China.

Managing director Andrei Akopian also hailed Russia central bank’s move to increase investment in yuan assets as “the best way to increase the popularity of the Chinese RMB among Russian investors.”

Yuan accounted for 13.1% of the Russian central bank’s foreign currency reserves in June 2021, compared with just 0.1% in June 2017. Dollar holdings dropped to 16.4%, from 46.3%.

“If we talk about trade and investment, it makes a lot of sense for both countries not to trade in the in U.S. dollars, because then you have double conversion, in addition to other difficulties recently,” Akopian said.

But the pain for many Chinese businesses is immediate, with a volatile rouble and trade contracts not being honoured.

“Everyone is focused on maintaining or cutting existing business right now. No one is talking about new business. That’s what I’m hearing from all quarters, including Chinese clients,” said a lawyer who declined to be named.

Han-Shen Lin, senior advisor The Asia Group and an ex-banker, also cautions that Chinese banks could face tougher scrutiny in the face of western sanctions against Russia.

“All the Chinese banks know that the U.S. dollar clearing global banks will be asking Chinese banks about involvement in sanctions-related counterparts transactions,” Lin said.

“What will be of interest is how Chinese banks can segregate the sanctioned transactions versus non-sanctioned”, such as energy-related businesses. – Reuters