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China these days appears to be trying hard to burnish its image in the international community, but this probably won’t be easy to accomplish. At any rate, China’s peace initiative to end the war in Ukraine has thus far been more a marketing campaign than a gamechanger.

A difficult image makeover

China’s reputation in the world has continually worsened in recent years among industrialized and emerging-market countries alike. The country’s opaque information policy during the COVID-19 pandemic is only part of the reason why. The occasional intensely aggressive posturing by Chinese diplomats (an assertive style known as “wolf warrior diplomacy”) also hasn’t won the Middle Kingdom any friends. The fact that China’s New Silk Road is burdening more and more developing countries with crushing debt instead of reaping them economic benefits from the infrastructure projects is another negative fleck on the long list of image blemishes. In this context, Beijing’s current efforts should be interpreted as an attempt to get the image pendulum swinging back in the other direction. China would like to patch up its foreign relations as a counterpoint to the country’s domestic policy challenges and its strategic rivalry with the USA. Beijing chalked up a first achievement in March in its role as a mediator between Saudi Arabia and Iran, and that culminated in a successful deal that eventually could lead to a normalization of relations between the two Middle Eastern countries. Another example was Xi Jinping’s phone call with Ukrainian President Volodymyr Zelenskyy in April.

Not a gamechanger

That phone conversation was about China’s 12-point peace plan. It, however, is unlikely to gain much traction beyond its intended signaling effect because it, for instance, does not call on Russia to withdraw from annexed regions. China’s initiative is unlikely to have direct relevance anyway because the focus in the weeks ahead will instead be on Ukraine’s long-awaited military counteroffensive. If Ukraine does not succeed in recapturing significant territory during the further course of this year, only then would the resulting stalemate perhaps make it necessary to negotiate a ceasefire. In a failed counteroffensive scenario, an armistice could become realistic by as soon as November – it would reduce the risk of an escalation and would accordingly be beneficial for the financial markets. If Ukraine, however, fights as well as it did during last year’s offensive, it could retake substantial territory. In this (more probable) scenario, risk premiums on equity markets could briefly flare up again in summer or autumn. At present, the financial market seems to us to be a little too complacent about the potential tail risks that could materialize as a consequence of an unconventional reaction by Russia to defeats on the battlefield.