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The CPC's recent policies in China have made the country less attractive to European investors and it has no intention of changing its course.

A report released on 21 September by the European Union (EU) Chamber of Commerce in China paints a gloomy picture of the future scenario. It says that many companies are now looking to shift planned and future investments to other markets that provided “greater reliability and predictability”.

The report notes that whilst Beijing’s reform agenda earlier provided for stability and growth, in recent times, ideology was trumping the economy. In 2020, Beijing was seen as a safe haven when it was able to deal with the disruption of COVID-19. However, in the past year, its zero-COVID policy has disrupted business operations.

It quotes Jorg Wuttke, the President of the EU Chamber of Commerce in China President, stating that whilst companies were eager to do business, they were perceiving “political, economic, and reputational risks to be mounting” on account of Chinese policies.

This is a significant development considering that since 2011, China has emerged as one of the biggest trading partners of the EU and, indeed, its largest source of imports. Investment ties between them, too, are substantial. However, the report reflects a fallout of a series of developments including tensions over investment policies, human rights in Xinjiang, the COVID-19 pandemic and, most recently, the Ukraine war.

Commenting on the report, the Financial Times, said that the European businesses had been forced to “reduce, localise, and silo” in China. Not surprisingly, the report was panned by the Global Times  which said that the report’s allegation that China was losing business allure to EU firms was untrue and “full of one-sided interpretations and distortions against the Chinese markets.”

Amongst the major political consequences of the Ukraine war has been the revitalisation and strengthening of the western alliance and the leadership of the United States (US). Whilst countries in Europe, or for that matter, so-called neutrals like India, may have had some reservations over depending on the US to maintain regional balances, they really have no alternative unless they want to subordinate their interests to Russia and China.

 

"Amongst the major political consequences of the Ukraine war has been the revitalisation and strengthening of the western alliance and the leadership of the United States (US)."

 

The Europeans are at last taking their defence seriously, as evidenced by even Germany’s decision to substantially increase its defence expenditure in the coming years. A subsidiary consequence has been the acceleration of the trends pulling China and Europe apart.

China’s decision to stand by Russia in its flagrant violation of the sovereignty of a UN member has had a sharply negative impact on the Central and East European (CEEC) region which was being assiduously cultivated by Beijing through the 17+1 (China and CEEC) grouping.

Russia has gambled and lost in its last throw of the European dice. Its coup de main in Ukraine failed and it has actually contributed to strengthening Ukrainian nationalism immeasurably. It has not only revitalised NATO but actually added to its strength by pushing two key nations—Finland and Sweden into the military alliance.

China’s choice

Although China did have a choice to adopt a different stand, it probably miscalculated. It expected a quick Russian victory would strengthen the “no limits” partnership, instead, it is stuck with a neighbour whose erratic behaviour poses a major danger to global peace and stability, of which China remains a major stakeholder and beneficiary.

In terms of trade, China depends more on Europe than the other way around. As Jorg Wuttke has pointed out, “ Europe exports 600 million euros worth of goods to China every day, whilst the Chinese export 1.3 billion euros daily to Europe”. For both of them, stakes are high and not only their companies, but the well-being of their nationals are dependent on even and stable relations. Initially, European companies found their operations in China to be extremely profitable but now they are confronted with change.

China-Europe distancing

China now confronts a slow erosion of its hugely beneficial relations with the West. In some ways, this has been in the works for a while. Beginning in 2016, the European view of China began to change. It started with concerns over China’s technology acquisition policy when a leading German company, Kuka, was acquired by China.

In 2018, the Sino-US trade war began to increase the pressure on Europe to abjure Chinese technology as in the case of 5G networks provided by Huawei. And the COVID-19 pandemic led to a sharp reassessment of the importance of strategic consequences of supply chains.

 

"China now confronts a slow erosion of its hugely beneficial relations with the West. In some ways, this has been in the works for a while. Beginning in 2016, the European view of China began to change."

 

The US decision to shift its policy from engaging China to one of strategic competition was reflected in the European Outlook document of 2019 which spoke of China being a cooperative partner, negotiating partner, economic rival and “systemic rival.”

In May 2021, the EU released an Industrial Strategy to cut its dependency on China in six strategic areas such as raw materials, pharma ingredients, and semiconductors. This was part of a larger post-COVID action to review its supply chains and source of raw materials.

Despite this, the EU and China signed a wide-ranging Comprehensive Agreement on Investment, in December 2020, overriding the concerns of the incoming Biden administration. However, as 2021 unfolded, things went south and the chances of the CAI being ratified by the EU are now bleak.

The problem arose when a 2020 news report noted that the Swedish retailer H&M had decided not to use cotton from the Xinjiang region. This led to a ferocious Chinese reaction that virtually gutted the company on China’s e-commerce and social media platforms.

More likely this was an outcome of sanctions issued by the EU under its new Global Human Rights Sanctions Regime in March 2022. Amongst those sanctioned were four Chinese officials on account of large-scale detentions of Uighurs in Xinjiang. China retaliated and sanctioned several EU officials, including members of the EU Parliament.

Within Europe at this time, a clear division of China was visible. Countries like France and Germany sought to fashion a posture of strategic autonomy for themselves. On the other hand, Chinese diplomacy had made substantial inroads into the EU by fashioning what became known as the China-Central and Eastern European Countries (CEEC) grouping also known as the 17+1 grouping involving 17 CEEC countries and China. However, things have now changed.

The Ukraine war has led most of them, barring possibly Hungary and Bulgaria, to take a strong stand against Russia. Issues relating to Taiwan and China’s attitude to the war and disillusionment with the 17+1 process have also enhanced the degree of estrangement from China. Between 2021 and 2022, the three Baltic states have actually left the grouping and the Parliament of the Czech Republic has called for its withdrawal from it.

 

"Issues relating to Taiwan and China’s attitude to the war and disillusionment with the 17+1 process have also enhanced the degree of estrangement from China."

 

The European calculations are also affected by the developments of the last several years. Countries such as France, the United Kingdom (UK), and Germany have begun to pay greater attention to the Indo-Pacific. The EU has also indicated an institutional interest in playing a role in the region which is essentially that of the soft containment of China. As for the UK, it has joined Australia and the US in creating a new military alliance in the region called AUKUS. The recent tensions over Taiwan have only strengthened the mood.

Earlier this month, the EU Parliament members overwhelmingly passed a resolution condemning China’s provocative actions towards Taiwan and said that these could have consequences for relations with the European Union. The resolution hailed the “like-minded partners” who adhered to values of “freedom, democracy, human rights, and the rule of law.”

There should be little doubt that a key factor in the change of the European sentiment relates to trade and economic policy changes in China. Policy decisions such as the crackdown on the technology sector, the application of its zero-COVID policy, and the increasing role of the Communist Party of China in the private sector companies have made the country less attractive to European investors. Besides disrupting life and economic activity in various cities, their COVID policy is making it difficult for companies to attract talent from abroad to work in their companies.

As of now, despite a markedly slowing economy, there are no indications that Beijing is contemplating any change of course. What will happen after the coming CPC Congress is something only the future can tell.

Manoj Joshi (Dist. Fellow ORF)
13 October 2022

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