How China is Buying Influence in Europe

As the novel coronavirus ravages national economies and people’s lives, leaving businesses and countries struggling for years, the European Union has issued a warning, requesting the Member States “to be vigilant and use all tools available at Union and national level to avoid that the current crisis leads to a loss of critical assets and technology.” The fear is based on the experience from the 2008 financial crisis when Chinese investors started to buy up European companies, among which were many strategically important assets. At that time, a MERICS report on Chinese FDI in Europe and Germany and the active lobby work by the EU Chamber of Commerce in China among the decision-makers in Brussels helped to raise awareness of the issue. Today, China again tries to present itself as a responsible great power coming to help Europe in crisis, under the banner of “building a community of common health for mankind” (based on the formerly introduced foreign policy concept of “community of common destiny”). At the same time, there have been reports of Chinese firms getting ready for discounted deals in Europe.

This time, however, the conditions for Chinese takeovers of European companies differ due to two factors.

First, the EU has learned its lesson from the previous global crisis. Even before the coronavirus crisis, the Union was reflecting and debating upon a perceived need for a more assertive European strategy towards China. Not satisfied with China’s long-term rhetoric of “win-win cooperation”, the EU has started to request more “reciprocity, a level playing field and fair competition across all areas of co-operation”. In order to better protect its strategic assets, last year in April, the EU introduced a new framework for the screening of foreign direct investments. Today this framework has become very useful to fend off potential threats to common EU interests in the form of foreign investment from third countries, such as the People’s Republic of China, and help the Member States to “address cases where the acquisition or control of a particular business, infrastructure or technology would create a risk to security or public order in the EU, including a risk to critical health infrastructures and supply of critical inputs.”

Secondly, and equally important, China has learned from the past as well. It has promoted Chinese companies to “go out” since the end of 1990s, establishing the relevant framework to support Chinese outward investments. However, the call to “proactively carry out overseas investments” by the NDRC and related agencies in 2012 caused an unprecedented boom in Chinese capital outflow, not all of which was in accordance with the government’s plan. Thus, new guidelines were issued, first for private companies and then for state-owned enterprises (SOEs). Additionally, a blacklist system was put in place to curb the investment risks and illicit capital outflows. As a result, Chinese FDI in Europe declined, with the share of state-owned investors plummeting and private companies focusing on less politicized sectors such as consumer products and services.

Although the restrictive measures introduced both by the EU and China as well as China’s own economic conditions set limits to a new buying frenzy in Europe, a rise in investment activities by “certain” Chinese companies is still expected. Naturally, also the “China threat” narratives flourish. In order to better understand the actual circumstances and potential risks, the following text provides some insight into ways through which China could buy influence within Europe.

Trade: The Lure of the Chinese Market

The EU and China are closely tied by trade, with China being the EU’s second-biggest trading partner and the EU as China’s biggest. Since China’s admission to the WTO in 2001, the EU’s exports to China have been annually growing by 10% (goods) to 15% (services). China’s exports to the EU have increased even more rapidly. Today, China is the EU’s largest source of imports and its second-largest export market. Although the EU currently has a trade deficit with China, its overall trade balance is positive. Despite the fact that political discourse on trade policy tends to be preoccupied with exports and with the competition brought by imports, as pointed out in a Bruegel working paper, there are also benefits that consumers derive from trade through increased competition, lower prices, improved quality and increased variety.

In trade, one way for China to “buy” influence in Europe is through access to its growing and increasingly lucrative market (which also includes access through investment as targeted by the EU-China Comprehensive Agreement on Investment). The average effectively applied tariff for EU products entering China in 2017 was 8.75%, compared to 3.6% for Chinese products entering the EU. Although China has been willing to reduce tariffs on automobiles and parts as well as luxury goods and apparel products, these changes would most benefit its current largest trading partners such as Germany, France and Italy. Notably, Germany is the rare case of an EU country having a trade surplus in goods with China, with 44% of EU exports to China originating from Germany – almost as much as the next nine countries put together. German companies have also become well-established players in China, both producing there for export and supplying goods and services for domestic consumers, making Germany one of the largest, and still growing, investors in China (although the overall share of the EU’s overall FDI invested into China is minuscule, about 5% of the total in 2017). Therefore, it is no wonder that Germany is seen as one of the most vulnerable EU countries to Chinese influence, well-demonstrated by the debate concerning Huawei’s 5G infrastructure in Europe. Furthermore, recently, the EU has been blamed for yielding to pressure by Beijing to change the wording in the disinformation report by the EEAS as well as accepting the censorship of an op-ed authored by the EU Ambassador to China and the Ambassadors of the 27 EU Member States published in China Daily. The fear of risking “certain imports” being banned by China as well as the EU’s attempt to avoid additional tensions in trade relations at this time of economic fallout are seen as the reasons behind the EU’s softening stance on China in such cases.

Investments: Limiting Risks

For decades, the focus of the EU-China investment relationship has been on European companies’ investments in China. The periods before reform and opening-up left China in urgent need of new resources like capital, technology and know-how, whereas foreign companies wanted cheaper labor as well as an enabling environment to exploit production capacities. For decades, this trade-off played out well for both sides and, as value chains were increasingly intertwined, China slowly emerged as the leader of globalization. With this new status came ambitions. Whereas originally the focus of the “go out” policy/ “going global” strategy has been on SOEs and promotion of national champions, securing access to natural resources and energy, acquiring technology, know-how and brands as well as access to markets, China has gradually developed more complex and sophisticated overseas investment policies, allowing privately-owned companies to play a much bigger role in Chinese outward foreign direct investments (OFDI).

This change is also pointed out by the MERICS report on Chinese FDI in Europe published in April 2020, according to which the share of state-owned investors in Chinese OFDI in Europe has fallen to 11% of the total, whereas private investors from China have become increasingly active. What has also changed are the sectors in which  Chinese companies now invest. As mentioned previously, Chinese companies prefer less politicized and restricted sectors such as consumer goods and services. Nevertheless, also information and communication technologies remain a top target for Chinese investment as the interest in European technology and know-how continues. Looking behind the overall investment numbers into the various sectors, few large deals play a significant role in the results, while most of the investments belong to smaller acquisitions below EUR 100 million. The share of Chinese FDI in the EU represents only a tiny fraction of the total (about 4% in 2017).

Not only do investments by Chinese SOEs tend to be seen as a potential risk to national security and sovereignty (e.g. COSCO’s takeover of European ports), also – as it is often claimed – privately-owned companies from China can constitute a risk. Firstly, they are frequently considered to be subject to the authority of the Chinese government. This is best demonstrated by the case of Huawei which has been highly politicized and thus there will hardly be proof strong enough to convince the skeptics of the security of Huawei’s technology. Secondly, any deals which allow Chinese counterparts to acquire strategic assets, e.g. KUKA’s acquisition by the Shenzhen Stock Exchange-listed Midea Group, are also perceived as threats. However, in some cases, national security is considered at risk, although the actual circumstances do not support such a claim. For example, in the case of the proposed Tallinn-Helsinki tunnel, both background research of investors, as well as the reaction from the Chinese side, have shown that there is little evidence of any “influence-buying” strategies devised by Beijing.

In order to correctly identify cases of potential risk to security or public order, the Member States have been advised by the EU to develop their own national-level investment screening mechanisms. In addition, to fend off the threat of a Chinese takeover of European tech firms, Margrethe Vestager, the EU’s competition commissioner, suggested that the states themselves “should consider taking stakes in companies”. Whether this is a realistic proposition merits a separate discussion.

R&D Collaboration: Keeping the European Edge

In the context of the ongoing US-China trade confrontation, there has been a lot of talk about the new “Cold War” in technology, but also criticism of the use of this term, both from policy analysts in Europe as well as the US. Nevertheless, ever since China published its “Made in China 2025” strategic plan, it became clear to other leading industrial countries that they face a serious challenge. Although inspired by China’s decades-long development cooperation partner Germany’s “Industry 4.0” plan and aiming at developments obviously beneficial to any state, such as upgrading its industry from low-end manufacturing to high-value production, promoting indigenous innovation and reducing reliance on foreign technology imports, the reaction from leading economies with high-tech industries such as the EU, Germany and the US was rather “hostile”, as claimed by the Chinese officials. Naturally, China’s declared goal to become the leading global technological superpower by 2049 is not something that could go unchallenged, especially as the plan is criticized for foreseeing too much involvement of the state and too little of market forces, creating unfair competition, both domestically as well as internationally, and restricting access to the Chinese market.

However, as some analysts point out, China faces several major bottlenecks in achieving its ambitious goals. It relies heavily on foreign core components as it has still not mastered the foundational technologies which are essential for developing an advanced high-tech sector in areas such as the digital economy, new materials, semiconductors, advanced machinery and machine tools. To compensate, China has been constantly increasing its spending on R&D, aiming to become the world leader in science and innovation by 2050, in AI by 2030, and in nuclear power production by 2030. In addition, China is actively seeking international cooperation in R&D, so as to access technologies and know-how abroad. The MERICS report on Chinese FDI in Europe specifically focuses on the recent expansion in R&D collaborations between Chinese firms and European entities, warning that the risks involve the facilitation of the transfer of critical and dual-use technologies to China’s military-industrial complex or contribution to the Chinese state’s ability to exert mass control over its population. The MERICS report claims that “providing Chinese parties with access to potentially sensitive European assets” happens “sometimes without European counterparts even noticing.” According to a recent study by the Polish Institute of International Relations (PISM), some EU Member States, like France, Germany, and the UK, “despite maintaining the semi-official EU arms embargo”, have been selling China products “that have potential military use, such as dual-use components and subsystems (e.g., engines, sonar, radar, helicopters, and civilian technologies)”. According to the study, the high-tech cooperation with the EU constitutes “a part of Xi’s concept of civil-military fusion, as dual-use technologies extracted (or acquired) from European companies support the modernization of the Chinese military”. Therefore, R&D collaboration schemes require more scrutiny to ensure that European companies and research institutions do not – intentionally or unintentionally – give away assets that provide China an opportunity to “win twice” through these collaborations.

Loans: Beyond the “Debt Trap”

Ever since its establishment, the People’s Republic of China has been lending money to other countries in need, for example during the 1950s and 1960s lending to communist states with friendly relations to China, and since the launch of its “going global” policy, providing financing to developing and emerging market countries for large-scale investments in infrastructure, energy and mining. However, never has China’s lending policy attracted as much attention as it has now, with the emergence of the Belt and Road Initiative (BRI) in 2013. According to research by the Kiel Institute for the World Economy, in 2018 the Chinese government held more than US$5 trillion in debt claims towards the rest of the world (6% of world GDP). The largest proportion of this debt is made up of portfolio investments, usually acquired via sovereign bond purchases of the People’s Bank of China, typically used to finance advanced and higher middle-income countries, making these countries significantly indebted to the Chinese government (e.g. notoriously the USA, but also European countries such as Germany, the Netherlands, France, and the UK). Compared to that, direct loans and trade credits play a remarkably marginal role. When excluding portfolio and short-term trade debts from the total Chinese claims on the rest of the world, the insignificant size of Eastern Europe’s “dept problem” becomes even more clear as they still lag behind regions like Far East Asia, Central Asia, Sub-Saharan Africa, Latin America, and parts of the Middle East and North Africa.

With China’s growing activism in overseas lending, a narrative of “debt-trap diplomacy” is also gathering popularity. One of the oft-mentioned cases in this context,, is the Sri Lankan Hambantota port project, although the evidence shows that corruption played a major role in China acquiring the port. Furthermore, according to research done by Rhodium Group as well as the Lowy Institute, asset seizures are actually very rare, debt renegotiations tend to be much more nuanced and little evidence has been found suggesting China’s deliberate engagement in “debt-trap” diplomacy. A huge part of China’s foreign finance also falls into the category of aid (concessional lending at below-market interest rates). However, threat perception in this regard is still relatively high in Europe, especially as Hungary signed a loan deal with China for building the Budapest-Belgrade railway after Serbia had already done the deal for their part. The secrecy about the exact terms of the loan does not help to relieve skepticism, even though the Hungarian government claims the Chinese loans to be “favorable relative to the currently available debt financing conditions.” Some vigilance is definitely needed here as there are risks related to such loans, concerning not only potentially harmful terms and cases of corruption, but also their potentially high share of GDP or weakness of institutional mechanisms to protect the debt sustainability of borrowing countries.

State-supported Competition: What Kind of Reciprocity?

The European single market is seen as the EU’s main economic engine which enables goods, services, money and people to move freely. Among other things, this requires a well-functioning infrastructure, the development of which the EU has been supporting through its funding of projects within the Trans-European Transport Network (TEN-T). With the launch of the BRI, China started to take greater interest in such infrastructure projects and so the EU-China Connectivity Platform was established in 2015. One of the fields of cooperation includes the exploration of business and investment opportunities, which China has been keenly following as shown above.

In addition to entering the scene through FDI and loans, Chinese actors have become increasingly active and eligible for participating in the EU or EU Member State-funded tender procedures. The case of COVEC’s failed attempt to build a motorway in Poland has long served as a prime example suggesting that Chinese companies were not fit enough to enter the EU’s public procurement market. However, things have changed. In August 2019, after two failed tenders for the construction of an expressway, the Polish General Directorate for National Roads and Motorways (GDDKiA) finally signed a contract with the cheapest bidder – the Chinese company Stecol Corporation. In recent years, Chinese companies have also been winning public contracts in Romania, Croatia, and Sweden, although it has been argued that their prices tend to be unrealistically low. This has caused EU leaders to call for new rules which would make it harder for the Chinese companies to win such contracts in Europe and the European industry representations to demand more reciprocity from the International Procurement Instrument (IPI) to get equal opportunities in the Chinese market. Nevertheless, as large Chinese construction corporations are typically state-owned and their pricing schemes remain non-transparent and complex, fair competition continues to be an issue in government relations and a challenge for Western companies, both domestically as well as internationally.

Looking at the trade numbers, there is no doubt that connectivity with China remains a strategically important issue for the EU. As shown by a recent study on BRI’s impact on Europe’s TEN-T and transport system, volumes of cargo moved by sea and air have been constantly growing, with a strong consequent impact on the relevant infrastructure and services. The main destinations of maritime freight in Europe have been the ports in the UK, Germany, the Netherlands and Italy, before traveling onward by river barge, train or truck to the other EU Member States or to landlocked and non-EU countries. Similarly, most of the air freight lands at the airports in Germany, the Netherlands, France and the UK, moving on from there, if needed, to other destinations by road. Land routes are also nothing new in the context of the BRI as the viable Trans-Eurasian rail connections were tested already in 2008 and the first regular connections from China to Europe were opened on the routes Chengdu-Łódź, Chongqing-Duisburg and Zhengzhou-Hamburg in 2011-2013, mainly to service global producers from the electronic and automotive sectors. However, with the BRI, local governments in China have been encouraged to develop new connections to Europe, which are heavily subsidized (US$2,000-4,000 per container, with the total fiscal burden of a province amounting to US$200-300 million per year). Although countries and individual businesses in Europe (especially in the Central and Eastern regions) have been aggressively “selling” themselves to China in order to profit from this opportunity, many of these connections will not be sustainable and vanish from the map as quickly as they emerged.

As an answer to China’s overwhelming BRI, the EU has finally come out with a strategy that emphasizes sustainable, comprehensive and rules-based connectivity between Europe and Asia. Whether this will also help to reduce the state-supported competition from China remains to be seen.

Chinese Aid

For decades, China has been the recipient of foreign aid, both from national as well as international organizations. The largest distributors of official development aid (ODA) in Asia from Europe have been Germany, the UK, the Netherlands, and France. Germany as the biggest donor, has left its recognizable mark, including in China’s legal system, standards and regulations framework and various development topics (e.g. cross-border regional connectivity, economic growth model, environmental issues, city development, Made in China strategy and many more). Even in fiscal year 2017-2018, Germany’s average actually spent aid to China was still US$758 million, leaving France (US$175 million), the EU institutions (US$148 million), the UK (US$67 million) as well as such international organizations such as OPEC, ADB and others way behind.

As in the case of loans (which are closely related to or even part of foreign aid), China’s ODA activities can also be traced back to the 1950s, although Chinese aid back then does not quite qualify as ODA according to the standards set by the OECD. China’s external aid system was reformed in the mid-1990s and started to draw more international attention since 2000 with the first Forum on China-Africa Cooperation (FOCAC). But the latest reform of the Chinese foreign aid system took place more recently, with the launch of the BRI. The aim of this reform was to bring more order to the system, differentiate foreign aid from commercial financing packages, and integrate a greater range of socially conscious development projects, in areas such as agriculture, public health, and education. Nevertheless, when looking at China’s official finance data, it shows quite the opposite picture: ODA (concessional in terms, primarily intended for development and welfare; the top recipient is Cuba with US$6.7 billion) constitutes a small and even decreasing proportion, whereas the area with the largest recent increases is made up by Other Official Flows (OOF; non-concessional in terms, primarily intended for commercial or representational purposes; the top recipient is Russia with US$36.6 billion). The so-called 17+1 format countries receiving any official finance from China include Serbia (US$2 billion, of which US$980 million is ODA), Bosnia and Herzegovina (US$1.4 billion, US$8.6 million as ODA), Romania (US$1.2 billion), Montenegro (US$1 billion, US$911 million as ODA), Macedonia (US$809 million, US$610 million as ODA), Albania (US$293 million, US$6.5 million as ODA), and Bulgaria (US$96 million).

Traditional aid is not the only way China could be perceived as buying its influence in Europe. Similarly to the crisis in 2008, when within a year China’s official finance (mainly OOF) went up to almost US$70 billion from a level of less than US$15 billion, China has tried to benefit (or, more likely, to repair its image) from the coronavirus pandemic. This attempt manifested itself most obviously through so-called mask diplomacy. Serbia has been provocatively lauding Chinese support, while ignoring the help of its usual partners, like the EU (whose contribution of ODA in 2017-2018 was US$594 million, additionally from Germany another US$203.5 million). Recognizing the threat to its presence in the region, the EU announced up to €38 million “in immediate support” for the Western Balkans to overcome the health emergency and an additional reallocation of €374 million for the socio-economic recovery of the region. Notwithstanding the efforts by the EU, Serbia still plays tough, as demonstrated by the comment made by President Aleksandar Vučić concerning Serbia’s absence from a list for the EU’s macro-financial assistance (MFA) funds. In this case, the EU will have a very tricky game to play, not to give in to the manipulation on one hand while still attempting to win the hearts and minds of people, before losing sympathies to China.

Investments in Human Connections

No one who wants to do business or establish collaboration with China escapes the concept of guanxi. It is so inherent to the culture and system that success seems unimaginable without achieving some level of mastership in guanxi-building. It is also impossible to achieve it overnight but requires serious dedication and long-term investments. Due to the costly nature of guanxi, one needs to choose targets wisely. Furthermore, betting on the wrong kind of guanxi might get you into serious trouble (as demonstrated by the anti-corruption campaign-related cases in China). Having this in mind, it is no wonder that one of the connectivities announced for the international cooperation at the Belt and Road Forum in May 2017 was people-to-people exchange.

The collaboration targets various fields: education, healthcare, culture, and media. Student exchanges and collaboration in science were particularly emphasized. For the implementation, China introduced a three-year action plan and the Silk Road NGO Cooperation Network was established. The claimed aim of the programs in education, healthcare and livelihood improvement was to deepen understanding and build trust among participating nations. “Knowing the culture, laws and customs before venturing into a foreign country is essential, because if the locals do not welcome your business, your endeavor is doomed to fail,” Zhao Kejin, an associate professor in international studies at Tsinghua University was cited commenting on the cooperation.

Indeed, not all European countries differ from China in certain aspects. Corruption is not a China-imported problem in Europe but has been part of the European system longer than Europeans want to admit. The results of the Corruption Perception Index 2019 clearly show that corruption is still a challenge needing to be addressed in Europe. Unfortunately, this weakness makes some countries particularly vulnerable and presents an opportunity for Chinese players to get access to projects and assets in Europe by just “buying” the support of relevant decision-makers. EU regulations and the framework for investment screening help to bring more transparency and rule-based decision-making into the processes related to EU-funded projects and Chinese deals with EU Member States. However, as the case of Hungary demonstrates, sometimes even this is not enough to lift the secrecy concerning investment conditions and reduce potential threats to the European interest. Although China solemnly promised in 2017 to “clean” the BRI as a response to claims that Chinese-funded enterprises are the main exporters of corruption, and announced earlier this year that “foreign experts and scholars” applauded its “remarkable results and the Chinese experience is worth learning from”, it remains  in the hands of European countries themselves to ensure their integrity in this regard.

But corruption is not the only challenge when it comes to China’s investments in human connections. In addition to the strategic challenges presented by the R&D collaboration analyzed previously, a closer look into the mechanisms in place behind the China-driven people-to-people connectivity should put Europe on guard. A recent study by CHOICE platformfocusing on China’s influence in Central and Eastern Europe (CEE) in the context of the 17+1 format suggests that, due to the nature of the Chinese regime and the penetration of society by the party-state apparatus, the cooperation qualifies rather as “government-to-people” connectivity. Warnings concern almost all areas of collaboration – from sports to medicine, from education to media. Youth in the CEE countries especially seem to be a key target group, both through educational programs as well as political party collaborations. This indicates a long-term investment approach by China in the region and should not be neglected neither by national governments nor by the EU. Impacting the next generation of talent and leaders means, in essence, buying the future of Europe.

There Is No Other China

Notwithstanding all these challenges, European countries, whether individually or as the EU, need to deal with China. As the latest Business Confidence Survey of European business in China showed, their commitment to the Chinese market remains high, with the majority reporting that China remains a top three destination for investment, due to “the vibrant and innovative private sector”. In addition to the attractive local market, China continues to be important in the highly complex value chains, making it hard for  European manufacturers to pick up and leave China.

On the European side, China is also here to stay. As stated in the beginning, both Europe, as well as China, are in a continuous process of learning – about themselves and each other. This, of course, could be perceived as an inconvenience caused by the need to get out of a comfort zone. Another way of seeing this, however, could be as an opportunity to change. China today, after all, is to a certain extent of Europe’s own making and the tools and measures it uses now with Europeans are nothing novel. Based on the long-term relationship, Europe and China should have enough commonalities to build upon and look for avenues of cooperation that truly benefit both sides. Establishing a more solid strategic base is already a good start.