10 Jul European Café: Power balance in the 21st century – A summary

In 2023 CEID is renewed its European Cafe series of discussions, which focuses on a selected expert discussions on the main dilemmas of Hungarian foreign policy. The discussions are not be open to the press. The aim of the programme is to bring together views in a civilised way and to formulate a minimum foreign policy in the form of concrete proposals.

What could Hungary gain or lose from relations with China?

Recently one of the key issues in global politics has been the stance towards China: while there is a clear expectation from Washington (regardless of administration) that the European Union, as the number one ally, should line up behind the United States, Europe – whose second largest trading partner is China – is far from united on this issue. In February 2024, Tamás Matura, Associate Professor at Corvinus University, was a guest of the CEID European Café series, with whom we talked about China, the future of European-Chinese relations and the Hungarian government’s China policy.

It said to be clear that the Member States of the European Union are in a delicate situation. While there is increasing pressure from Washington to join the US and push back Chinese companies, many countries have different preferences. As a model of EU’s balancing politics, European politicians, led by European Commission President Ursula von der Leyen, are pushing for de-risking rather than the de-coupling advocated by the US. However, in her annual assessment speech last year, von der Leyen made clear her support for imposing market protection tariffs on Chinese car companies that benefit from massive state subsidies – not necessarily under US pressure, but rather in the fundamental interest of European companies. However, there are still significant differences between Member States on how to deal with China, not only between Member States but even within the dominant Member State, Germany: while most large German companies have a fundamental interest in maintaining relations with China, small and medium-sized companies have already started to withdraw from it. Until a German strategy is in place, there is little chance of a genuine European-level China strategy.

Not only the European Union has uncertainties, China itself is in a difficult situation. China’s previously robust economic growth has slowed considerably: while official figures still point to economic growth of 4-5%, it is actually more like 1-2%. Chinese working capital outflows peaked in 2016 and have since fallen sharply, many of the investments in Africa and South America have not been recouped, China is trapped in a ‘creditor trap’ and bad investments are being counted these areas.

Meanwhile, the debt stock has grown enormously, the debt of the large corporate sector is 160% of GDP, and the total debt could exceed 300% of GDP this year, which means that China is ahead of the United States (249%).To restart the economy, a significant liberalisation would be needed, but the internal processes show the opposite: centralisation and manual control are becoming stronger, while the generational change has stopped politically, Xi Jinping has no designated successor.

One cause for concern is that military spending is rising steadily while economic growth is slowing down. This could forecast the risk of an armed conflict with Taiwan, and it is no coincidence that Beijing is keeping a close eye on the West’s reactions to Russia’s aggression in Ukraine. Although a possible military action against Taiwan is not imminent, it cannot be excluded that it could take place around 2027-2028, before the next Taiwanese elections or the Chinese congress, if economic growth does not take off and tensions within the country rise. Current plans are for China to have six aircraft carriers by 2030, with which it can clearly dominate the seas, and can build civilian ferries capable of moving troops and military vehicles. They are also working on a nuclear strike capability, with 1,000 missiles by 2030, at the same time the last real military actions of China was in 1979 (Sino-Vietnam War), so it is difficult to predict what they can deliver in a real situation and whether they can match US forces.

In relation to Russia, China’s interest is to keep the war in Ukraine going as long as possible, as this weakens Moscow and make it increasingly vulnerable to China, which buys most of the gas that is excluded from Europe, thus indirectly financing Russian military spending. The war is also weakening Europe, which Beijing hopes will also play into its hands. Russian aggression (and the gas crisis) is also keeping the United States, China’s biggest rival and adversary, busy, and it remains to be seen how the balance of power will evolve after the US presidential election: from a Chinese perspective, neither Joe Biden nor Donald Trump are optimal candidates, the former being a hardliner and the latter unpredictable.

Regarding Hungarian-Chinese relations, recently the Hungarian government is open to Chinese (and Asian) capital.  China and South Korea have been outpacing European investment in terms of working capital investment on an annual basis, but overall they do not threaten European predominance. The Hungarian government, which is increasingly building its economic model on FDI and forced industrialisation, counts the arrival of Chinese firms, which see a bridgehead in EU Hungary, as a foreign and economic policy success. This role could be particularly valuable if the EU were to impose sanctions on certain Chinese automotive products. However, the Hungarian strategic interest is not always visible: it is not clear exactly what benefits the government expects from Chinese investment that is disproportionately large for the country’s size and capabilities (it does not have the labour nor the energy to match), but these will further strengthen the country’s exposure to the automotive sector rather than diversify it.

In political terms, Hungary has become the only openly pro-China country in the EU (in sharp contrast to the other three V4 countries). Since 2018, the Hungarian government has regularly vetoed EU joint decisions on China, as a gesture to Beijing, but also to “raise” issues (e.g. the Uighur issue) that Beijing is not keen to address. The close Russian-Hungarian relationship is not China’s piece of cake either, thus Beijing prefers to see Hungary as a short-term friend (‘frenemy’).

Suggestions

• cost benefit assessment of Hungarian-Chinese relations, outlining a medium- and long-term strategy on what Hungary expects from China, what our real interests are
• closer coordination on China with Republican think tanks if the administration continues to count on a Trump presidency
• sovereignty protection: taking a security approach, rethinking certain Chinese technologies, replacing them in critical infrastructure and state institutions
• not only in the area of relations with China, but in general, it would be worth rethinking Hungarian economic strategy and moving towards diversification (prioritising innovation, value-added investment, rather than low-wage manufacturing). Reducing exposure to the automotive sector and requiring investors to participate in infrastructure development for energy-intensive investments. Chinese technology transfer for renewables
• reconsidering and eliminating the unnecessary political declarations
• preparation for EU regulation, a coordinated policy with other critical countries (e.g. France) on China policy within the EU
• in line with the fact that European medium-sized companies are increasingly leaving China, a more thorough strategy on what kind of working capital investments the Hungarian government should support in China is needed, given that there are no success stories to report in 15 years