China and Europe are drifting apart

September 22, 2022 06:00
In her State of Union address last week in Brussels, European Commission President Ursula von der Leyen outlined measures to reduce the EU’s dependence on China. Photo: Reuters

China and Europe are drifting apart, with investment by each in the other falling and Europe’s share of the Chinese market declining. Public sentiment in the EU is increasingly anti-China.

These are the conclusions of the European Business in China Position Paper 2022/2023, issued on September 21 by the European Chamber of Commerce. It was compiled after consultations with more than 1,800 member companies in China.

“China’s move away from the rest of the world – embodied by the restrictions imposed under its Covid-19 policy – indicates that, at the moment, ideology is trumping the economy. If China persists with this approach, the business environment will continue to become more challenging,” it said.

The Covid restrictions have had a crippling effect on the attraction and retention of foreign and Chinese talent. The travel, visa and permit restrictions have caused an exodus of EU nationals, as well as those from Japan, South Korea and the U.S.

In the first eight months of this year, EU exports to China declined by more than eight per cent from a year earlier. China’s exports to Europe rose almost 19 per cent in the same period.

“Chinese investment into Europe has long been on a downward trajectory and is now falling well short of its potential,” the report said. “Inbound investment flows from the EU (into China) are declining. The bulk is contributed by a handful of large companies, and prevalent access barriers deter potential newcomers to the market. In the last four years, the top 10 investors contributed more than three quarters of European FDI in China.

“Those established in China are not looking to leave, but are weighing the possibility of shifting planned or future investments to other markets perceived to provide greater reliability and predictability,” it said.

“China’s push both for increased ‘self-reliance’ and ‘buy Chinese’ are only easing the country into deeper isolation at a time when its economy would benefit from getting back on the path toward opening up.”

While FDI into China grew in 2020, investment from the EU dropped 11.8 per cent from the previous year and its proportion of overall FDI fell to 3.8 per cent from a high of 11.1 per cent in 1999. “The trend of declining FDI is unlikely to reverse while European executives are heavily restricted from travelling to and from China to develop potential greenfield projects,” the report said. “The growing list of challenges is pushing many to reduce, localise and silo their China operations, with an increasing number creating two separate systems – one for China and one for the rest of the world – which is an expensive and insufficient solution.”

On October 16, the 20th National Congress of the Communist Party will be held in Beijing. “China finds itself at a critical juncture: the decision of whether to take action to reach its full economic potential is entirely in its own hands.”

The report said that challenges would only intensify as firms faced increased scrutiny from EU stakeholders, governments, NGOs and media over a range of issues. “Russia’s invasion of Ukraine raised questions over whether China could take similar actions against Taiwan and what the impact might be on companies’ global operations,” it said.

Last Thursday President Xi Jinping met Russian President Vladimir Putin in Samarkand, in Uzbekistan. They pledged to support each other “on issues concerning their core interests.” It was their first face-to-face meeting since the start of the invasion.

In her State of Union address last week in Brussels, European Commission President Ursula von der Leyen outlined measures to reduce the EU’s dependence on China. These include the European Critical Raw Materials Act, as the bloc seeks to shore up supplies of minerals such as lithium and rare earths.

She said that almost 90% of rare earths and 60% of lithium were processed in China. “A single country currently dominates almost the entire market. We must avoid becoming dependent again, as with oil and gas.” She was referring to Europe’s dependence on Russia before it invaded Ukraine.

Through the legislation, the EU would identify potential strategic projects along the supply chain and build up reserves where supply was at risk.

The gap between China and Europe is widening. It reverses four decades of friendship since the start of the reform and open-door era.

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A Hong Kong-based writer, teacher and speaker.