One Country – Two Directions: The Obscure Economic Policy of China and How the EU Should Relate to It

Written by Adrian Kokk

”The relationship between the European Union (EU) and China is simultaneously one of the most strategically important and of the most challenging we have”, President of the European Commission Ursula von der Leyen said, following a recent summit on a potential investment agreement between the two parties (European Commission, 2020). This comes at a time when the issue of Sino-European relations will become one of even greater significance, as it is expected to be a top priority for the incoming German presidency of the Council of the European Union (Goßner, 2020). A continuously debated question, the prospect of creating a level playing field in regards to investment has been sustained by a high presence of Chinese interests on European markets. After having themselves long been reluctant towards opening their market to foreign influences, China’s skepticism may actually wear off, judging by recent events. But even as China is starting to ease on restrictions on foreign investment, step by step opening up the country to the external world, President von der Leyen’s statement sheds light on a profound dilemma. Amid the European economy’s current state of pandemic desolation, Chinese companies, backed up by hefty subsidies from Beijing, are looking to go on an acquisition spree. Despite the dire financial needs of European businesses, the EU must not cave for the extended interests of the Chinese government. In the long term, the Union shall have to cooperate with others to find ways, in accordance with international law, to condemn the unfair game that Chinese President Xi and his subordinates are playing, while at the same time promoting the vision of a more open China, of which glimpses are being shown. 

As mentioned earlier, China has a tradition of protectionist sentiment, but the future might hold groundbreaking changes. Ever since the introduction of the first capitalist reforms under the premiership of Deng Xiaoping in 1978, China has successively emerged as a global economic powerhouse while still being ruled by a communist regime (Mitter, 2016). Even though this event marks an important point in time  when the accessibility to the Chinese market for foreigners has become an issue of debate, the question regarding China’s openness has been discussed for centuries. 

As a matter of fact, history might challenge the notion of China always having been an isolated state. The Chinese have always been susceptible to external cultural influences, something that was documented by Christian missionaries, who have been present in the country for numerous centuries. In 1910, for example, British missionaries noted an eager willingness among Chinese workers to learn English, thus displaying quite an open-minded attitude towards contemporary Western influence (Mitter, 2016). However, this sense of openness is definitely not applicable to all aspects of Chinese society, especially not issues of a financial or commercial nature. Even though it is not as easy to say that China always has intuitively resented foreign activity on its market, it is not a fair description if one takes into account the long history of Western economic exploitation. A lot of indications imply that the existing system is intrinsically unjust towards foreigners. For example, the government in Beijing has in the past not had any scruples about mixing elements of protectionism into their financial policies, by making it difficult for foreigners to invest in the country’s booming economy (although the growth has slowed down in recent years). An example would be a foreigner’s ability to invest in the stock markets of Mainland China. A-shares, i.e. domestic stock, may only be acquired by a Qualified Foreign Institutional Investor (QFII), effectively hindering investors abroad from gaining control over established Chinese businesses. And even among the QFIIs the access is limited, as they are only granted investment opportunities based on quotas issued by the Chinese government (PwC China, 2012). Furthermore, by examining data on foreign direct investment (FDI), even the untrained eye can spot noticeable differences among China and the EU. In the case of the former, inward FDI stock, meaning the combined worth of foreign investors equity and loans to enterprises, totaled 21% of nominal GDP. That same figure was 59% for the European Union (OECD Data, 2020), who’s total production value exceeds that of China. All of this indicates that China has enforced a systematic scheme to repulse foreign influences from its market. But now might be the beginning of a new era, judging by what has occurred in the legislative area. On January 1st this year, a new foreign investment law (FIL) was enforced in the country. Replacing three previous laws on foreign investment, the new law is designed to attract streams of capital into the country through numerous changes of former legal conditions. Practically speaking, the implementation of the law will for example protect the investments, earnings and rights of foreign investors (FIL Article 5), and guarantee that national policies regarding development of enterprises shall apply equally to foreign- funded businesses (Article 9). Moreover, the law also serves to protect intellectual property rights of foreign investors (Article 22), while still barring foreigners from investing within any field on the so-called ”negative list” (Article 28). Yet, as a supplementary action, China restructured the negative list back in 2019, by e.g. allowing foreigners to invest in oil and gas exploration without being obligated to have a Chinese national as a business partner (Jones Day, 2020). All things considered, this seems to be a step in the right direction. Hopefully this piece of legislation is a serious attempt on Chinese officials’ part to enhance the level of transparency, as well as to change the current milieu of hostility towards foreign interests. If so, we might be witnessing the first in a series of reforms that can improve the way of life for billions of people, and alter the shape of the global market. 

But these hopes of prosperity are doomed to be short-lived, as China still engages in other disturbing activities, seen from a market-oriented perspective. It is far from a secret that the central government pays subsidies of astronomical sizes to Chinese corporations. In the year 2018, subsidies to domestically listed companies totaled $22.3 billion, a 14% increase from the previous year (Hancock & Jia, 2019). This undoubtedly gives China’s business sector a hedged position in the international economic landscape, compared to enterprises from different parts of the world. Not only does state support of such magnitude disrupt the natural mechanisms of the global free market, it also poses a risk against national security in, for example, many EU member states, especially in this time of economic hardship. Many European business sectors are desperate for fiscal stimulus, having sustained detrimental financial damage from the coronavirus, and Chinese investors have proven to be willing to assist their European counterparts. An example would be the case of troubled airline Norwegian Air, which a Chinese company recently bought a stake in. The problem is that said company has, as one could expect, close ties with the Chinese government (Ewing, 2020). This is the inevitable end product of the current system. Chinese investors, essentially bought by the state, acquire European companies, often enterprises involved with highly advanced technologies, and gain access to integral information. Fortunately, EU officials have recognised the threat such a scheme constitutes. Existing EU law regulates the subsidisation by EU member states, but these rules do not apply to third countries. Besides the notion of disrupted competence, the problems of technologies potentially being transferred beyond the EU and the sometimes narrow distinction between private and public interests have been acknowledged by the EU as the negative effects of foreign subsidies (European Commission, 2020). It appears that the European Commission is thus preparing to actually prevent external subsidies from distorting the internal market (Ewing, 2020). Even the Commission proposed economic stimulus package of €750 billion indirectly combats the interest of Beijing, as European companies need not look any further than within the EU for helpful funds. Ergo, the EU has faced China with several necessary measures in this issue. Actions like these clearly mark that the practice of the government in Beijing is not tolerated, as it eradicates the harmony of the free market and means that valuable information can end up in the wrong hands. 

But is this truly the right way for the EU to act on this matter? From a short term perspective, a piece of legislation targeting foreign subsidies is absolutely vital if the integrity of the internal market is to be upheld. But at the same time, the EU must be careful not to condemn the Chinese government for granting vast financial support to its companies. Not only is it an issue that primarily does not concern the EU, it would also be hypocritical for the Union to attack such policy. Supporting ambitious, and costly, European projects, such as the New Green Deal, while simultaneously bashing other great powers for sponsoring their own economy is a stance that cannot be defended with plausible arguments. China must be entitled to invest in China, or else the same cannot apply to the EU. 

However, in the long term, the EU must be clear that the unfair use needs to come to an end. Yet there are still quite few options. Increasing tariffs on Chinese products is not a sustainable method. A trade conflict would likely affect the Chinese economy to some extent, as the EU is the top importer of Chinese goods, and in 2019 the nation’s exports to the Union amounted to €362 billion (Eurostat, 2020). But let’s not forget that a trade war would not exactly be beneficial to the EU either, and would mark a protectionist viewpoint that is not compatible with the Union’s values, including cherishing free trade to the fullest possible extent. Also by studying the progress of the United States (US)-China trading conflict, a long dispute that has only resulted in a mere phase one agreement, the obligations of which China has trouble meeting in these difficult times (Rapoza, 2020), one can conclude that the EU ought not take a path similar to that of its American friends. A potential alternative would be for the EU to advocate to limit China’s influence over significant international organisations. An example would be the International Monetary Fund (IMF), an institution that works to promote financial stability, international trade and monetary cooperation, among other things (IMF, 2020). The 189 member states of the IMF receive proportional voting power through quotas, which are based on the size of GDP (weighted 50%), openness (30%), variability (15%) and international reserves (5%) (IMF, 2020). This means that the US is the most influential member with 16.52% of the votes, followed by Japan and China with 6.15% and 6.09% of the total number of votes respectively (IMF, 2020). There are two main problems with this system, in regards to the influence it can grant China. The first issue is that a member state may increase its quota, and thus number of votes, via contributions to the organisation. This is not an actual structural problem, but it makes the situation regarding China even more difficult. Despite currently having just above 6% of the votes, China has the opportunity to increase its share, and probably more so than other member states, considering the nation’s giant economic apparatus. The second issue has to do with the openness factor in the quota formula. As defined by the organisation itself, this variable is based on international trade and financial flows, calculated as the average annual sum of receipts and payments (goods, services, income and transfers) over a five year period (IMF, 2010). Seen in the context of China, this is troubling for reasons. Firstly, China’s enormous engagement in international trade ought to result in the parameter of foreign capital flow becoming obsolete. By having a great presence in global trade, China can, judging by the definition of openness, circumvent the requirement of being open in terms of enabling fair foreign investments. Secondly, the variable is perhaps not proportionally weighted. In a global economic community, which the IMF represents, openness must always be prioritised. In this state, China can maintain a position of power, without fully respecting the principles of economic openness. Therefore, this principle needs to be modified. First and foremost, the IMF needs to put greater emphasis on the financial flows aspect, as in demanding a suitable and pleasant environment for foreign investments. Moreover, the variable of economic openness must gain a more significant stance than it presently has, and not be up for compromise as illiberal economies purchase their way to power. By doing this, China would need to reform if they want the status quo on their influence in the international community. It is now up to the member states of the EU, or all European nations for that matter, to push the question of reform of the IMF, if reform on China is what we desire in the long run. 

In conclusion, our relations to China are important and extremely complex. In some areas, we are perhaps witnessing substantial progress, from which a new and more liberal age of foreign activity within the Chinese economy may blossom. In other ways, further reforms are absolutely essential, both of the Chinese political system and the international system that allows it to prevail. Overall, this ambiguity, clinging on to the old system while heading towards modernity, has occurred many times in the history of China. Is there still a genuine ambiguity between preservation and change today, or is the reform aspect a facade, strategically facing the scrutiny of the external world? Only time will tell. 

References

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Goßner, C. (2020, May 29). China: One of Germany’s EU presidency priorities. Euractiv. Retrieved June 28, from https://www.euractiv.com/section/eu-china/news/china-one-of-germanys-eu- presidency-priorities/ 

Mitter, R. (2016). Modern China: A Very Short Introduction (2. ed.). Oxford, UK: Oxford University Press 

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