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MERICS China Essentials
13 min read

EU-China investment deal leaves a lot to be desired

The facts: The pace of EU-China negotiations on the Comprehensive Agreement on Investment (CAI) intensified significantly as 2020 drew to a close. Before the end of the year the deal was struck - despite the reservations of some member states and calls from the incoming Biden-Harris administration in the United States for “early consultation” with Europe on “common concerns about China’s economic practices”.

The EU says that the CAI brings it improved access in sectors like automotive, financial services, real estate, rental and leasing, and addresses issues such as labor rights, forced technology transfers and unfair competition, especially from Chinese SOEs. The EU Commission also points to unprecedented Chinese commitments on climate and human rights. Experts in China have described the end of the seven-year long negotiations as a step toward multilateralism. The EU has been praised in China for skillfully balancing its relationships with both the United States and China and for exercising its principle of “strategic autonomy”.

What to watch: The political endorsement of the deal by EU leaders is currently being converted into a detailed agreement which will then require approval by the European Parliament. This may prove challenging with some MEPs concerned about the timing and human rights, especially in the light of recent arrests in Hong Kong and a mounting international debate about China’s systematic use of Uighur forced labor.

MERICS analysis: The agreement is a political and symbolic win for China. It projects an image of strong EU-China cooperation at exactly the time when the election of Joe Biden in the United States raises the prospects of a renewed transatlantic approach to China. For Europe, it will bring selective improvements regarding market access, non-discrimination and operating conditions in China, even if many of the market openings China has offered are mostly a repackaging of existing commitments. Some crucial and structural issues, however, are not addressed – like domestic procurement rules that discriminate against foreign investors or restrictions on cross border data flows. With regards to human rights and labor issues, China has so far only committed to “working towards” ratifying the missing International Labor Organization (ILO) conventions in the CAI. This might well take decades – if it happens at all.

The promises of the CAI also need to be seen in the context of larger ongoing developments in China’s legislation. For instance, both the Foreign Investment Law and the draft Data Security Law allow “corresponding measures” for discriminatory action against Chinese companies by other states, and new security review measures for foreign investment were introduced in December. Additionally, the Ministry of Commerce’s (MOFCOM) recent order on “Countering unjustified extra-territorial application of foreign legislation and other measures” penalizes Chinese and international companies present in China that comply with international sanctions. This could cover EU firms that restrict sales to Huawei in order to comply with US sanctions.  

“Foreign companies should be prepared for continued, or even greater, geopolitical uncertainties affecting their presence in China, irrespective of what Beijing is promising in the CAI.” MERICS analyst Katja Drinhausen.

More on the topic: Read MERICS Executive Director Mikko Huotari’s op-ed in Handelsblatt here (in German) and an interview with Huotari and MERICS Chief Economist Max J. Zenglein here.

Media coverage and sources:

Hong Kong government cracks down on pan-democratic camp

The facts: The Hong Kong government has launched the biggest crackdown on protagonists of the pro-democracy movement since the imposition of the National Security Law. 53 influential figures of the pan-democratic movement and potential candidates for the coming Legislative Council (LegCo) elections were arrested on January 6 for their roles in the informal primaries in July 2020. In police statements, they were accused of trying to secure a legislative majority with the goal of shutting down the government, which they say constitutes “subversive behavior” under the national security law. While the EU called for the immediate release of those arrested, Chief Executive Carrie Lam criticized “double standards”. She referred to international reactions to the unrest at the US Capitol. Chinese party-state media compared the events in Washington to Hong Kong protests. This Thursday, Hong Kong police reportedly arrested 11 people on for allegedly helping 12 pro-democracy activists accused of attempting to escape to Taiwan.

What to watch: The joint resignation of pan-democratic delegates over disqualifications on Beijing’s order in November already left the Legislative Council firmly in the hands of pro-Beijing lawmakers. The mass arrests can be expected to lead to prosecutions and further disqualifications that prevent those affected from standing as candidates in the coming LegCo election. The authorities seem intent to make sure that despite popular support hardly any democratic candidates will enter the race against pro-Beijing candidates in this autumn.

MERICS analysis: The targeting of a diverse group of potential candidates for the next Legislative Council flies in the face of early assurances from Beijing and the Hong Kong government that the law would only effect “a very small number of extremists.” The arrests are yet another step in the vast spectrum of measures to limit civil liberties since the national security law was introduced in Hong Kong in July 2020. More changes in the political administration, judiciary, media, education and civil society can be expected.

Media coverage and sources:

Science, supply chains and financial sector set as priorities for China’s economy

The facts: Strengthening science and technology, supply chain independence and the prevention of “disorderly expansion of capital” are among the eight key missions of China’s economic policy in the coming year. The annual Central Economic Work Conference (CEWC), a high-level CCP meeting led by president Xi Jinping and premier Li Keqiang, discussed economic goals and priorities. The leadership used the meeting to make the point that China is the only major economy in the world to achieve positive economic growth in pandemic-ridden 2020. They also made crystal clear that it was them that deserved the credit for China’s swift recovery. For 2021 the CEWC outlined eight priorities:  

  • Strengthen national science and technology  
  • Achieve independence in China’s supply and industrial chains
  • Expand domestic demand
  • Promote reform and opening up
  • Promote agriculture and seeds
  • Strengthen anti-monopoly policies and prevent disorderly expansion of capital
  • Address the housing problem
  • Work towards achieving carbon neutrality 

What to watch: One priority proposed by the CEWC is to boost demand-driven growth. Policymakers want to raise household’s purchasing power, and various ministries have already jointly issued a notice to encourage rural consumption. Local governments are being pushed to abolish administrative hurdles (such as license plate restrictions) for consumer goods like cars. In the quest to free up households’ financial resources housing costs are also a key issue. The CEWC’s readout even hints at rent controls and SOE’s providing free housing. Yet new tasks for 2021 keep piling up.

MERICS analysis: Strengthening national science and technology has, for the first time in years, been catapulted to the top spot on the list of priorities for 2021 – in its response to US sanctions that have led to Chinese companies such as Huawei losing access to global supply chains. Stronger regulation of private financial service providers such as Ant Financial also shows that limiting uncontrolled capital expansion and anti-monopoly policies will range high on the agenda. The lack of control over private digital financial providers worries the government, also with regards to overall stability risks in the financial system that were exposed after a series of debt defaults shook the sector in 2020. China’s total debt to GDP ratio has increased sharply and now stands at 280 percent.

Media coverage and sources:

China seeks to shore up friendships in Africa

The facts: Beijing has kicked off a new year of diplomacy by sending its top diplomat to Africa. Chinese Foreign Minister Wang Yi wrapped up the week-long tour of the continent on Saturday, concluding state visits to Nigeria, Democratic Republic of Congo (DRC), Botswana, Tanzania, and the Seychelles. During the tour Wang signed memoranda of understanding on the Belt and Road Initiative (BRI) with the DRC and Botswana.

What to watch: In a smooth and carefully orchestrated tour, Wang largely stuck to approved talking points including Covid-19 vaccines, economic recovery, and “transformative development” – three narratives that he had previously outlined in an interview given to Xinhua and which will be the focus of this year’s Forum on China Africa Cooperation summit in Senegal. With many in Africa feeling that rich countries are selfishly guarding access to Covid-19 vaccines, Beijing has an opportunity to strengthen friendships by providing access to Chinese vaccines. Wang fell short of addressing the ongoing African debt crisis that will also define foreign relations with African countries going forward into 2021.

MERICS analysis: Anticipating competition from a more internationally engaged Biden administration, Beijing is seeking a head start by shoring up ties with developing country partners. Beijing’s new white paper on “International Development Cooperation” makes explicit the centrality of “South-South” cooperation and China-Africa relations to Chinese foreign policy. In order to translate the friendly rhetoric that accompanied Wang’s tour into reality, it will be important that Beijing makes good on promises to provide access to Chinese vaccines and to deliver sustainable economic recovery through the BRI amid scaled back loan commitments.

Media coverage and sources:

METRIX

138 METRIX China Briefing 2021-01-14

138 new Covid-19 infections have been discovered on mainland China, the highest one-day-increase since July 2020. 28 million people are now under home quarantine. (Source: Reuters via VOA)
 

Review: Invisible China: How the Rural-Urban Divide Threatens China’s Rise, by Scott Rozelle and Natalie Hell

President Xi Jinping has recently declared victory in China’s campaign to eliminate absolute poverty. The policy, started in 2016, has lifted nearly 100 million people above the national poverty line, according to Chinese state media. Villagers in the remotest areas have been moved into new homes with improved roads, running water and electricity. From the perspective of Beijing, the goal of poverty eradication has been met.

But Rozelle and Hell present a different story. Rich in data from decades of research, including door-to-door surveys in remote Chinese villages, the authors reveal the startling consequences of China’s unequal allocation of healthcare and education. Beijing’s ambition to be a “strong country” and a digital superpower belies what the book defines as “Invisible China” - the left-behind rural population, which includes 70 percent of the country’s children, more than half of whom are undernourished and have little to no access to proper healthcare and quality education. The authors acknowledge that China has well-educated elite workers, but points to the 300 million or more who have not graduated from high school. Even if every individual goes to high school from now on, it will be nearly 2040 before half of the labor force are high school graduates.

The book is not just a critique of China’s policy shortcomings. It was written, as the authors say, in the hope that China finds solutions to these problems because, “For all the risks of a rising China, the risks of a floundering China are far greater.” Rozelle and Hell’s work provides deep insight into what they call “the human capital crisis” facing China today.

Reviewed by Valarie Tan, Analyst at MERICS

More on the topic: Watch the recording of our web seminar on the current state of inequality in China featuring Scott Rozelle, David Rennie (The Economist) and Valarie Tan.

PROFILE: Jack Ma – a fallen superstar?

With speculation running rife about the whereabouts of Jack Ma, co-founder and former executive chairman of Alibaba, richest man in China and business superstar, many are asking if he has finally fallen foul of Beijing for good. But a look back at his relations with the Chinese government reveals that this is nothing new.

Ma’s career began modestly as an English teacher in Hangzhou. During a visit to the United States in the 1990s he was introduced to the world wide web. Back in China, he set up China Pages, an online business directory. It took off, but just a year later was forced into a merger with the state-owned enterprise China Telekom. Ma resigned and, after a stint at a state-controlled advertising agency, launched Alibaba in 1999.

Today it is the biggest technology company in China and Ma is the 17th richest person in the world and a global business celebrity. However, when the party honored his contribution to national development in 2018, they were careful to highlight his party membership. Then at 54, he announced he was retiring to focus on charitable work. Many speculated whether the move was entirely voluntary.

In October last year, Ma made a high-profile speech in which he criticized China’s state-owned banks and the country’s regulators for lacking innovation. The reaction was swift: Chinese regulators halted the share offering of his company Ant Group and launched anti-monopoly investigations into Alibaba. Ma has not been seen in public since.

Ma is held up by Beijing as an example of China’s growing clout in finance and technology. But, like Ren Zhengfei, CEO of Huawei, he is also closely monitored. Beijing allows him to run thriving businesses and to amass a personal fortune, but when he is deemed to cross the line, he is reined in. Nor is he the first Chinese business leader to vanish after criticizing the government. Real estate mogul Ren Zhiqiang went missing last year after attacking the government’s handling of the Covid-19 pandemic. He has since been expelled from the party and sentenced to 18 years in prison for taking bribes. Others include Xiao Jianhua, head of investment firm Tomorrow Group, who disappeared in Hong Kong in 2017, and Guo Guangchang, founder and chairman of investment conglomerate Fosun International, who went missing in 2015.

The message is clear: in China, no one can be seen to be bigger than the party or Xi Jinping.

Media coverage and sources:

Vis-à-vis: Kevin Rudd, Isabel Hilton and Jonathan Hilman on global challenges in 2021

Accompanying the MERICS China Forecast 2021 event, MERICS waged a look at three global challenges in 2021: decoupling and the evolution of multilateralism, cooperation and competition in the climate crisis, and the development of connectivity in a world plagued by a pandemic. MERICS analyst Grzegorz Stec spoke with three very accomplished and knowledgeable guests to discuss these issues.

The Honorable Kevin Rudd, CEO and President of the Asia Society, and President of the Asia Society Policy Institute, discussed the politicization of the international economy and the prospects for adjustment of the multilateral system in the year ahead.

Isabel Hilton, CEO and Editor of China Dialogue, shared her insights into China’s efforts in combating the climate crisis and the challenge of developing an effective international framework.

Jonathan Hillman, a senior fellow with the CSIS Economics Program and director of the Reconnecting Asia Project, discussed the geopolitical connectivity competition and the relevance of the Indo-Pacific region in this context.

Listen to the discussion in the latest episode of the MERICS experts’ podcast.

Kevin Rudd, Isabel Hilton and Jonathan Hillman on global challenges in 2021

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