The primary aim of Chinese foreign policy in the months to come will be to “reset its economy and win back friends.” The immediate focus of this appears to be European countries.
From Beijing’s perspective, this is essential given the backlash it has faced both internally and from governments of the West over its zero-COVID policy, and the Communist Party of China (CPC’s) crackdown on the private sector which caused the bursting of its property market bubble and ripple effects for real estate and big technology firms across the globe.
An important additive factor is China's decision to not take a firm stance against Russia’s invasion of Ukraine. Moreover, as trends in de-globalisation have materialised in the post-pandemic world order, competition in high technology has furthered the US-China rivalry, and so have narratives surrounding decoupling, diversification of supply chains, and reducing dependence on China.
China's Economic Slump
Domestically, the slowdown in the Chinese economy began even before the pandemic. Data shows that under Xi, GDP growth has declined from 7.8 percent in 2013 to just 3 per cent last year. Exports, as a percentage of GDP, are also down by 4 percent in the same period, and so is the government tax revenue which fell from 9.9 percent in 2013 to 8.09 percent (of GDP) in 2020.
Now, despite international agencies like the International Monetary Fund (IMF) revising their growth projections for 2023 from around 4 percent to above 5 percent, there will be a likely decline in factors affecting growth across sectors. Despite positive growth in retail sales due to Spring Festival celebrations, significant economic challenges exist.
These include an overall slump in demand, an ironic focus on “opening up”, and expanding the role of the private sector in the market on the one hand and dual circulation on the other, and local protectionism that aims to foster small and medium enterprises while creating a more “controllable” industrial system with foreign participation encouraged, but in-check.
Moreover, with a target on the back of high-net-worth individuals as part of a state-led crackdown on the “disorderly expansion of capital,” the private sector, led by property, education, and tech sectors, is unlikely to see a path-breaking revival. Clearly, a larger trade-off between near-term stimulation of economic growth and long-term structural financial challenges is at play.
In this context, China needs not just a sound economic and financial policy, but a moderate foreign policy tone that lets its economic allies and supply chain partners regain trust.
China's Relations With Europe
Here, an article by the Director of China’s Central Foreign Affairs Commission, Wang Yi, in the January edition of CPC’s Qiushi magazine, points to an important front on relations with Europe.
It says that “China will achieve closer high-level communication with Europe.” The point about Europe is critical to address the question of whether Chinese foreign policy will become more accommodating in 2023.
More than the US, China has to prevent its decoupling with the European Union. This is because the EU is one of China’s largest trading partners, and if one is to accept the proposition that domestic factors do indeed shape foreign policy.
China needs the EU to meet domestic economic demands, and expand consumption and growth in critical sectors. Secondly, good relations with the EU balance the China-US rivalry scale. This is why China’s “charm offensive” is and will continue to focus on the EU.
Recent developments bear this out. First, German Chancellor Olaf Scholz visited China in November 2022 followed by European Council President Charles Michel’s visit in December. Then, Italian Prime Minister Georgia Meloni accepted Xi’s invitation to visit Beijing on the sidelines of the G20 Summit in December last year, and now French President Emmanuel Macron is signaling intent to visit the country as soon as possible.
Will China's Charm Offensive Work?
Both Macron and Scholz have also opposed decoupling from China, even though they have talked about reducing dependency. At the World Economic Forum in Davos, Switzerland, in January 2023, Chinese Vice Premier Liu He also dialled down the heat on “wolf-warrior-ism” by pledging to strengthen cooperation, uphold “international division of labour,” and enable the “free flow of production factors.”
At the same Forum, European Commission President Ursula von der Leyen said that “China heavily subsidizes its industry and restricts access to its market for EU companies…[and so] we need to focus on de-risking rather than decoupling.”
This does not, however, mean that China’s charm offensive has worked or will work. Grave challenges exist in China’s EU outreach.
The most pertinent is the erosion of trust in the latter due to China’s inability to condemn the Russian invasion of Ukraine outright. There is absolutely no softening of the stance China has assumed on the issue, and instead, more strategic signaling is underway on expanding China-Russia bilateral relations. Wang Yi’s above-mentioned article also stated that in the coming year, “China will deepen strategic mutual trust and mutually beneficial collaboration with Russia.”
China has also reportedly continued to export dual-use military technology to Russia, including components like computer chips and infrared cameras, the export of which is sanctioned by the US and its allies. So as far as the question of moderation goes, there is a great game of balance at play. On the one hand, Xi is busy wooing China’s largest trading partner, and on the other, ties with Russia are advancing on solid footing.
Undermining US Is China's Biggest Weapon
Secondly, business isn’t going about as usual. Even though the EU focuses on diversifying and “de-risking” more than decoupling, European investors and businessmen operating in China continue to lose confidence.
As per the European Chamber Business Survey 2022, between 2019 and 2022, the difficulty of doing business in China has increased from 53 per cent to 60 per cent. Respondents from the pharma sector, for example, reveal noteworthy results.
While a major chunk of them (79 per cent) believed that business became more difficult to conduct in China year-on-year, 100 per cent of them affirmed that their revenue either increased (67 per cent) or remained the same (33 per cent) in 2021-22 as compared to the previous fiscal year. This could be explained by the Chinese government’s continued endeavours to crack down on the unevenly high growth of the largest-earning foreign private businesses in the country.
Another explanatory factor is the volume-based procurement policy of the Chinese government—the bigger the contract to sell pharmaceutical drugs in the Chinese market, the lower the drugs have to be priced to win it.
Overall, most European companies that experienced difficulty in expanding business and/or sustaining revenue earnings have accredited it to COVID-induced restrictions. And this is why the scrapping of the Zero-COVID policy has created some hope for these businesses.
The biggest tool in China’s Europe outreach kit is undermining America’s image by laying great emphasis on the US’ attempt to harm both European and Chinese interests.
Europe's US-China Dilemma
European officials have been quoted as saying that China overuses the idea that the US military and American energy firms are actually earning profits from the Russia-Ukraine war, while letting the EU suffer the consequences of rising gas and oil prices. This is reflective of a gripping reality that there is fragmentation within the EU on not just how to deal with China, but also the US. Calls for greater strategic autonomy for the EU are underway, even as there is a significant improvement in EU-US relations since Trump.
On the one hand, the EU has great economic costs to pay if it detaches itself from China completely, but on the other, the EU is still largely inclined to join the American initiative to hinder high-technology innovation efforts in China (especially 5G, Artificial Intelligence, Quantum, and semiconductors).
At the same time, the EU has expressed apprehensions surrounding provisions of America’s Inflation Reduction Act, which European Commissioner for Trade Valdis Dombrovskis has termed “discriminatory” because of its focus on expanding the profitability and competitiveness of North American firms while suggesting that Europe replace is energy dependence on Russian providers of oil and gas with American ones.
The frictions this has created are being exploited by China, and are encouraging the US to come to the negotiation table with the EU on how concerning provisions can be “tweaked” to benefit both parties.
Hence, in a period of tumult in China-EU and EU-US relations, it would be interesting to observe whether China’s charm offensive can leverage more investment from European businesses amidst lowering investor confidence, while boosting its own image against the US and balancing expectations on the Russia-Ukraine front.
(Anushka Saxena is a China Studies Research Analyst with the Takshashila Institution. This is a personal blog, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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