Economic Ties Stabilize China-EU Relations




SINCE China and the EU first established diplomatic relations four decades ago, dialogue and cooperation have played key roles, in spite of occasional setbacks. Frequent diplomatic exchanges between European and Chinese leaders on official visits have elevated bilateral ties to a new level of stability and maturity. At the core of this stability lies rapidly developing economic relations and trade between China and the EU. Despite occasional disagreements on policy, win-win cooperation remains the main focus for both parties. Both the EU and China are committed to enhancing their partnership to bring peace, economic growth and reform.


Shaky Progress


2016 saw a number of incidents that struck a discordant note in the overall harmony of these bilateral ties. A ruling by the European Parliament on May 12, proved a hindrance to China’s bid for market economy status; 546 MEPs voted against treating China as a market economy and only 28 MEPs voted in favor, while 77 abstained. According to EU regulations, the European Commission must put forward a bill on whether market economy status should be granted to China, and this would only officially take effect after being voted through by both the European Parliament and the EU Council; the current resolution is, therefore, a “non-binding” one.


Another case in point was the referendum on Brexit on June 24. The unexpected move to leave the EU was made after 51.9 percent of Britain’s population voted in favor, versus 48.1 percent against. The decision had an immediate impact on economic agreements between China and the U.K. On July 29, just 11 hours before Britain was due to sign a deal with China and France to develop Hinkley Point nuclear power station, U.K. Business Secretary Greg Clark announced that the signing would be postponed. Fortunately, the decision to suspend the project was later overturned by new Prime Minister Teresa May.


In October, Chinese companies were challenged on two acquisitions, which somewhat chilled trading relations between China and Germany. The bid by China’s Fujian Grand Chip Investment Fund LP to acquire German microchip equipment manufacturer Aixtron, was withdrawn by Germany’s Federal Ministry for Economic Affairs and Energy, which stated that it would reappraise the deal. A few days later, the Ministry announced that it was suspending a Chinese consortium’s acquisition of LEDVANCE, a lamp brand of Osram, pending an investigation.


Focus on Win-Win Cooperation


In spite of these hiccups, China and the EU remain committed to win-win cooperation. Bilateral trade volume has risen and both sides are playing an increasingly important role in each other’s trade. Eurostat reveals that the EU-China trade volume reached €520.75 billion in 2015. EU exports to China stood at €170.39 billion, forming 9.5 percent of the EU’s gross exports. Imports from China clocked in at €350.36 billion, accounting for 20.3 percent of the EU’s gross imports. In the last decade, bilateral trade volume more than doubled. Today, China is the EU’s second largest trading partner, while the EU has remained China’s top trading partner for 12 consecutive years.





The 11th EU-China Business and Technology Cooperation Fair, whose aim is to explore cooperation in promoting the transition to a green economy and sustainable development of enterprises, opened in Chengdu on November 3, 2016.



In addition, increased mutual investment presents considerable potential for further growth. According to Eurostat, the EU’s direct investment stock in China had kept increasing between 2008 and 2012. In 2011, it passed €100 billion for the first time and the following year it continued to grow, reaching €120.73 billion, a 120 percent increase over 2008’s figure.


In the last few years, a new trend has appeared in bilateral investment ties; Chinese investment in the EU is fast gaining momentum. The 2014 Statistical Bulletin of China’s Outward Foreign Direct Investment shows that China’s direct investment stock in the EU rose nearly 71 times from 2005 to 2014 (see Figure 1). These statistics do not appear to have been updated by Eurostat since 2012. Despite small anomalies between Eurostat’s data and that of the COFDI bulletin, all numbers indicate an increase in Chinese investment in the EU.





In spite of this trend, some European countries are worried that mergers and acquisition by Chinese companies may drain their advanced technology resources and even threaten their national security. Misunderstandings and prejudice may partly explain why the EU has frequently imposed restrictions on Chinese investors. In fact, China’s investment in Europe is still in its initial phase, and makes up a rather small part of foreign investment in the EU. According to Eurostat data, U.S. direct investment stock in the EU stood at €1.54 trillion in 2012, accounting for nearly 40 percent of the direct investment stock that the EU has attracted from non-EU economies. China’s investment, however, formed less than one percent of the total, at €27.43 billion, and China’s direct investment in the EU is much smaller than that of the EU in China. In 2012, the EU directly invested €120.73 billion in China, which was 4.4 times that of China’s direct investment stock in the EU. Clearly Europe is not likely to be “occupied” by Chinese enterprises. Rather, it is hoped that Chinese investors will boost European economic recovery. China and the EU must uphold the principle of equality and mutual benefit in order to facilitate the stable growth of mutual investment, enhance bilateral investment treaty negotiations, and foster a favorable investment environment for both EU and Chinese businesses.   


Meanwhile, financial cooperation between China and the EU continues to increase and highlights bilateral relations in economy and trade. As the scale of investment between China and Germany expands, both government and business leaders are committed to strengthening financial cooperation to meet the growing demand for payments in RMB, an inevitable outcome of the rapid growth of mutual trade and investment. In recent years, new deals have been made between China and Germany: a currency swap agreement was signed; Bank of China’s Frankfurt Branch was designated as a clearing bank for RMB; Germany gained RMB 80 billion as a qualified foreign institutional investor’s capital amount; and the China Europe International Exchange (CEINEX) was established. CEINEX satisfies both Chinese and German investors’ demands for RMB in financing and investment, bolsters internationalization of the RMB, and assisted in making Frankfurt the trading and pricing center for RMB assets.





The European Chamber of Commerce in China released the European Business in China Position Paper 2016/2017 in Beijing on September 1, 2016.



On April 19, 2016, Bank of China officially opened its new branch in Stuttgart, its sixth branch in Germany after having already established branches in Frankfurt, Hamburg, Düsseldorf, Berlin, and Munich. Bank of China now covers all major German cities, forming a nationwide network to facilitate investment and financing for Chinese enterprises operating locally. Stuttgart is the capital of Baden-Württemberg which boasts a well-developed economy with strong industry and high-tech development. World-famous companies like Daimler-Benz are situated there. Bank of China’s Stuttgart branch can also facilitate German companies’ investment in China and create more opportunities for bilateral trade and financial cooperation.


Creating More Opportunities


An investment agreement between China and the EU should be drawn up as soon as possible together with feasibility studies on a China-EU Free Trade Agreement. The increase in economic and trade cooperation will no doubt create friction, so it will be necessary to work through any possible disputes with dialogue and consultation in order to ensure that the remedies are mutually beneficial. China and Europe have a common interest in the development of infrastructure, upgrades in industry, scientific innovation, the development of green energy and urbanization. Huge potential exists for investment in these areas. A China-EU Investment Agreement encompassing investment protection, market threshold, and investment environment will provide an institutional guarantee to both Chinese and European companies.


Strengthening cooperation in science and technology will not only assist China’s efforts to upgrade its national industry but also invigorate economic growth in Europe. The EU has adopted several regulations regarding high-tech exports to China, which have been a setback for bilateral high-tech trade. If the EU could lower export restrictions on the new energy, new materials, and environmentally-friendly means of production that are desperately needed in China, European technology could reach a vast market which would assist in upgrading the current industrial structure and transform the model of economic development in China, while also injecting the European economy with new impetus in this post-crisis era.


Improving financial and monetary cooperation will maintain the stability of the euro and accelerate the internationalization of the RMB. European countries have been weathering the storm of the debt crisis while trying to facilitate the integration of EU nations. To help Europe at this difficult time, China unswervingly supported the euro and assisted integration in Europe through the acquisition of bonds and increasing imports. In return, the strong infrastructure of the European financial centers facilitate the internationalization of the RMB and European nations can use the RMB to make a global impact.


People-to-people exchanges are at the heart of the link between China and Europe, and guarantee the sustainable development of sound economic and trade relations. China and Europe have diverse values and ideologies; misunderstandings and prejudice easily occur. Only through mutual understanding can two strangers become real friends. People-to-people ties play an important role in promoting understanding. Since the signing of a joint declaration at the first China-EU High Level People-to-People Dialogue in April 2012, some positive outcomes have already emerged. At present there are six million personnel exchanges between China and Europe annually – with 16,000 people travelling every day. According to statistics from the China National Tourism Administration, 2,984,100 European tourists travelled to China in 2015 and the number of Chinese citizens choosing Europe as their top travel destination increased to 3,427,600. In the last decade, over 30,000 students and researchers from China and the EU have studied abroad or had scholarly exchanges with universities or institutes sponsored by mutual scholarship.


China and EU should also focus on strengthening cooperation in global economic governance. Both active advocators of global economic governance reform, China and the EU share much common ground. The two sides should advance the process of institutionalizing the G20, making it the fundamental platform for global economic governance. They should also advance international financial institutional reform, increase the diversity of the monetary system and overturn the continued dominance of the US dollar, so as to create a fairer international monetary system that will help develop a stable global economy. China and the EU are major players in the global trading system. Strengthening cooperation in the formation of global trade rules and rejecting trade protectionism in any form is their mutual responsibility.


DR. LI GANG is an assistant research fellow with the Institute of European Studies at the Chinese Academy of Social Sciences.