The Presidents of France and of the European Commission, Emmanuel Macron and Ursula von der Leyen, arrive in Beijing this week for difficult talks that come at a critical moment in China's development as it seeks to recover from three years of Covid.
Foreign investment in China is falling and the two sides have still not ratified the China-EU Comprehensive Agreement on Investment (CAI) agreed in 2020. The shadow of Russia's invasion of Ukraine hangs heavy over the talks.
"China's approach to the war will determine ties," said von der Leyen last week. "Far from being put off by the atrocious and illegal invasion of Ukraine, President Xi is maintaining his ‘no-limits friendship' with Putin, China is becoming more repressive at home and more assertive abroad. Beijing's clear goal is a systemic change of the international order, with China at its centre."
Images of Vladimir Putin and Xi smiling together in Moscow last month (March) played very badly in Europe, where people and governments regard Putin as a second Adolf Hitler.
In the business sector, ties are strong. In 2022, China was the third largest partner for EU exports of goods, with nine percent, and the largest partner for EU imports of goods, with 20.8 per cent. Germany is the biggest European investor in China.
In a speech last Thursday, von der Leyen said that the EU must not decouple from China. "We need to focus on de-risk, not decouple. Our relations are not black or white, and our response cannot be either," she said.
But an article by Shen Jianguang, chief economist at JD Digits, published last month (March) in China Chief Economist Forum, found that China had a decline of 40 per cent in foreign direct investment in 2022, with only 11.9 per cent of global FDI in the second half of 2022. The number of foreign manufacturing enterprises in China fell from more than 76000 in 2009 to less than 44000 last year, Shen said.
A Position Paper of the European Union Chamber of Commerce in China, released in February, said that, while those who have already established their presence in China were not looking to leave, there was increasing consideration of the possibility of shifting planned investments to other markets due to weak domestic demand and supply chain disruptions. "Even though the Chamber wants to help China fulfill its enormous economic potential, action from Chinese decision-makers is needed to improve the business environment further and promote constructive dialogue," it said.
Jorg Wuttke, Chamber President, said GDP growth of more than 4.5 per cent in China this year was unrealistic. "We believe growth as low as 0.5 per cent is within the realm of the possible. If Beijing starts crucial, long-deferred structural reforms in earnest, growth between 1-3 per cent in 2023 and over the medium term, would be a reasonable expectation," he said.
For its part, China says that it is up to the European side to take the initiative. "Who in their right mind would abandon such a thriving market as big as China?" said Fu Cong, China's ambassador to the EU last week. "It will only be at their own peril for European politicians to undermine positive business sentiment toward China."
He said that European governments and politicians should resist unwarranted pressure from the U.S. to decouple from China. He criticised the Netherlands for having yielded to the pressure from Washington and announcing restrictions on exports to China of high-end semiconductor-making technology this year. "There is no fundamental conflict of interest between China and the EU," he said.
He said he hoped the EU would muster enough courage and political force to give final approval to the CAI. After seven years of negotiations, the two sides signed the deal at the end of 2020.
In March 2021, the EU imposed sanctions on four Chinese officials believed to be linked to the alleged human rights abuses in the western region of Xinjiang. This led to immediate Chinese counter-sanctions on four EU entities and 10 EU officials, including members of the European Parliament. While the sanctions remain in place, the CAI cannot be ratified.
Von der Leyen and Macron will press the Chinese leaders not to provide military aid to Russia and ask President Xi to call or meet Ukrainian president Volodymyr Zelenskyy.
There is a dense agenda. The two sides have much to do to achieve a positive result.