De-Risk, Not Decouple

The latest strategy of the EU towards China 

Editor's Note: The Boao Forum for Asia held its annual conference from March 28 to 31 in Hainan, China, with the focus of solidarity and cooperation in the uncertain world. Spanish Prime Minister Sánchez visits China on the 50th anniversary of the establishment of diplomatic relations between China and Spanish and attended the opening ceremony. President of the European Commission von der Leyen delivered a speech on China-EU relations this week before her visit to China with French President Macron at the beginning of April, which will be mainly discussed in this newsletter. As always, our CCCEU Weekly Update is here to keep you informed about the latest developments in China-EU relations. Enjoy your reading and have a lovely weekend!

On March 30, President of the European Commission von der Leyen delivered a speech on China-EU relations at the Mercator Institute for China Studies and the European Policy Center. This speech was an important statement made by von der Leyen before her joint visit to China with French President Macron at the beginning of April, reflecting the logic of EU for China-EU relations in the future.

From the perspective of the strategic positioning of China-EU relations, von der Leyen pointed out that the relationship between the EU and China is one of the most intricate and important anywhere in the world, and how to manage it will be a determining factor for the future economic prosperity and security of the EU. She affirmed China's significant achievements in rapid economic growth, poverty alleviation and technological progress during the past half century, and mentioned that "China is a fascinating and complex mix of history, progress and challenges. And it will define this century." At the same time, she also affirmed the joint efforts and achievements of the EU and China in dealing with global climate change, crisis and conflict.

From the current situation of China-EU relations, von der Leyen said frankly that the relationship between the two sides has become more distant and more difficult in the last few years, and attributed it to "a very deliberate hardening of China's overall strategic posture for some time". She believes that China is currently undergoing triple changes: First, it is moving into a new era of security and control, including the security of emerging technologies such as quantum computing, robotics, artificial intelligence, high-speed rail, renewable energy, and the economic security of "making China less dependent on the world and the world more dependent on China" in terms of raw material supply and production chain. Second, the need for security and control trumps the logic of free markets and open trade; The third is to promote the systematic change of the international order with China at its center, which is reflected in the "the Belt and Road" initiative, the foundation of a new international bank, and China's recent practices on issues such as the Russia-Ukraine conflict and the reconciliation between Saudi Arabia and Iran. Given the significant changes that have taken place in the world and China in the past three years, the EU plans to reassess the EU-China Comprehensive Investment Agreement based on a broader China strategy.

From the perspective of the future trend of China-EU relations, von der Leyen stated that how China continues to interact with Russia will be a determining factor for EU-China relations going forward. The EU's strategy towards China focus on de-risk – not de-couple. "It is neither viable – nor in Europe's interest – to decouple from China. The relations are not black or white, and need not to be defensive.". First of all, she acknowledged that most of bilateral trade in goods and services remains mutually beneficial and 'un-risky', but stressed that unbalances are increasing and are affected by distortions created by China. Therefore, she proposed that the two sides need to rebalance this relationship on the basis of transparency, predictability, and reciprocity to ensure that trade and investment promote the prosperity of China and the EU. Secondly, she emphasized that "diplomatic de-risking" and "economic de-risking" are the two main directions for realizing the EU's de-risking towards China.

In terms of "diplomatic de-risking", the EU will maintain diplomatic stability and open communication with China, discuss how to make competition fairer and fairer and more disciplined, and how to work together productively in the global system in the future and on which challenges, such as climate change, natural protection, pandemic preparedness, nuclear non-proliferation, global financial stability, etc.

In terms of "economic de-risking", she proposed four pillars. First, enhance the industrial competitiveness and resilience of the EU itself. Specifically, through the Net Zero Industry Act and the Critical Raw Materials Act, the EU will promote manufacturing localization and supply diversification, reduce the dependence on China, and shape, maintain, and strengthen the EU's economic advantages in clean technology, cyber and maritime, space and digital, defense and innovation. The second is to make full use of the existing trade toolbox of the EU, including 5G, foreign direct investment, export control, etc., especially the recently adopted Foreign Subsidies Regulations. Third, develop new defensive tools for some critical sectors, which may involve sensitive high-tech fields such as microelectronics, quantum computing, robotics, artificial intelligence, biotech, to avoid the leakage of emerging and sensitive technologies through investment and exports. The Commission will present some initial ideas as part of the new Economic Security Strategy later this year. Fourth, maintain alignment with other partners. On the basis of fully utilizing the signed trade agreements, the EU will focus on economies such as New Zealand, Australia, India, ASEAN, and Mercosur partners with which the EU have not yet signed free trade agreements. It will strengthen cooperation in areas such as digital and clean technology through the Trade and Technology Council of India and the EU-Japan Green Alliance, and invest in infrastructure in developing countries through the Global Gateway strategy.

With regard to the upcoming visit to China, von der Leyen regards it as an important part of "diplomacy to de-risking", and points out that "the future cooperation between China and the EU in the global system" is also an important topic. She proposed to build on some islands of opportunity, such as climate change and natural conservation, to seek more fruitful cooperation.

Europe-China trade down 3.7% in January

According to Eurostat, in January 2023, EU trade with China amounted to €64.7 billion, down 3.7% year-on-year. Among them, exports to China were 17.4 billion euros, up 7.4%; imports from China were 47.3 billion euros, down 7.3%; the deficit was 29.9 billion euros, down 14.1%. China is the EU's second largest trading partner, the first source of imports and the third largest export market, accounting for 15.0%, 20.3% and 8.8% respectively. The United States continues to remain the EU's top trading partner, with a total trade volume of 67.3 billion euros, of which imports and exports were 30.3 billion euros and 37 billion euros, an increase of 30.6% and 3.9%, respectively.

IMF: Global Portfolio Asset Holdings Decrease Amid Elevated Uncertainty

IMF's latest Coordinated Portfolio Investment Survey (CPIS) shows that, amid multiple shocks, global portfolio investment asset holdings decreased by 15 percent in the first half of last year, the most since 2008. The decrease is attributed to both the reduction in investments and valuation effects.

The drop was largely driven by a decline in investments by the United States (in Germany and the Netherlands), Luxembourg (in the United States, Ireland, and Japan), Ireland (in the United States and United Kingdom), and Japan (mainly in the United States). On the other hand, portfolio investment holdings of the Cayman Islands increased by 6.2 percent due to investments in the United States and Japan.

EU strikes deal on renewable energy law, agrees 42.5% target by 2030

According to euroactiv, EU legislators reached an agreement on the renewables law in the early hours of Thursday (30 March) after a long night of negotiations which started at 16.00 CET the day before.

The political deal reached by the European Parliament, the EU's executive Commission and EU member states includes a legally-binding target to "raise the share of renewable energy in the EU's overall energy consumption to 42.5% by 2030," according to a statement released after the talks.

Britain agrees to join trans-Pacific trade pact

According to Xinhua, Britain has decided to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Prime Minister Rishi Sunak announced Friday.

This is its biggest trade deal since Brexit following 21 months of negotiations.

China and France complete first LNG gas trade in Chinese Yuan

China National Offshore Oil Corporation (CNOOC Group) and France's TotalEnergies have just completed their first RMB settlement transaction for LNG, with a volume of 65,000 tonnes.

According to Xinhua News Agency, CNOOC and France's TotalEnergies completed the first cross-border RMB settlement transaction of LNG on 28th, which is also the first RMB settlement of imported LNG procurement in China, marking a substantial step in China's exploration of cross-border RMB settlement transactions in the oil and gas trade sector.

What are experts talking about?

 "Variables of China-Europe Cooperation and Response" is an interview with Liu Zuokui, Deputy Director of the Institute of European Studies of Chinese Academy of Social Sciences,. The article points out that Europe wants security guarantees, but what we can offer is economic cooperation, which is a structural "mismatch". This mismatch is not something that China can change unilaterally, but can only maintain strategic patience and look forward to an early end to the Russian-Ukrainian conflict.

"Banking turbulence is not a reason to pause monetary tightening" by Zsolt Darvas. The author believes that despite calls for interest rate hikes to be paused, both the ECB and Federal raised rates- which was the right decision. The article pointed out that in the context of high inflation, low unemployment, robust wage growth and so-far feeble interest rate hikes, isolated banking problems do not justify a pause in monetary tightening.

Please note: the English version of this issue is slightly different from our Chinese one. The views and opinions expressed in this article do not necessarily reflect the official position of the CCCEU.