Welcome to the 4th issue of the #CEEasia Briefing.
In this issue, we dissect the following topics:
- Chinese takeovers of European businesses amid COVID-19
- Momentum for Taiwan
- Between pandemic and democracy
- Japan’s changing COVID-19 strategy
Chinese takeovers of European businesses amid COVID-19
What’s going on? European Commission has been trying to respond to the COVID-19 by urging EU countries to take adequate measures to shield their businesses from potential economic impacts. Last week, the Commission drew attention to potential Chinese takeovers of European businesses as a threat to European markets. It urged European companies to increase its stakes in businesses that might be struggling amid falling global demand.
An example of such a behavior was reported last week in the UK where Imagination Technology underwent a hostile change in management, presumably timed to exploit chaos surrounding the COVID-19 crisis. In the Czech Republic, CITIC (a Chinese SOE) decided to exercise its option rights to become a majority shareholder of Medea, a media agency that controls much of ad revenues. This raised questions about the potential impact on media independence.
In her interview with the Financial Times, EU Competition chief Margrethe Vestager said that laws which aim to address more structural issues regarding the level-playing field of European and Chinese companies should be released in June 2020. The discussion surrounding these investments was brought up by security concerns connected to the ICT sector and the worry that the Chinese FDIs in Europe have been given little scrutiny.
Going deeper… A recent study by Mercator Institute of China Studies (MERICS) released in April suggests that the Chinese FDI in 2019 actually fell to 5-year-low. It also highlighted the decrease in Chinese investments by SOEs, partially an outcome of a changing regulatory environment in Europe. Rather than focusing on the automotive and manufacturing industry, more attention should be paid to consumer products and services which are becoming the main destination of Chinese investors.
In Central Europe: Geographically, Austria, Bulgaria, Czech Republic, Hungary, Poland and Slovakia made up 3% of Chinese FDI investments in Europe in 2019. This is a rise of 1 p.p. since 2018, but a substantial decrease since 2011 when Eastern Europe accounted for 20% of Chinese FDI inflow in Europe. Among these countries, Hungary continues to be the major recipient of Chinese FDI with cumulative value of EUR 2.4 billion in the period 2000-2019. This is still a small sum compared to Germany (22.7 billion) and the United Kingdom (50.3 billion).
Recently, Central European states started to change their outlook on Chinese investment and started adopting national FDI screening mechanisms to evaluate the security risks of non-EU investors. Slovakia is the only country in V4 that has not come up with a proposal for FDI screening. While Hungary and Poland have already implemented FDI screening rules, Czech Republic is currently working on the proposal.
What about trade? Despite some level of Chinese investment in the V4 region, takeovers pose a lower risk to regional business than actual economic effects caused by the pandemic. ‘‘The collapse in global trade and subdued demand of Chinese consumers will have a significant effect on industrial output in the CEE region.’’ As our research fellow Martin Sebena explained in his paper, bilateral trade statistics do not show the actual dependence of V4 economies on China due to the strong integration of supply chains in the EU. However, China has long been a major end consumer and the collapse in demand from Chinese customers will be felt throughout the Central European manufacturing cluster.
Further reading:
Financial Times: Vestager urges stakebuilding to block Chinese takeovers
MERICS: Chinese FDI in Europe: 2019 Update
CEIAS: Chinese Trade and Investment in the Visegrad Countries: Mapping Increased Exposure
CEIAS: When Investments are not in State Interest
REUTERS: British lawmaker says China is trying to exploit the COVID-19 crisis
O médiách: Čínská CITIC ovládla majoritu v Soukupovej agentúre Médea
Momentum for Taiwan
What’s going on? While China stepped up its narrative of emerging from the COVID-19 pandemic as a successful and responsible power, not that many states are buying it. Despite its ‘mask diplomacy’ handed out to a high number of states (not only) in Europe, its efforts of portraying itself in a positive light have provoked fiery reactions from many. In light of this, the response by Taiwan that seems to have successfully contained the virus in its early onset is increasingly perceived as an example to follow and might potentially open new doors for Taipei.
In Central Europe. In April, the Czech Republic signed a partnership with Taiwan to fight the COVID-19. The arrangement is the first of its kind and includes a shared cooperation in the fields of research and production of anti-coronavirus drugs and transfer of technologies and medical devices. In addition, Taiwan has also donated 7 million masks to Europe, an act for which it has been applauded by European Commission President Ursula von der Leyen.
Why does it matter? Rising scepticism of China in some European countries makes some analysts rethink whether Taiwan could improve its diplomatic ties with some of them. Czech Republic, for example, was recently at the center of attention given the controversy over its sister-city relationship with Beijing. Prague has decided to scrap its agreement with China and replaced it with a new sister-city relationship with Taipei. However, it remains unclear whether such moves could boost Taiwan’s overall recognition.
Further reading:
Nikkei Asian Review: Taiwan sees doors open in Europe as virus response earns respect
Focus Taiwan: Taiwan, Czech Republic forge partnership over COVID-19
The Diplomat: Sister-City Relations and Identity Politics: The Case of Prague, Beijing, Taipei, and Shanghai
Between pandemic and democracy
What’s going on? South Korea is currently perceived as a success story when it comes to efficient containment of the COVID-19 outbreak. Besides managing to slow the spread of the virus, the country has now also held a legislative election – one of the first major elections to be held during the pandemic. In addition, the governing Democratic Party obtained one of the largest parliamentary majority since the 1987 democratic transition. In fact, this success could be reflecting South Korea’s approach and containment of the virus.
In Central Europe. However, the way the elections were handled in South Korea now
prompts many analysts to compare it with Hungary and Poland, where there are worries over the country’s commitment to ensure democratic rights.
Our board member Lucia Husenicová thinks that we should pay more attention to these differences: “There is a striking difference in how three comparably old democracies reacted to the coronavirus crisis. When we look at South Korean which started its transformation to democracy in 1988, they have managed to organize National Assembly elections as planned on April 15, 2020. The main argument against postponement was that they cannot take the right to vote of people, as it would remind them of the authoritarian past. The elections are at the end a celebration of democracy. The fact that the decision was right is confirmed by the ever highest turnout in the last 28 years.”
On the other side of the aisle, we have Hungary and Poland where the democratic transformation started in 1989. In the last few years, Hungary has been slipping towards authoritarianism. Looking at the recent set of actions undertaken by the Hungarian prime minister – presumably as a response to the COVID-19 – he now basically holds uncontrolled power, with the sole principles of democracy being deconstructed. In Poland, the presidential elections to be held in May are now planned to be organized by post. This leads many to question whether the basic rights of voters will be guaranteed, taking into account that according to local reports only 20% of the population is planning to participate.’’
Why does it matter? The seriousness of the COVID-19 pandemics and its worldly impact is proving to be a useful tool for authoritarian regimes to double down on their policies. While each country focuses on containing the epidemic at home as its primary focus, the international community pays less attention to what is going on elsewhere in the world.
Such is the case with Cambodia, where Human Rights Watch raised their concerns over the draft of the emergency law that would grant its PM Hun Sen imbalanced powers endangering the constitutional rights of citizens. It is thus important for us to keep these questions in mind, especially as the COVID-19 might alter the way we exist in a society for good.
Discussions regarding the use of technology for contact-tracing, such as mobile apps currently in use in South Korea, have also been raised in Europe. Implementing such measures here should require a public discussion over privacy concerns and infringement on individual rights which some might see as problematic. Despite the current emergency, these discussions should not be sidelined and a proper balance between security and freedom should be maintained.
Further reading:
VOA: With Masks, Hand Sanitizer, and Gloves, South Koreans Vote During Pandemic
The Atlantic: The EU Watches as Hungary Kills Democracy
Financial Times: EU must call out the follies of Poland’s Covid-19 elections
Human Rights Watch: Cambodia: Emergency Bill Recipe for Dictatorship
Japan’s changing COVID-19 strategy
What’s going on? Japan declared a state of emergency, urging people to stay at home and companies to close as it is coping with the COVID-19 pandemic. The number of infections surpassed ten thousand cases with the capital of Tokyo being hit the hardest.
Abe Shinzo also announced an unprecedented 1 trillion USD stimulus package, equivalent to about a fifth of Japan’s annual GDP, to cover the potential economic impact of the epidemic, pay for the measures implemented by the government and protect businesses and jobs. More than 2 billion USD of the package have been earmarked to help Japanese companies move production out of China because of the pandemic and supply chain disruptions it caused.
Besides, the very much prioritized Tokyo Olympic Games which were due to start in July were concluded to be impossible to take place this summer and thus postponed.
The government has been criticized for its response to the disease despite a lower death rate. The international community blames Japan for purposefully keeping down the new case statistics by refraining from widespread testing while its citizens criticize Abe’s late response to the spread of the virus in the biggest cities.
Why does it matter? Japan’s economy had not been performing well even before the global pandemic of Covid-19. As the global economy started slowing down, tourism, entertainment industry and trade have also been impacted, bringing large-scale economic disruption to Japan which had been hoping for an economic lift. Japanese manufacturers have been lacking key components from Chinese factories which has disrupted supply chains and made Japanese companies shift production out of China, which might divide the two trading partners.
Meaning… While some Japanese companies might shift their production back to Japan, others will most likely seek another cheaper solution. This might be an opportunity for countries of Central Europe as they might become a possible “manufacturing destination” for bigger global economies due to their skilled and relatively cheap labor. On the other hand, the economic impact of the pandemic will probably force Japan as well as other countries to cut down on its foreign investments which might as well hit the CEE region since the V4 countries are cooperating closely with Asian partners, Japan and South Korea in particular.
Further reading:
New York Times: Can Japan’s Economy Get Any Worse? It May Soon Find Out
Bloomberg: Japan to Fund Firms to Shift Production Out of China
Deutsche Welle: Japan losing patience with government over COVID-19 response
