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China Trends #20 - Critical Infrastructures and Power Games in EU-China Relations

China Trends #20 - Critical Infrastructures and Power Games in EU-China Relations
 Mathieu Duchâtel
Resident Senior Fellow and Director of International Studies
 Misha Lu
Lead Reporter of DIGITIMES Asia
 Anders Hove
Senior Research Fellow at Oxford Institute for Energy Studies
 Léonie Allard
Visiting Fellow at the Atlantic Council’s Europe Center
 Pierre Pinhas
Project Officer - Asia Program

By Mathieu Duchâtel

Over the past decade, numerous factors have contributed to the deterioration of EU-China relations. Of those factors, China’s investment in strategic infrastructure is often overlooked despite the role it played in nurturing mutual distrust, and in prompting Europe to adopt the much more defensive stance that it has now embraced.

Who remembers today that during their 2013 summit in Beijing, the two sides concluded an EU-China 2020 Agenda for Strategic Cooperation? In hindsight, this document represents the pinnacle of the optimistic engagement strategy that still prevailed in Europe at that time. Economically, the highest priority mentioned was negotiating an Investment Agreement that would cover investment protection and market access, presented as a precursor to a "deep and comprehensive FTA". Europeans had long hoped China would cooperate on international security issues, but the Hu Jintao-Wen Jiabao (2002-2012) leadership viewed the relationship primarily through the lens of trade, access to the European Union single market, and European technology and investment. Thus, it was surprising when China agreed to include a "peace and security pillar" in the bilateral agenda, aiming for a secure cyberspace, a strengthened human rights dialogue, and enhanced consultations on Africa, Central Asia, Latin America and regions neighboring both the European Union and China.

The 2013 summit was the second EU-China meeting since Xi Jinping had risen to supreme power in China, as the top leader of the state, the military, and the Communist Party. Some in Europe optimistically (and briefly) believed that the end of the Hu-Wen era would lead to the removal of at least some of the obstacles hindering the development of the EU-China partnership.

Yet, with Xi in charge, the exact opposite occurred: obstacles have accumulated, leading to growing disappointment and mutual distrust. On the international security front, after a decade without any record of significant cooperation despite the good intentions displayed in the 2013 communiqué, China and the European Union have now ended on opposite sides of the Russia-Ukraine war, so much so that some in Europe argue China should be considered a threat to European security. Economically, there is growing concern that the European Union and China may be in the early stages of a trade war, especially if the United States intensifies its trade measures against China after the November 2024 presidential elections and United States pressure on Europe to align intensifies - even though one may also think that strong America trade measures against China would lead China to become more flexible towards Europe. For now, what we see is the culmination of a trend that has developed over the past decade, during which the European Union has lacked the leverage to address the imbalances and asymmetries in EU-China relations.

Some in Europe optimistically (and briefly) believed that the end of the Hu-Wen era would lead to the removal of at least some of the obstacles hindering the development of the EU-China partnership.

The 2020 conclusion of the Comprehensive Agreement on Investment, often cited by China as evidence of its willingness to be flexible on market access, would have only marginally addressed the issues — and the agreement is now frozen due to political disagreements. Instead, the European Union focused on building a toolbox of defensive measures. Some of these are new, such as the Anti-Coercion Instrument (ACI), the FDI screening regulation, and the International Procurement Instrument. Others have been revised and updated, like dual-use export controls and anti-subsidy measures. When consultations fail, strengthening one’s defenses becomes the only viable path to rebalance an asymmetric relationship.

Infrastructure investment has been the backbone of China’s economic miracle since the launch of economic reforms in the late 1970s, creating new opportunities for private entrepreneurship - and enormous market scale for State-Owned Enterprises (SOEs). However, since Xi Jinping’s declared "New Era"(新时代), strategic infrastructure has evolved beyond purely economic development. The combination of China’s market scale, Xi’s vision for China’s global leadership, and the tendency of large Chinese infrastructure companies to seek vertical integration shifted Europe’s perspective, from one centered on economic development to one focused on unfair asymmetries and security risks posed by excessive leverage and access to sensitive data.

Consider three companies in three different sectors: COSCO (China Ocean Shipping Company), State Grid Corporation of China, and Huawei Technologies. Each operates in a sector deemed strategically important by the Chinese government: respectively, global trade and logistics, energy infrastructure and distribution, and telecommunications and technology. Each is heavily investing in innovation. Each has encountered politicized resistance in their expansion efforts in Europe - either on grounds of national security, or because of the distortions to free market competition induced by Chinese state capitalism.

COSCO’s dominance in maritime logistics stems from its comprehensive horizontal and vertical integration, owning and operating shipping lines, carriers, specialized vessels, terminals, shipyards, and managing supply chain logistics. COSCO aligns with China’s national security objectives by integrating civilian maritime assets with military operations, supporting the PLA Navy and enhancing Chinese influence over major trade routes.

State Grid Corporation, which supplies electricity to over a billion people in 26 Chinese provinces, with annual revenues exceeding $450 billion, operates on a scale comparable to entire countries. It wields significant political influence within China, and plays a crucial role in shaping energy policies, including China's dual carbon goals (双碳). The company focuses on ultra-high voltage (UHV) transmission lines, investing a record $76 billion in 2023 alone to expand UHV corridors and support clean energy integration. Additionally, State Grid is pursuing global expansion through strategic investments in power transmission projects.

Infrastructure investment has been the backbone of China’s economic miracle since the launch of economic reforms in the late 1970s.

Huawei has adeptly navigated the United States sanctions that many believed in 2020 and 2021 would decimate its smartphone and semiconductor design businesses. Leveraging its privileged access to China’s vast domestic market and substantial investments in AI, cloud computing, and operating systems, Huawei experienced a significant profit surge in early 2024. In 2023, the company introduced its "All Intelligence" strategy, aiming to connect everything by extending the reach of large-scale AI models to individuals, families, and organizations at the edge. This strategy seeks to seamlessly integrate Huawei’s various business sectors.

There remains a certain ambivalence in Europe's approach to relations with large Chinese corporate actors, particularly those involved in critical infrastructure. While there is a general awareness that the political system of the People's Republic of China enables the possible state mobilization of these companies as instruments of influence, control and possibly even retaliation during periods of political tensions, there is a lack of investment in understanding their autonomous strategies and operational methods. 

Looking ahead, Europe's dominant policy framework is likely to prioritize economic security, aiming to safeguard against excessive leverage, influence, and control risks, as well as the market distortions caused by state capitalism practices. In this de-risking process, Europe's defensive measures will be shaped by the interplay of three factors: the intensification of American actions against Chinese companies, the degree of Chinese assertiveness in East Asia and in support of Russian imperialism, and the attractiveness of China's critical infrastructure offerings in comparison with alternatives – including alternatives to be found in Europe, from European providers of the continent’s infrastructure needs to overseas activities within or outside the Global Gateway framework.

Given the scale of the challenge and regardless of the exact form of the deterioration of the international security environment that could come, it is urgent for Europe to invest in intelligence capabilities to better manage risks, to keep on prioritizing the construction of an efficient defensive toolbox, but also to embrace a vision of critical infrastructure as a source of power in international relations. 

Copyright image : Dan Sandoval / Ningbo Information Office

Charting Huawei's Trajectory through Three Periods of Transformation 

By Misha Lu

564%: this is Huawei’s year-on-year profit surge in the first quarter of 2024. This is a vibrant demonstration of the company’s revival and ability to navigate American sanctions. DIGITIMES Asia’s lead journalist and researcher Misha Lu provides an instructive overview of the history of Huawei’s transformation as perceived by Chinese industry analysts, from the "start-up period" to its latest "All Intelligence" strategy. Experts also highlight the pivotal moment fifteen years ago when Apple’s iPhone success altered Huawei’s development trajectory. However, Chinese commentators continue to emphasize the challenges ahead, given the increasing influence of geopolitical forces.

▶ Read the article

Grid Infrastructure as an Energy Transition Facilitator: The Role of China’s State Grid

By Anders Hove

State Grid stands out as the world’s largest electric utility company, distinguished by its extensive national footprint and substantial overseas investments. It also wields significant political influence, shaping Chinese energy policies. Anders Hove from the Oxford Institute for Energy Studies explores the company’s development strategy, highlighting China’s capacity to implement efficient green transition reforms. He emphasizes China’s leadership in Ultra-High Voltage (UHV) transmission lines. However, these reforms face obstacles due to a historical reliance on long-term contracts, intra-province trading, and a persistent emphasis on energy security over low-carbon solutions.

▶ Read the article

Own and Control: China’s Systemic Approach to Global Shipping 

By Léonie Allard

Figures speak for themselves: COSCO's global footprint is breathtaking. As a state-owned entity, COSCO ranks fourth worldwide in container fleet capacity and holds stakes in 17 strategically located foreign ports. Léonie Allard, a Visiting Fellow at the Atlantic Council’s Europe Center, explains the factors behind COSCO's unique position. She highlights how COSCO serves as an unparalleled driver of China’s national maritime strategy and a powerful asset in its ambition to become a "global maritime power", with national security objectives also in consideration.

▶ Read the article

About China Trends

China Trends seeks understanding of China from Chinese language sources. In an era where the international news cycle is often about China, having a reality check on Chinese expressions often provides for more in-depth analysis of the logic at work in policies, and needed information about policy debates where they exist. China Trends is a quarterly publication by Institut Montaigne’s Asia Program, with each issue focusing on a single theme.

The introduction article to this edition of China Trends by Mathieu Duchâtel was also published by The Diplomat.

China Trends #20 - Critical Infrastructures and Power Games in EU-China Relations (22 pages)Download
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