ISPI - Istituto per gli Studi di Politica Internazionale

06/05/2024 | Press release | Distributed by Public on 06/05/2024 03:07

Rain or Shine, the China-Hungary Relationship Can Weather It All

In early May 2024, Chinese President Xi Jinping visited Hungary, besides France and Serbia, during his five-day European tour. The visit marked the 75th anniversary of the establishment of diplomatic relations between Hungary and the People's Republic of China (PRC). Besides signing 16 agreements on a wide range of issues, China elevated its relationship with Hungary to the status of an 'all-weather comprehensive strategic partnership', putting Hungary just below Russia and Pakistan in importance. This gesture shows that Hungary's efforts are recognized and appreciated in Beijing especially at a time when fears of decoupling abound, the EU is stressing the need to de-risk relations with China, and trust and goodwill towards the Chinese government in the West is becoming a scarcity. Why, then, is Hungary bent on going against the grain and develop relations with China when many others are turning away from it?

Budapest's look set to the East

Hungary is historically, geographically, and politically bounded to Europe, and highly dependent on both trade and investment relations with developed, mainly-EU member states, yet it has enjoyed good political relations with China since the PRC was established. A new, fruitful period began after the turn of the millennium, following then-Prime Minister Péter Medgyessy's 2003 visit to Beijing. In the early 2000s, the Hungarian economy showed a rapid catch-up in regional comparison, the government pursued a policy of stimulating demand, and in addition to developing existing economic relationships with the West it began to look East. Although China was neglected by the first Orbán government (1998-2002), it has been receiving special attention since 2010 when the current administration came into office.

Hungary has become more open to Chinese business opportunities especially after the global economic and financial crisis, with the intention of decreasing its economic dependence on Western European markets. Against this background, a new foreign economic policy has been launched in 2012: the 'Eastern opening policy'. Disappointment coming from the slower-than-expected catching-up processes to Western Europe partly fuelled the turn to the East, which has been further reinforced by populistic tendencies in the past decade. Be it a new investment of a Chinese automotive company, the Shanghai-based Fudan University considering a campus in Budapest, or the arrival of half a million vaccines from China, the Hungarian government praises the results achieved, commends the deepening ties, and never fails to stress the relations are of particular importance for Hungary.

Balancing the economic equation

In the Hungarian government's perspective, China is a country bringing economic benefits through developing trade relations, growing inflows of Chinese investments, and, recently, infrastructure projects carried out by Chinese companies and financed by Chinese loans. This perception, however, does not necessarily reflect the reality when it comes to actual data on trade volume, stock of Chinese FDI, or implemented infrastructure projects. Trade between Hungary and China increased from the early 2000s onwards (relatively fast, from a very low base), coinciding with the accession of Central and Eastern European countries to the European Union in 2004. When China created the 16+1 initiative in 2012, trade volumes went up all around the region, including in Hungary. Yet, the increase was not balanced at all. While imports from China jumped substantially, exports to China remained at a modest level. In 2023, the trade deficit continued as Hungarian exports to China were slightly below 2 billion USD, while imports from China almost reached 10 billion USD.

When it comes to foreign direct investments (FDIs), China's economic impact grew significantly in Hungary over the past decade but remained relatively small as Chinese investments are still dwarfed by, for example, those of Germany. Based on OECD statistics, Chinese FDI stocks are around 3% of total inward FDI stocks in Hungary. With investments recently announced in the electric vehicle industry, this share will certainly increase but nowhere near to become dominant. Western European investors are still responsible for more than 60% of total FDI stocks, even as non-European investors from the United States, Japan, South Korea, or India are also important.

As for infrastructure, China has been involved in planning and negotiating several construction projects in Hungary for at least two decades now. A train connection between downtown Budapest and the capital airport, a bypass ring railway around the city, and two further airports have come up multiple times but none of these were realized. The Budapest-Belgrade railway, a 350-kilometres-long stretch between the two capitals, seems to be the first project to be finally implemented. But even this one seems to be a controversial project, both in terms of its usefulness and high costs.

As detailed above, economic benefits have been minor compared to the enthusiasm of the Hungarian government. Other countries in the region have already become disappointed or even suspicious about engagement with China, but Hungary continues to insist on the importance of the relationship. Consequently, the economic rationale lost some of its explanatory power while the political reasons have become more prevalent.

Orbán's power play

In recent years, Hungary has become an example and a model of the kind of relationship China seeks to establish and nurture with smaller powers interested in benefiting from its emergence in the international system. Hungary is a textbook case illustrating the five principles of coexistence, the bedrock of China's foreign policy approach to other states, in which mutual respect takes priority and the emphasis is on finding win-win arrangements without intervening in or criticizing each other's domestic affairs. Besides adhering to and practicing these principles bilaterally, Hungary's added value is its willingness to engage in conflicts with its Western partners - the EU in particular - and to embrace China's interests as its own. This is visible in Hungary's support for such controversial matters as the Belt and Road Initiative, Huawei's 5G push in global markets, or China's peace plan for Ukraine. In addition, Hungary also appeals to the status and prestige of China by, among other things, explicitly recognizing the one-China policy or framing the Hungarian strategy in the language of connectivity. For these reasons, Hungary has been regularly criticized in the West and called a Trojan horse doing China's bidding and undermining consensus and solidarity within the Euro-Atlantic alliance. And indeed, while Europe would be interested in a united action against the China challenge, Hungary is 'dangling the spectre of China as an alternative partner,' and definitely makes it difficult to achieve a common European position.