EU-China Briefing - 25 May 2020

Written By GS

YOUR WEEKLY SHOT OF EU-CHINA NEWS

BY FLAVIAN BERNEAGĂ AND GRZEGORZ STEC

Click & Read:

  1. Two Sessions 2020 - China’s Economic Way Forward

  2. Two Sessions 2020 - Breaking One Country, Two Systems, and Changing Rhetoric on Taiwan

  3. World Health Assembly - From China’s Worst Nightmare, to a Dream Come True

  4. France and Germany Propose a Recovery Fund

  5. China Discovers New Clusters of COVID-19 as Europe Reopens

  6. EU’s Neighbour Rethinks its Post-Brexit China Policy

 

1. Two Sessions 2020 - China’s Economic Way Forward

On May 21 and 22, the Two Sessions began, with a delay of roughly two months due to the coronavirus. They will last for one week.

► A major feature of this year’s Two Sessions is that they are happening in person as usual: no virtual calls, just 5000 delegates from all over China coming to Beijing, despite the challenge of COVID-19;

► As the government is trying to put the country back on track, the Two Sessions provide important information on China’s economic recovery plan;

► This year, the NPC did not provide any GDP target, a feat as historically unique as China’s economic contraction earlier this year;

► A major obstacle in China’s recovery path right now is its debt, which was exacerbated by China’s response to the 2008 global financial crisis.

Quick Definitions

The ‘Two Sessions’ refers to the annual congregation in Beijing of two political entities:

  • The National People’s Congress (NPC)

  • The Chinese People’s Political Consultative Conference (CPPCC)

Together, they are officially known as the supreme power body in China, but their powers are limited and they represent mostly a venue for the CCP to explain its decisions and plans to the wider public.

NPC

  • This is a (rubberstamp) parliamentary body made of 2987 representatives, elected by people’s congresses in the provinces.

  • At the lowest administrative levels (county and township congresses), they are elected by Chinese citizens. At every level above that, each congress is elected by the congresses below it. The NPC is at the top of this pyramid.

  • Theoretically, the NPC elects the president and the chair of the Central Military Commission (both are roles Xi now holds) and must approve the nomination of the Premier. In reality, these decisions are taken within the Party; the NPC simply enacts them.

CPPCC

  • This is the NPC’s advisory body, meant to represent civil society, and has 2200 representatives.

  • It is comprised of influential business people, United Front representatives, ethnic groups, and some prominent thinkers.

  • It does not have decision-making powers and largely exists to give legislation a seemingly more pluralistic character.

Let’s Talk ¥¥¥

Amid the dire economic state left by the virus, the Two Sessions disclosed both economic data and expectations.

  • Breaking with the tradition of past sessions, Premier Li Keqiang did not provide an annual economic growth target for 2020.

  • For a planned economy that perpetually evaluates its officials based on their compliance with growth plans, this decision is huge (albeit in recent years Beijing has also been looking at improving environmental policies and innovation capacity).

  • Li announced a $506 billion (CNY 3.6 trillion) fiscal stimulus recovery plan. The fiscal deficit will rise from 2.8% of GDP last year to 3.6% this year.

  • This is a notable move. It is the first time the fiscal deficit will have gone over the 3% threshold.

  • 1 trillion CNY worth of treasury bonds will also be issued, but they will not be included in the budget or the deficit ratio. The local government special bond quota has increased as well, from 1.6 trillion CNY to 3.75 trillion CNY.

  • Business tax cuts and fee reductions worth 500 billion yuan will be implemented, while expenditure on investment projects will rise by 22.4 billion CNY.

  • Non-essential spending will be cut by 50% and payments to local authorities increased by 12.8%.

  • The People’s Liberation Army (PLA) had hoped to obtain a bigger chunk of the budget, allowing it to match or exceed the 7.5% growth registered last year. The request was grounded in arguments that the PLA needs more resources to tackle threats at home and abroad (particularly given South China Sea and Cross-Strait tensions).

  • Nonetheless, Li Keqiang did not follow through with their request. The PLA’s budget increased by 6.6%, still considerable, given the overall cuts happening amid the pandemic.


Debt Pressures

Compared to the financial meltdown of 2008, the biggest independent variable for China in 2020 is debt.

  • The fiscal stimulus announced by Li fell short of expectations, mirroring worries of overspending and debt. China’s total budget deficit hovers around 8.3%, up from 5.6% in 2019.

  • Beijing’s stimulus is only ⅙ that of the US stimulus package, which is worth $3 trillion (with US House Speaker Nancy Pelosi pushing for another $1 trillion).

  • It is also smaller than China’s 4 trillion CNY package during the 2008 crisis.

  • Beijing has learned the lessons of 2008, when China incurred massive debt and wasteful spending.

  • Nonetheless, another stimulus package is expected. It will likely come once clearer statistics about the virus’ impact on the economy are known.

TAKEAWAYS

 

► A SHOW OF RECOVERY
Usually, the Two Sessions are important because they reveal the priorities and plans of the party-state, and convey targets in economic growth, unemployment, inflation, and fiscal deficits. This year, the Two Sessions adopted a completely new mantra. The fact that the NPC and the CPPCC happened in person makes an important statement, intended to signal that the situation is under control.

However, expectations of economic recovery continue to be blurry. The package announced is not enough to restart the economy and China is still waiting to see how the pandemic unravels, not only domestically but also in its core markets in Europe and North America. That is why Li Keqiang did not announce all the money in one shot. Once demand picks up, it will become clearer how much stimulus the Chinese government needs to inject to help its economy.

► STABILITY, STABILITY, STABILITY
This is a year of historical events in China’s economy. In the first quarter of the year the economy contracted for the first time since the Cultural  Revolution, and now no GDP target has been announced. This is very significant. Announcement of the GDP target has always been the key point of the Two Sessions and it has always constituted a benchmark for evaluating the performance of Chinese officials. It has traditionally guided the actions of a large part of both the state apparatus and more than 90.5 million Party members.

Instead, Li Keqiang focused on stability, keeping people—especially college graduates and the ex-military—employed. Beijing well remembers the Tiananmen protests, which were sparked to a large extent by the economic situation and unemployment. So, with the economy—and also, as we will see, in other respects Beijing is trying to close ranks and fortify. At the same time, it is aware of the challenges of excessive spending and wants to achieve stability without increasing an unsustainable debt and prompting unreasonable spending by local governments.

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2. Two Sessions 2020 - Breaking One Country, Two Systems, and Changing Rhetoric on Taiwan

Exacerbated by these economic troubles, the Chinese government has made moves with deep implications for Hong Kong and Taiwan.

► Beijing sidelined the Hong Kong Legislative Council and vowed to impose a new national security law, which effectively does away with Hong Kong’s political autonomy.

► The decision prompted multiple countries to condemn the move and express support for the “One Country, Two Systems” arrangement that was supposed to remain in place until 2047.

► When referring to reunification with Taiwan, Li Keqiang omitted the word “peaceful”, which points to a change in policy tone.

One Country, One System

On May 22, the NPC announced it will sideline Hong Kong’s Legislative Council and will pass a national security law for Hong Kong.

  • In its wording, the new law both punishes and seeks to prevent acts of “treason, secession, sedition, subversion against the central people’s government, or theft of state secrets … and to prohibit political organisations or bodies of the region from establishing ties with foreign political organisations or bodies.”

  • This is a clear sign that Beijing has become fed up with anti-government protests in the past year. It is also a decisive follow-up to its 2003 demand to Hong Kong to establish a national security law, according to Article 23 of Hong Kong’s Basic Law (the de-facto constitution of the Hong Kong Special Administrative Region under the One Country, Two Systems arrangement), which the Hong Kong government has not adopted due to recurring protests against it.

  • The NPC also stressed that the Hong Kong government must craft promotional and educational programmes, and submit regular reports to Beijing, in case national security is threatened.

  • Enforcement of the law is still undecided. Technically, central government authorities can set up intelligence agencies in Hong Kong, but local administration still has the constitutional power of enacting Article 23 of the Basic Law.

  • Even so, the Hong Kong government cannot contradict the law made by the NPC and Carrie Lam - Chief Executive of Hong Kong - has already indicated she will fully cooperate on the matter.

  • The law will be voted by the NPC plenary on May 28.

  • In the meantime, Hongkongers took to the street to protest the law. The police brutally dispersed demonstrators with tear gas and a water cannon truck, mere days after officials in Beijing stated the law will not impact local freedoms. Over 180 people have reportedly been arrested so far, but the situation keeps developing.

International Criticism

News of Beijing’s decision sent waves through the international community, issuing a wide array of responses:

  • The EU took a mild approach, saying it is closely following developments related to the law and reiterated its commitment to the “One Country, Two Systems” principle. Nonetheless, it stopped short of explicitly criticising the move by the NPC or indicating what it would do if the principle is not upheld.

  • So far, no comments have been made by Germany, France, or Italy.

  • The United Kingdom, Canada, and Australia issued a joint statement by their foreign ministers, urging China to uphold the Sino-British Joint Declaration and the UN covenant on human rights.

  • Lord Chris Patten, the last British governor of Hong Kong, took a harsher stance: “Unless the Chinese Communist regime sees sense, this will be hugely damaging to Hong Kong's international reputation” and will “underline something which more and more people understand: that Chinese communism is not to be trusted on anything.”

  • Boris Johnson, in turn, is expected to announce that the United Kingdom is ready to welcome refugees from Hong Kong.

  • In the US, two Senators started drafting a bill with support on both sides of the aisle to sanction Chinese officials and entities linked to the new law. In a less clear message, US President Donald Trump only said: “I don’t know what it is, because nobody knows it yet. If it happens, we’ll address that issue very strongly”.

  • The US State Department took a different approach, warning Beijing that Hong Kong’s special status in US law was conditioned by its autonomy and respect for human rights.

  • As of May 23, a Joint Statement signed by 198 legislators from 23 countries indicated their support for Hong Kong and warned: “If the international community cannot trust Beijing to keep its word when it comes to Hong Kong, people will be reluctant to take its word on other matters.”

  • Among them are 70 from the EU, with Slovakia clearly taking a leading position with its 26 signatories.

Dress Rehearsal for Taiwan?

Speaking on May 21 of reunification with Taiwan, Premier Li Keqiang did not include the word “peaceful” in his statement, a break from typical wording. However, even if Beijing may want to switch its policy, it is girdled by critical economic and geopolitical factors.

  • In his state-of-the-nation report in front of the NPC, Li Keqiang opposed ‘separatist’ claims and said he will encourage Taiwanese people to oppose “Taiwan independence and promote China’s reunification.”

  • It was the first time since Xi Jinping has been in power that the phrase “peaceful reunification” was not employed.

  • The shift comes after four years during which the People’s Liberation Army (PLA) has deployed its Air Force and Navy to deliberately circumnavigate the island and breach its airspace. It also comes amidst current and retired voices within the PLA claiming the coronavirus crisis presents the perfect opportunity for military invasion of the island.

  • Nonetheless, there is no across-the-board consensus in Chinese society on military invasion, given the potential costs to human life and international relations, as well as the question of American defense of the island. Xi Jinping himself has preferred to maintain Hu Jintao’s guidelines on peaceful reunification.

  • For Taiwan, the absence of the word does not indicate any meaningful change in China’s approach, but is an expression of Beijing’s dissatisfaction.

  • Li’s statement comes just a day after Tsai Ing-wen was inaugurated for a second presidential term. She is an anti-unificationist and rejects the mainland’s proposal to adopt the “One Country, Two Systems” to Taiwan. Even so, Beijing will have to interact with Tsai’s Taipei for the next four years.

TAKEAWAYS

 

► THROWN UNDER THE BUS
Altering national security legislation in Hong Kong has been a key goal for Beijing since 2003. The Hong Kong government perpetually found itself constrained by protests by the Hong Kong populus, which was intent on protecting the island’s autonomy, and had to shelve the bill indefinitely. Following the protests in 2019, sparked by the Extradition Bill and following police brutality, the central government probably grew conscious that Carrie Lam would not be passing the legislation and moved to do the legwork itself. Of course, this contradicts Hong Kong’s Basic Law and the One Country, Two Systems model, which was supposed to ensure Hong Kong’s autonomy until 2047. Making the move allows Xi Jinping to play the role of strongman, diverting attention from other challenging issues.

China’s economic situation was already challenging in some regards  before the pandemic, leaving it up for debate whether the Party-State will be able to deliver one of its century goals: doubling 2010 GDP per capita levels by the end of 2020. The virus put another, possibly final, nail in the coffin of this goal. On top of that comes criticism about the initial response to COVID-19 and mismanagement of Sino-American relations. So now, with the growth target scrapped and concerns about employment stability, the government is doubling-down on a nationalistic agenda that echoes well with domestic audiences. Such messaging helps the Party-State to project a message of power and stability in the eyes of its Mainland populace.

► VALUES-DRIVEN POLICY?
The response from Europe has been soft so far. The EEAS and the UK have reiterated support for the ‘One Country, Two Systems’, but did not say what they will do if Beijing tramples on it. As we mentioned in previous takeaways, the EEAS’s hands are tied, because it needs to speak with the voice of all EU countries at once, meaning the lowest common denominator that is often toothless.

Even so, the overall weak reaction is worrisome. It poses yet another question of the extent to which the EU is able to protect values in relation to China. Maybe German presidency could consider shelving the Leipzig Summit in response to Beijing’s moves on Hong Kong. But hard ramifications have yet to appear and we are also “closely following these developments”.

► THE 'TWO PATHS' IMPLICATION FOR TAIWAN
Hal Brands (professor at Johns Hopkins University) and Jake Sullivan (former deputy assistant to President Obama and national security advisor to VP Joe Biden) put forward a two-path approach to China’s objective of superpower status. The first one asserts China will seek to establish a strong presence in the Western Pacific in the same way the United States did with the Americas back in 1823 with the Monroe Doctrine. This path is bad news for Taiwan, because it most likely implies military conquest and a Beijing in a position of unassailable strength to dictate the politics of East Asia and Southeast Asia. The second path focuses on maintaining relations with East Asia as they are, but investing in economic, technologic, diplomatic, and political influence as a means of increasing its status. This would allow it to shape economic rules and international institutions, and adapt global technology standards to its capabilities.

This second path does not involve a military clash with Taiwan and it appears it is (for now) Beijing’s preferred modus operandi.

However, given how Beijing approached the One Country, Two Systems model with Hong Kong it is unlikely that Taiwan populace will be open to entering into such a relationship.

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3. World Health Assembly - From China’s Worst Nightmare, to a Dream Come True

Between the 18th-19th of May, the World Health Assembly (the forum through which the World Health Organisation is governed) gathered virtually for a key meeting amid the pandemic.

► Preparations were marked by coalition-building for an international investigation into the origins of COVID-19, backed, among others, by the EU and Australia.

► There were also voices of support for Taiwan joining the meeting as an observer, but Taipei announced its withdrawal on the first day of the WHA.

► Donald Trump threatened to pull the US out of the WHO over its alleged leniency towards China and mismanagement of initial warnings about the outbreak.

► Xi Jinping turned the gathering to China’s advantage by pledging $2 billion to WHO and offering a potential future vaccine made by China as a public good.

Big Cloud, Little Rain

120 countries backed a draft motion for an investigation into the origins of the virus.

  • The motion, drafted by the EU and Australia, called for an “impartial, independent and comprehensive evaluation” of "the WHO-coordinated international health response to COVID-19."

  • While the motion did not mention Wuhan as ground zero for the virus, it did call for collaboration with the World Organisation for Animal Health to “identify the zoonotic source of the virus and the route of introduction to the human population.”

  • Nonetheless, this motion did not make it to the negotiation table. Instead, the EU tabled a new draft motion which was rather diluted. The new motion does not call for investigating the “origins of the virus”, but for an independent and comprehensive evaluation on “experience gained and lessons learned from the WHO-coordinated international health response to COVID-19”.

  • The new motion was approved by 110 countries, including China, and was eventually adopted. Xi Jinping conditioned support for the investigation on the basis that it will happen only after the pandemic is under control.

Taiwan’s Status

Another contentious topic before the WHA started was whether Taiwan would be granted the right to participate in the meeting as an observer.

  • Taiwan’s participation was seen as a nod to its efficient handling of the virus and, likely, also its active “Taiwan Can Help” campaign including, despite its observer status having previously been suspended in 2016.

  • At the time, President Tsai Ing-wen publicly contested whether Taiwan was part of China, prompting Beijing to push for limiting Taipei’s diplomatic presence.

  • Taiwan managed to garner the support of important players for its bid to join the WHO. Among others: the US, Canada, Australia, Japan, the United Kingdom, France, Germany, and New Zealand.

  • Nonetheless, on May 18, the same day the WHA was bound to begin, Taiwanese Foreign Minister Joseph Wu announced Taiwan will postpone its bid for observer status.

  • The decision was taken after “allies and like-minded nations” suggested that Taiwan put forward its bid after the resumed sessions, in order to allow other countries to focus solely on countering the virus. Wu made it clear that once things go back to normal, Taiwan will pursue a “full and open discussion” on its bid to join the WHO.

A Tale of Two Leaders

Donald Trump and Xi Jinping provided two vastly contrasting approaches to the WHA.

  • On May 18, Donald Trump wrote a strongly-worded letter to WHO’s Director General Tedros Ghebreyesus, giving the WHO an ultimatum of 30 days to “commit to major substantive improvements,” and threatened to permanently pull the US out of the organisation.

  • He accused WHO of issuing misleading claims about the coronavirus and for being a “puppet of China” by downplaying the pandemic. At the same time, he refused to address the WHA at all.

  • Xi Jinping, in turn, was expected to face significant backlash over the virus’ outbreak and the international community’s calls for an international investigation into the origins of the virus were meant to hold China accountable.

  • That did not happen. Xi managed, in fact, to turn the WHA to China’s advantage:

    • The problematic issue of Taiwan’s bid was postponed (at least for now).

    • The motion that was adopted defuses the calls to hold China accountable, because an investigation will happen only after COVID-19 will be brought under control. In the absence of a vaccine, this may not happen in 2020 at all.

    • Xi also pledged $2 billion in funding to the WHO over the next two years, which matches WHO’s entire budget contributions in 2019. It is more than twice the US contribution in 2018 and 2019 (before Trump retracted it), and four times that of the UK.

    • By comparison, the European Commission’s two-year contribution for the 2018-2019 sessions was $131 million.

    • Xi also pledged to aid the healthcare systems of developing countries in Africa and offered a future Chinese-made vaccine as a global public good.

TAKEAWAYS

 

► POWER VACUUM
‘Multilateral China/Unilateral US’ is not a new dynamic and the two are inexorably linked. We’ve seen it already happening at the UN, where Trump used the UNGA platform to reject the Paris Climate Accord, quit talks on migration, walk away from the Iran Deal, and withdraw from the UN Human Rights Council, all while China increased spending on peace-keeping missions and managed to have Chinese nationals lead four UN agencies. In a similar vein, Trump’s decision on the WHO limits US power and participation in global responses and creates a vacuum that China is eager to fill, because it helps both its domestic and foreign policy.

The EU, once again, finds itself stuck between American unilateralism and a brand of Chinese multilateralism that it doesn’t fully support. Lacking American support, the EU probably saw itself cornered to accept the watered-down report, because no better option was available.

► SMOKE SCREEN
The problem with Donald Trump (aside from encouraging us to take hydroxychloroquine) is that he is terribly inconsistent. He is not wrong that there are massive transparency issues related to the virus’ origin in China, but he is also covering up his failure to contain the virus by scapegoating the WHO. The WHO and Director Ghebreyesus can undergo several months of scrutiny for their dovish attitude on China, but, in fact, the WHO is not an executive organisation. It relies on messages from its members (including China and the US) and its job is mostly to coordinate and advise members. Trump himself praised China 15 times between January 22nd and February 29th, while the virus was spreading.

► TWO SIDES OF THE SAME YUAN
China is by far the country most advantaged by how the WHA turned out. It managed to dodge two bullets—Taiwanese participation and independent investigation into the origins of COVID-19—while also branding itself as the friend of developing countries in their fight against the coronavirus.

At the same time, China exhibited the extent to which it will punish those who question its narrative. On May 19, it slapped an 80% tariff on Australian barley exports, which threatens to create a dent of $500 million/year in the Australian economy. This was in retaliation to Australia being the first and one of the most vocal counties to request an independent investigation in China.

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4. France and Germany Propose a Recovery Fund

On May 18, Angela Merkel and Emmanuel Macron held a joint press conference by video at which they announced their joint proposal for an EU economic recovery fund signalling their support for a more robust EU response:

► €500 billion are to be allocated in budgetary expenditure to the countries and sectors most affected;

► The ‘Frugal Four’ (Austria, Netherlands, Sweden, Denmark) opposed any plan that offers grants, instead of loans;

► The money would not come without conditionality, as member states would need to follow the guidelines of the Commission.

The Locomotive Gets Going...

France and Germany made a breakthrough achievement in announcing a joint plan for Europe’s economic recovery. According to the proposal:

  • The plan involves a temporary fund of €500 billion with money borrowed from financial markets, then distributed to member states through the EU budget. The expenditure ceiling of the EU budget would be increased to 2% (up from 1%) of gross national income for the next 3 years.

  • The extra 1% would not be contributions from member states, but debt. Importantly, it will not be counted as individual debt of the member states, it would be the EU’s debt.

  • Angela Merkel said the money would be distributed to “the most affected sectors and regions on the basis of EU budget programmes and in line with European priorities.” Competitiveness, and the digital and green transitions are key staples of the plan.

  • The money would be paid back after the end of the next Multiannual Financial Framework (MFF), meaning after 2027.

...But Some Wagons Are Stalling

The so-called ‘Frugal Four’—composed of Austria, Netherlands, Sweden, and Denmark—rejected the proposal and came up with a loan-based alternative. This is important, because any plan needs to have support from all member states in the Council to be adopted.

  • The impromptu leader of the Four, Austria, announced through Finance Minister Gernot Blümel that they cannot support a plan where “the EU borrows on the markets to finance non-repayable grants.”

  • Their core argument is that money borrowed from the markets should be paid by the countries who received the cash, and it must be followed by deep reforms to make their economies shock-proof.

  • In turn, Southern Europe retorts that the crisis was not its fault and that further adding to already high levels of debt will slow down the EU’s recovery.

  • Nonetheless, the debate was notably less combative than before. Strong loan supporters such as Dutch PM Mark Rutte or Swedish Finance Minister Magdalena Andersson were not nearly as vocal as during the ‘coronabonds’ saga.

  • A number of central and eastern European countries also voiced mild concerns, fearing such a fund would cut financial streams that usually flowed into cohesion funds from which they benefit.

  • The Frugal Four presented on May 23 an alternate plan that approves of a one-off emergency fund, but rejects debt mutualization or “significant increases” in the EU’s upcoming multiannual financial framework.

No Such Thing as a ‘Free Lunch’

As one EU diplomat put it, “if you are spending everybody’s money, terms must apply.”

  • Merkel and Macron included in their proposal a requirement of a “clear commitment of member states to follow sound economic policies and an ambitious reform agenda.”

  • Commission VP Valdis Dombrovskis explained what that meant: most of the money would be spent on investments and structural reforms.

  • Member states would need to agree on common recovery priorities, then present investment and reform proposals based on those priorities. The Commission would monitor their implementation.

  • Nonetheless, the official blueprint to be issued by the Commission this week will provide clear details into the Commission’s expectations and will decisively dictate the position of member states.

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TAKEAWAYS

 

► EVER CLOSER UNION?
A month ago, we encouraged you to think of the implications of a Fiscal Union. Are we there? Not quite. This would not be the first time the EU issues debt for balance of payment support, but it has never happened with such a big sum, so the agreement between Merkel and Macron is truly a big stepping stone towards further European integration. Within five days, Angela Merkel endorsed the joint recovery plan and showed support for a political union that “may also involve amendments to the treaties.” Furthermore, during the first in-person meeting with her commissioners on May 18, Ursula von der Leyen told them the EU has an opportunity to lobby for new powers and place the Commission at the center of the recovery. This shows there is impetus in Brussels, Paris, and Berlin for reform. The Commission’s proposals for the recovery fund will most likely indicate whether member states are on board to boost up the EU’s competencies.

► STRUCTURAL REFORMS AS CONSENSUS-MAKER
Even if the Frugal Four did put forward a new plan, a level of consensus seems to have been reached on linking loans to structural reforms. An official from Mark Rutte’s party highlighted economic structural reform as a key point for the Netherlands. Polish Minister for European Affairs Konrad Szymański and Slovak Foreign Minister Ivan Korčok echoed similar sentiments. Even if Vienna and Amsterdam will finally budge on grants, they will come with serious economic reform proposals for Southern Europe.

► THE BERLAYMONT WOULD LIKE TO THANK KARLSRUHE
What drove Germany to finally switch sides? Well, for once, we could thank Emmanuel Macron’s efforts to stand with Italy, Spain, and Portugal, while also winning friends in Belgium, Luxembourg, and Ireland, thus creating a team that supersedes North-South divides. Secondly, and probably more importantly, Karlsruhe did the trick. The German constitutional court in Karlsruhe cast doubt on May 5 on the European Central Bank’s bond-buying powers. This proved to be the tipping point for Merkel, who came to the conclusion that the coronavirus presents the EU’s biggest crisis yet, endangering its single market and the overall future of the Union. This says something from a leader who has dealt already with crises in 2008, 2012, 2015, and 2016. Strengthened by her unmatched popularity at home, she put Karlsruhe in its place and threw her backing behind the Commission.

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5. China Discovers New Clusters of COVID-19 as Europe Reopens

New developments regarding COVID-19 in China should not go unnoticed in Europe.

► Chinese authorities are carrying out a large-scale operation to test the entire 11 million-strong population of Wuhan using batch testing;

► Lockdown of over 100 million people was reintroduced after a new cluster of COVID-19 was discovered in China’s North-East;

► It is possible that the virus mutated, as it exhibits different properties than the version analysed in Wuhan;

► At the same time, EU countries plan to lift lockdowns on non-essential travel by mid-June.

Corona-update from China
Chinese authorities move to test the entire population of Wuhan, where the coronavirus originated:

  • It is a huge undertaking, considering that the population of the city amounts to 11 million, and the initial plan assumed finishing the testing in just 10 days (although this may be postponed)

  • Excluding people who were tested in less than a week before the mass programme began, the number totals around 8 million.

  • The tests began on May 18, with the Wuhan Health Commission reporting on May 20 that more than 2.8 million tests had already been completed.

  • The rapid progress is partially attributable to using a batch testing method: grouping individual samples and only testing individuals if a batch comes in positive.

New clusters appeared in the northeastern provinces in May:

  • The clusters of the coronavirus were discovered in Jilin, Liaoning, and Heilongjiang, despite China applying one of the strictest virus prevention and detection regimes in the world.

  • As of May 21, Chinese authorities confirmed 46 cases located across three cities—Shulan, Jilin (city), and Shenyang—all believed to be linked to travellers from Russia.

  • Among the 46 reported cases, 10% turned critical and 26 were hospitalised.

  • In response, the authorities reintroduced lockdown measures over a region of 100 million people, including halting train services, restricting entrance to residential compounds, and closing schools.

  • It comes as another blow to the already economically challenged northeastern region, sometimes referred to as China’s Rust Belt, as it is home to China’s declining heavy industry.

  • In 2019 the three aforementioned provinces jointly had a GDP standing at less than half of that of Guangdong province.

Worrying News
The cases from the new cluster appear to be different from the virus in Wuhan:

  • The infected seem to carry the virus for longer and to show no symptoms for a period longer than two weeks.

  • Moreover, the virus appears to damage primarily the lungs, which is different from reports from Wuhan, which pointed at multi-organ damage.

  • Still, it is hard to confirm at this stage if the virus has indeed mutated or whether the differences in observations are the result of doctors not operating under critical conditions, as were doctors in Wuhan.

  • If the virus mutates so quickly, it would make the efforts to research it and develop a vaccine much harder.

This comes amid global infections hitting new milestones:

  • On May 20th, the WHO confirmed the highest single-day spike of new cases, totalling 106,000 in 24h.

  • Two-thirds of the cases were reported in just four countries, which also top the number of cases: the US, Russia, Brazil, and the UK.

  • The number of global cases surpassed 5 million just a day after WHO’s announcement.

Meanwhile in Europe
Multiple European member states are moving to lift restrictions:

  • Most of the member states moved to reopen bars, restaurants, and retail on May 18. Mask-wearing is not obligatory in many of these countries.

  • Symbolically, one of the countries to reopen was Italy, the first country to go into full lockdown. Over the last two months, close to 33,000 lives were lost and its economy shrank by 10%.

  • Following the Commission’s Guidelines on Tourism and Transport in 2020 from May 13, most member states plan to lift restrictions on non-essential travel around mid-June.

TAKEAWAYS

 

► THE EU SHOULD PAY ATTENTION...
Despite being busy with the opening up of the economy, the EU should not overlook the new developments in China. And as we discussed in one of our past news briefs, the EU countries have already once disregarded the situation in China and even reported to the Commission that they are ready to tackle the threat of the virus, which turned out not to be the case. Now, armed with the traumatic experience of the first wave, they hopefully monitor the second wave in China, which follows the lifting the local lockdowns.

► ...BUT REMAIN CAUTIOUS
China most likely has been toying with its COVID-19 data in the past, as we explained in one of the past briefings. That means that the current reports should also be taken with a grain of salt.

Beijing is concerned with its economy and announcing alarming new data or deciding to put Wuhan under lock-down once again would undermine the belief of the markets that China is recovering and could also affect domestic spending. Both are now important for the Chinese economy, which is trying to regain strength and remain stable after the historically terrible first quarter of 2020. So there are definitely incentives for China to downplay the situation.

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6. EU’s Neighbour Rethinks its Post-Brexit China Policy

There are concrete signs of an active rethink of China policy going on in the UK:

► Tory MPs formed a research group to debate engagement with China;

► Boris Johnson ordered drawing plans to limit reliance on China for non-food essential products and to eliminate Huawei from the UK’s infrastructure;

► However, it remains unclear whether this constitutes a long-term strategic shift on China.

UK’s China Rethink
The outbreak of COVID-19 hit the UK hard and made the Conservatives open a debate on a rethink of China policy:

  • At the end of April, a group of conservative MPs formed the China Research Group—modelled on the European Research Group formed in the context of Brexit—with a goal of “promoting debate and fresh thinking on China.”

  • At the request of Prime Minister Boris Johnson, the authorities are developing “Project Defend”, which is aimed at identifying the UK’s economic vulnerabilities and developing a plan to diversify supply chains of essential non-food products. It is to be part of a broader approach to national security developed by Foreign Secretary Dominic Raab.

  • On May 23, reports emerged that Johnson asked officials to draw up plans to phase out the involvement of Huawei in UK’s telecommunication infrastructure by 2023, reducing it to zero.

  • This comes just a week before Prime Minister’s visit to the US for the G7 summit, when Johnson is expected to negotiate a trade deal with Donald Trump (bear in mind that this comes at a time when Brexit negotiations are growing tenser).

  • On top of this comes the matter of China not respecting the Sino–British Joint Declaration concerning Hong Kong and breaching Hong Kong’s Basic Law, which we discussed in the second news bite.

  • Still, it is unclear whether these moves are part of a mature, long-term strategy on China within the Tory camp.

TAKEAWAYS

 

► WIDER CONTEXT
As much as it is unclear whether the UK government has developed a concrete, long-term strategy on China, it is clearly being crafted as part of wider thinking being given to the UK’s position after Brexit. For a better context for such considerations, we encourage you to listen to our interview with John Farnell, a former European Commission Director responsible for international affairs at DG Enterprise (now DG GROW) and a Research Associate at the University of Oxford China Centre. We discussed with him the impact of Brexit on EU-China relations and the UK’s position within the US-EU-China triangle.

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EU-China Briefing - 1 June 2020
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EU-China Briefing - 18 May 2020