The Sino-Hungarian Relationship’s Effects on the EU and NATO

This contribution is part of the book “The Dragon at the Gates of Europe: Chinese presence in the Balkans and Central-Eastern Europe” (more info here) and has been selected for open access publication on Blue Europe website for a wider reach. Citation:

Dempsey, Samuel, The Sino-Hungarian Relationship’s Effects on the EU and NATO, in: Andrea Bogoni and Brian F. G. Fabrègue, eds., The Dragon at the Gates of Europe: Chinese Presence in the Balkans and Central-Eastern Europe, Blue Europe, Dec 2023: pp. 331-356. ISBN: 979-8989739806.

1. Introduction

Nonresident Senior Fellow at Carnegie Europe, Judy Dempsey, using the words of U.S. Under Secretary of State for Political Affairs, Victoria Nuland, outlined the controversial placement of Hungary that has upset the Western security and economic framework, “Orbán sleeps under his NATO article 5 blanket by night while pursuing his illiberal state with EU funds by day” [2]. Hungary’s controversial policies have led it to becoming a black sheep, not just in the wider interregional relationship, but closer to home among the Visegrad 4 (V4) partners, where it is viewed increasingly as unreliable [3]. Hungary’s policy decisions have developed in contrast to the greater pressing initiatives of the EU and NATO, and Orbán is vocal in sharing this dissent. “What’s going on in the European Union today is, I think, what the people in Brussels call decoupling, or isolation, or a breaking off of ties. And there are proposals to initiate such a policy in relation to China… That would be a very big mistake. It would be a huge European mistake” [4]. Hungarian Foreign Minister Péter Szijjártóc, has gone as far to say that for Europe to decouple or de-risk from China would be “suicide” for Europe [5] Still, post Russian invasion of Ukraine, China’s standing in Europe is declining [6] It is the opportune time to reevaluate Hungary’s Eastern Opening policy and influence in the EU and NATO.

Hungary has very clearly stated that it does not want NATO to become an anti-China bloc [7] Hungary still believes under its current cost-benefit analysis, that playing both sides (West and East) offers more value to the Hungarian ruling class and elite, than acting as a reliable multilateral partner. However, despite the symbolic and messaging ‘gain,’ the true economic or security benefits of Hungary’s Eastern Opening policy have not manifested [8].

Hungary has become a country at the fork of connections with authoritarian countries such as China and Russia, because Viktor Orbán’s rule in Hungary has developed a political machine “run by one man” [9]. Despite its membership in NATO and the EU, Hungary’s democratic state is scarce. Both V-Dem and Freedom House label Hungary’s political system as an “electoral autocracy” and a “hybrid regime.” The European parliament has recognized this development itself, in its resolution on September 15, 2022, which concluded that Hungary has become an “electoral autocracy” [10]. Hungary is the black sheep of the West because its state institutions are weak, it has “capture-able” states and systems domestically within civil society, and the civil society has limited independent voices, all of which enables and encourages the malign presence of countries like China [11]. As China has the ambitious Belt and Road Initiative to expand its market influence in Europe, Hungary is the easier entry point given the more aligned values of the current Orbán regime. A Pew Research Center study in 2019, found Hungarians and Greeks to be the most China-friendly people in Europe: 26% said the world would be better with China as a leader, while 46% said the world would be better with the U.S. as a leader [12]. As German Marshall Fund Senior Fellow on Central Europe Daniel Hegedüs asks, “how can NATO credibly portray itself as the shield of Western democracies if democracy is not ‘the only game in town’ among the alliance’s members? How can the European Union credibly impose democracy-related conditionality over candidate countries and neighbors if it is not able to tackle autocratization in its ranks?” [13].

To understand the Sino-Hungarian relationship and its effects on the EU and NATO, this chapter will overview Hungary’s Eastern Opening policy, the economic trade and investment between China and Hungary, and Hungary’s divisive actions within the Europe, transatlantic, and global arena that has led many to believe that China holds direct influence over Hungary’s foreign policy. However, despite their overlapping connections and the narrative the two countries prefer to boast and project, China has limited interest in actively guiding Hungarian policy nor does it have high interest in Hungary as a country in comparison to other regional campaigns. On the other hand, Hungary, by nature of the ruling coalition and regime led by Orbán, reaps much benefit from positioning itself alongside the West and China and Russia. It allows the Hungarian elite to advance its kleptocracy and individual businesses and political interests, and it gives Hungary greater leverage in the EU and NATO to bring more to the negotiating table while still reaping the benefits of these Western multilateral institutions.

2. Hungary’s eastern opening policy

Following the 2008 financial crisis, Hungary pivoted its foreign policy focus with the “Eastern Opening Policy” (EOP) in 2012 [14]. Upon coming to power in 2010, Prime Minister Viktor Orbán made it a central vocation to have Hungary at the forefront of the Sino-Central Eastern European partnership [15]. This original Eastern pivot was intended to cultivate ties not only with China but also with India, Russia, Japan, Turkey, Azerbaijan, Singapore, and South Korea. Central to this mission was Beijing’s 2012 16+1 initiative, which was founded in Budapest as an interregional agreement to interconnect business and investment with the Belt and Road Initiative. Ian Johnson, the Stephen A. Schwarzman Senior Fellow for China Studies at the Council on Foreign Relations, believes the historical similarities of socialist heritage enable the possibility of such an agreement [16]. The Sino-Hungarian connection is not new; along with many Warsaw Pact countries, Hungary recognized the PRC in 1949. On the 70th anniversary of this diplomatic recognition, both countries celebrated greatly [17]. In the mid-2000s, former Prime Minister Péter Medgyessy, who led Hungary’s socialist government, encouraged the first Chinese economic investment campaign in Hungary [18]. Today, Medgyessy is a consistent advocate for Sino-Hungarian relations, frequently boasting of China’s economic governance model when addressing the public [19]. His stance is largely reflective of the Hungarian sentiment to support Chinese trade [20]. No CEE country has gone to the lengths of Hungary to present itself as an economic hub for China in Europe [21]. After joining the 16+1 Initiative, Hungary was the first European country to sign the 2015 BRI Memorandum of Understanding with China, the highest level of agreement for business investment cooperation with China [22]. In April 2019, the 16+1 expanded to be the “17+1 Cooperation” [23].

Despite the Eastern Opening policy appearing to focus primarily on economic investment and cooperation, François Venne at the Center for European Policy Analysis believes the goal is for Orbán to maintain strong “illiberal” friends, not only with China but also with Russia, Turkey, and Brazil, as an option to diversify future geopolitical alliances with the U.S. or EU [24] Hungary’s foreign policy has more to do with Orbán’s desire to repaint the country’s narrative to consolidate his own opportunity than it does with an Hungarian institutional model or desire for economic growth. Hungary uses China to paint a more Eurasian identity for Hungary over the European model of the EU or NATO. Partnering with Beijing benefits Orbán’s political posture. It enables a Euroscepticism that Orbán can leverage in Brussels and use to search for further illiberal partners at home and abroad [25]. Tamás Matura, an expert on central and eastern Europe’s relations with China, emphasizes that Hungary’s China policy is “not a national strategy, but a one-man show” [26]. The internal politics of Hungary do not reflect Orbán’s view, thus if the United Opposition party in Hungary lost power, the China policy would cease to exist [27]. As a result of Orbán’s leanings, Hungary has become unreliable as a Western ally. Infamously, in July 2014 Orbán gave a speech praising China and Russia’s “illiberal democracy,” as an example for Hungary to follow [28]. Despite the decline of China’s marketability post-COVID-19 pandemic, unlike much of the CEE region, Hungary still maintains its policy of growing its ties with China. The Eastern Opening Policy, despite its official intention to boost economic relations and development opportunities with Eastern partners, has thus far proven to be a mechanism for Orbán’s political posture domestically and within multilateral institutions while increasing individual opportunity for those within the Orbán circle.

3. The belt and road initiative in Hungary: Beijing’s foreign direct investment in comparison to the west

Despite the facade of economic partnership, Beijing’s investment and cooperation plans with Budapest have little to show for it. Since 2004, China has embarked on a large investment campaign in Hungary, but only after 2013 did it truly take off [29]. By Hungary’s estimates, Chinese investment is below €3.95 billion at most, or around 4% of the total FDI in the country. An FDI total similar to Japan or South Korea (countries, unlike China, often on the backburner for Hungarian promotion of the successes and needs for an Eastern Opening policy). Hungary’s reported metrics should also be taken with a grain of salt, as Venne from CEPA reports that according to impartial statistics, both China and Hungary inflate their numbers of investment and cooperation to garner more attention to the relationship than is deserved [30]. On the other hand, Germany’s FDI stands at €26.6 billion, and the EU consistently invests €4 billion each year [31]. The 17+1 initiative was even assigned the mission of assisting the BRI in Europe and “disentangling” the region from Europe [32]. As Brussels and Europe still maintain far more economic sway in Hungary than any partners to the East, this disentangling has not yet come to fruition. Additionally, as Hungary contributes less than €1 billion to the EU budget, it is the fourth-largest net recipient of EU funding [33].

Looking at the greater region, this wouldn’t come as much of a surprise. The European reception of the BRI is declining amongst the already slow start [34]. Czech researcher Richard Q. Turcsanyi estimates that China still makes up under 2% of the CEE region’s exports and 9% of its imports. Hungary follows the same trend as the rest of the region, with China’s FDI accounting for less than 1% in the CEE region. Turcsanyi has said that China “has the least Chinese presence when compared to any other region in the world when measured by its shares of economic interaction” [35]. What is surprising about these calculations is that China, more so than most countries, relies on mercantilism to grow and develop its foreign policy and trade relationships. Worsening China’s position, the majority of China’s investment projects in Hungary and the CEE region have underperformed [36].

Yet, despite the last decade of Chinese FDI falling short, this year Beijing is Hungary’s largest economic partner outside of the EU and largest investor. The Hungarian Minister of Foreign Affairs and Trade, Péter Szijjártó, has claimed that Chinese FDI will double this year to €13 billion [37]. This would be quite drastic given that emerging Asian economies accounted for only 2.4% of Hungarian exports in 2020, the same figure as in 2010, with China’s export share only moving from 1.6% in 2010 to only 1.7% in 2020 [38]. Although overall trade turnover has increased from €3.5 billion in 2005 to €6.3 billion in 2018. The results from the increased purchase of manufacturing and consumer goods by Hungary, primarily car parts and machinery [39]. Still, in 2021, Chinese firms were only responsible for creating roughly 15,000 jobs in the country, far less than from the European market. Germany’s Bosch, for example, alone had 13,500 Hungarian staff members at the same time [40]. Overwhelmingly, the EU is, and appears to be, Hungary’s most important economic partner. In 2022, 78% of Hungary’s exports went to the EU, and 71% of its imports came from the EU [41]. Germany still holds the most trade weight, accounting for 24% of imports and 28% of exports, and therefore the most financial and political leverage in Budapest [42].

4. BRI investment plans and institutional connections

Much of the Sino-Hungarian economic relationship has depended on the announcement of large-scale infrastructure and education projects. The most prominent is the flagship project of the Budapest-Belgrade Railway (BBR) line. This project would enable great regional connectivity between the Balkans and Central and Eastern Europe, and it would do so in conjunction with the BRI, bringing in Chinese trade with greater convenience [43]. However, given the financing, 15% from the Hungarian rail transport company, 85% from a loan from the Export-Import Bank of China, and the EU-China economic market overlaps, the project has held much controversy and has had a slow start, with an expected operation date of 2025 [44]. A red flag posed by this railway deal is that China Railway Group Limited and Opus Global are within the Chinese-Hungarian consortium, a company controlled by Orbán associate Lőrinc Mészáros. The corruption of Hungary enabled its marketability for the mercantilism of China. As the deal has continuously been pushed, Hungarian analysts also believe the project’s ability to perform according to the projections stated is limited [45]. Furthermore, the loan repayment plan for China would take decades to pay off, and many analysts discuss the inability of Orbán’s stovepiped policy channels to engage with such concerns [46]. Last year’s largest investment inflow was the result of Chinese battery maker Contemporary Amperex Technology Co. Limited, which invested €6.85 billion for a new factory that would provide services for Mercedes-Benz, BMW, and VW [47]. The two Chinese organizations that have had the longest presence in China are the Bank of China and Huawei. Huawei established its primary European supply center in Hungary in 2005 [48]. The regional headquarters of Bank of China’s Central and Eastern Europe have been in Budapest since 2003, serving as the middle point for Chinese regional investment, and Bank of China (CEE) established its own separate Hungarian affiliate, Bank of China (Hungary), in 2014 [49]. After becoming the first CEE country to issue RMB-denominated sovereign bonds in 2016, in 2017, the Hungarian National Bank agreed to the Bank of China (Hungary) to become a regional renminbi (RMB) clearing and settlement house [50].

A unique connection that Hungary and China also hold is the presence of official and unofficial diplomatic stations in each respective country. Despite Hungary’s small size, it has an impressive number of diplomatic missions in China, with an embassy in Beijing, consulates in Shanghai, Chongqing, and Hong Kong, and plans for a new consulate to be established in Guangzhou. These missions facilitate trade, investment, tourism, and trading houses run by Hungarian businessmen that support further power and money acquisition for the elite [51].

The education exchange connection is also vital to the posture of the Sino-Hungarian relationship. In 2017, the first Chinese-sponsored policy research institution in the CEE region was established with the Chinese Academy of Social Sciences founding the China-CEE Institute in Budapest. The aim of the China-CEE Institute is to connect the regions through research on socio-political developments in the CEE region [52]. The staff is made up of European researchers with a Chinese administration.

While Hungary is a focal point for the BRI and 17+1 initiatives, besides its cultural and symbolic connection, the economic partnership has little to show for it. While there are signs this is changing, it will take clear deliverables to signal true change given the lack of transparency of either Hungary or China in depicting their relationship picture.

5. Courting show pony or trojan horse: Hungary’s divisiveness in the EU and NATO

According to Dr. Edit Zgud-Przybylska, a fellow at the Central European University, China has focused on Hungary as a regional partner due to Hungary’s veto power in the EU, over which it thinks its mercantilism can sway, and Orbán’s past preference for standing in line with China’s contrary positions on EU policy [53]. What further encourages China is Hungary’s “clientelist corruption,” which they believe can “shield China from EU criticism,” which in the end inhibits the EU’s ability to stand united on issues such as Hong Kong, Taiwan, or Xinjiang [54]. This top-down autocratization is the backbone of Orbán’s foreign policy strategy. The primary intentions of the strategy are to avoid U.S. or EU sanctions that may develop from democratic backsliding and give more wiggle room within the Western space to create a favorable domestic environment for the Orbán regime [55]. As German Marshall Fund Senior Fellow on Central Europe Daniel Hegedüs explains, the strategic goals are supported by two principles: to “free ride” off of NATO and the EU to be “geopolitically disloyal” in playing all sides, hence the growing connection with China and Russia [56].

Yet, despite this geopolitical strategy, the claims that Hungary is China’s “Trojan horse” paint the picture in reverse. China does not have direct influence through Hungary on EU or NATO developments or consensus, but the Sino-Hungarian relationship poses several challenges: Orbán is emboldened and encouraged to be a divisive figure to maintain appeal to China, and the relationship and BRI development demonstrate the contestation of EU or U.S. economic influence in Central Europe [57] Hungary is not a Trojan Horse for Chinese influence; it is a courting show pony that, if not addressed, will widen internal ideological and strategic friction in Brussels. There is little evidence that supports the idea that China has embarked on an investment campaign in Hungary with the intention of forming a voice with the West. One study found Hungary’s votes within the EU on imposing anti-dumping measures (ADMs) on Chinese goods to have maintained the same voting patterns, if not become more critical of China, from before and after the creation of the 16+1 Cooperation, given Hungary has supported more ADMs against China since 2011 [58]. Part of this lack of direct influence is the lack of necessity for China to create it. Hungary, no matter China’s bilateral extension of appeal, is already pro-China as a direct result of Orbán. Matura has gone so far as to say that Chinese political scientists have told him that China would prefer Hungary not block EU statements to not give the impression that China has a stronger malign influence in the CEE region than it does in reality [59]. This is where the indirect influence comes strongly into play; regardless of China’s intentions, Orbán’s foreign policy is personally connected to China’s interests, provided that, given Orbán’s corrupt mercantilism and desire to cultivate his own business opportunities, “his personal cost-benefit analysis of working with China comes before Hungary’s more generally” [60].

China’s goals in the region are to expand exports and investments, promote a positive image of China, and where necessary, exert political influence [61]. To do so, unlike elsewhere in the CEE region, China has used different tactics to its “wolf warrior diplomacy.” It does not use aggressive diplomacy seeking to deliver concrete markers of influence but slightly expands pressure and opportunity [62]. China’s soft power influence is focused on enabling the already primed ruling party of Hungary, Fidesz, through intermittent, limited engagement [63]. Some claim this engagement can take more aggressive forms, such as the Confucius Institute network, which, while Hungary welcomed its fifth institute in 2019, many other Western states have opted to rollback [64]. Hungary also hosts other cultural institutions, including a think tank, several partnerships with Hungarian universities, a bilingual school, a traditional Chinese medicine facility, and cultural and friendship organizations [65]. These connections provide the opportunity for easier intelligence gathering practices, although the evidence for such activity is limited given the lack of scrutiny by the Orbán regime or possibly, even compliance. Regardless, at present, no clear conclusion can be produced; only speculations can be deduced from malign CCP activity in other countries through Confucius Institutes. There are 110 overseas police “service stations,” that China uses for illegal policing activity [66]. Yet, as a senior Hungarian intelligence officer stated, the Chinese “do not trust others other than their own,” and “they are not recruiting classic agent networks in the West, rather white friends for Great China” [67]. This depiction opens up the narrative that China uses institutional connections and its diaspora abroad to spy on and coerce foreign allies, partners, and adversaries. This is quite charged rhetoric: while there is evidence of such behavior widely, in the case of Hungary, further objective investigation is required.

The indirect influence on Hungary has consistently manifested in an aggravating manner for the West. German Foreign Minister Heiko Maas called Hungary’s move to block the April 2021 EU statement condemning the Hong Kong security law an “absolutely incomprehensible” action that prevented the EU from speaking with “one voice” over China [68]. Hungary has undermined or blocked EU statements on issues, predominantly centered around human rights, regarding the South China Sea, Hong Kong, Xinjiang, and Taiwan [69]. Hungary’s prevention of the EU speaking on China with one voice almost led to its ousting. In September 2018, for the first time, the European Parliament voted to trigger Article 7 of the Treaty on the European Union, which could have revoked Hungary’s EU funding and voting rights [70]. In the end, Hungary maintained its voting rights, and in November 2020, Hungary again blocked the EU budget that included a COVID-19 relief package as it held a provision that would require funds to derive from a country with respect for democratic norms [71]. Hungary has also recently blocked or refused to sign EU statements criticizing China’s actions in Hong Kong, the South China Sea, and the genocide of the Uyghurs in Xinjiang [72]. Most recently, Hungary did not block EU sanctions on Chinese officials responsible for the human rights abuses in Xinjiang, but Hungarian Foreign Minister Péter Szijjártóc called them “pointless, self promoting and harmful” [73]. Despite the symbolism of these comments, they are well received in China [74].

Hungary’s attempts to position itself as the middle ground between the West and East, in this case China but also in context with Russia, have sent ripples of volatility through Western international and broader multilateral institutions. While Brussels and Washington have made the priorities of anti-corruption, stricter FDI due diligence verification, and limiting Chinese expansion of digital authoritarianism and critical tech and mineral sectors, Hungary has made it a proactive effort to engage in scratch my back, I’ll scratch yours’ exchanges between the CPP Hungarian elite through incentives like scholarships and academic exchanges, and has placed a fork within NATO’s security concerns for 5G infrastructure, allowing Huawei to continue its work in Hungary [75]. Hungary also dissented from the transatlantic view to block Taiwan’s bid for observer status in the World Health Organization during the COVID-19 pandemic, and alongside Greece, in 2021, the two countries abstained from the UN Human Rights Council in Geneva against China’s human rights abuses in Xinjiang [76].

6. Conclusion

President of the European Commission Ursula von der Leyen has insisted that to move forward with the European relationship with China, to “de-risk – not de-couple,” there must be a collective European response [77]. However, as Hungary maintains its welcoming position for China, with plans for increased trade and investment cooperation, and is actively working to further weaken its institutions and civil society, Hungary will for the near future continue to be a place for China to engage with and add complications to the European and transatlantic relationship. While the Sino-Hungarian relationship is in large a marketing campaign used for both countries to sow narratives of dissent within the West, boost the status of selected elites, and posture within security and economic conversations, the few economic deals that are manifesting will lead to the future generations of Hungary left with a hefty debt burden [78]. As for China’s influence on Hungary within NATO and the EU, Hungary has chosen to be a hurdle within both organizations to court and swoon the CCP and Chinese market. The PRC, however, has little interest in directly influencing the decision-making of the Orbán regime. Hungary’s Eastern Opening Policy, the extension of the ambitions of Orbán, allows the Hungarian elite to advance its individual businesses and political interests and pursue all the carrots on the table while maintaining the protection of the West. These carrots should be further limited by Brussels and Washington. Between 2016 and 2020, the U.S. offered many carrots to Hungary that offered little change. For Ursula von der Leyen or NATO Secretary Stoltenberg, for that matter, to sustain future plans for unity, both must more actively engage with Hungary through multilateral targeted sanctions (sticks) that impact direct Hungarian elite stakeholders and signal a requirement for Hungary to choose either courtship with limited reward or partnership that offers already proven protection and economic success.

References

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