The Hungarian government's invitation to Chinese President Xi Jinping on Europe Day and the 20th anniversary of Hungary's accession to the bloc is a blatant message to the EU, foreign policy experts have told bne IntelliNews.

Hungary has been ready to defend Chinese interests at the political level for almost a decade, rendering Budapest an attractive target for Chinese diplomatic efforts and influence campaigns, Hungary’s leading foreign policy expert Botond Feledy told bne IntelliNews.

Chinese President Xi Jinping’s arrival in Budapest with a delegation of some 400 is also timed for the 75th anniversary of the restoration of diplomatic ties between the two countries and it could be a milestone in the two countries’ relations with important global implications, Gong Tao, China's Ambassador to Hungary, told a group of journalists last week at the Chinese embassy. 

These days Hungary's nationalist government likes to boast of its long-standing connection with China dating back to 1949 but conveniently overlooks the key figure responsible for forging that historical tie: Matyas Rakosi, a Stalinist hardliner who was ousted from power following the death of the Russian dictator.

Xi Jinping's first trip to Europe in five years will wind up in Hungary, after visits to France and Serbia. It will be the first visit by a Chinese president to Hungary in 20 years.

Sino-Hungarian relations have blossomed over the past decade, marked by a significant increase in political and economic cooperation. This has coincided with Prime Minister Viktor Orban’s  "Eastern Opening" strategy, launched around 2013, aimed at diversifying its trade partnerships by looking eastward. This opened doors for China's growing economic clout in the region, but nowhere did it go as  deep as in Hungary.

Critics have drawn a parallel to Orban’s gradual strategy to drift from liberal democracy around that time, as Hungary’s nationalist leader declared his intention to build an illiberal state, based on national foundations, citing Russia and China as prime examples in a 2014 speech. Orban reasoned that as liberalism promotes the selfish interests of often unpatriotic individuals, only an illiberal democracy can devotedly serve the general interest of the nation.

After four supermajority victories, there is no longer a single public institution that limits the executive and an estimated quarter of the economy is now controlled by Orban’s cronies, Under the tilted election system and media dominance it is questionable if the current government can be voted out at any time, some argue. In 2022 a report by the European Parliament, Hungary was referred to as a "hybrid regime of electoral autocracy".

Economic considerations have also played a key role in Orban’s policy shift. Before 2010, only a handful of major Chinese companies were present in Hungary. Wanhua was the biggest investor after it bought Hungarian petrochemical firm BorsodChem for €1.2bn in 2011, and it has carried out major investments in its subsidiary since. 

Hungary became the first European country to establish a working group with China under the Belt and Road Initiative (BRI) framework in 2015, which aims to connect China with Europe through infrastructure projects. Budapest saw it as a chance to boost its infrastructure development.

In 2017, bilateral relations reached a new height when the two parties established a comprehensive strategic partnership. Over the past five years, Chinese investments in Hungary have experienced steady growth, with China now standing as the largest foreign direct investor in the country.

Orban was the only EU country leader to participate in the third BRI summit last October, where he encouraged more Chinese companies to invest in Hungary. To attend, Hungary's premier skipped an extraordinary video conference by EU leaders to address the terrorist attacks by Hamas against Israel.

Over the last 6-7 years Hungary has strengthened its financial ties to China with the aim of becoming a regional financial hub, besides being an economic meeting point between East and West.

The country is home to the biggest banks, including the Bank of China, China Construction Bank and the China Development Bank in Hungary. CDB, known for financing infrastructure projects, could provide funding for BRI projects in Hungary, like the Budapest-Belgrade railway, while CCB is present in Budapest with a fintech lab.

Hungary’s central bank governor Gyorgy Matolcsy has lauded fast-emerging Asian economies as prime examples of breaking from the middle-income trap and has spoken of the need of internationalisation of the Chinese currency for settlements.

During Orban’s last visit to China Hungary signed a cooperation agreement with the Industrial and Commercial Bank of China (ICBC), which could pave the way for its entrance to the market.

Tourism has also blossomed over the years and China introduced visa-free travel for Hungarian tourists in March. The number of direct flights between the two countries could increase to 20 this summer, the highest among countries from Central Europe.

When faced with the criticism of fostering close ties to China, Hungarian government officials, including Orban, have struck back by accusing Western leaders of hypocrisy, as other European capitals have been just as active courting  Chinese investments as Hungary, they argue.

But according to  Feledy, it was Hungary which vetoed several EU-level proposals condemning China for human rights violations or over Hong Kong or Taiwan. According to a compilation by valaszonline.hu, some 60% of the vetoes regarding Russia or China have come from Hungary in the last six years.

The riskiest part of the Hungarian strategy with China is the inherent tension between befriending the China-hawk presidential candidate, Donald Trump, he told bne IntelliNews.

The Hungarian premier, who is enjoying the spotlight, has navigated himself into a political corner where autocrats of third countries may use him more than he can use them for domestic or EU politics, according to Feledy.

The foreign policy expert noted that financing from China or FDI from other Asian countries provides no alternative to EU grants. It has become increasingly clear in recent years that there are no political conditions attached to loans by Beijing, but as other examples show, collateral is all the more important, he notes.

Hungary will assume the EU's rotating presidency in July, which serves as a tool to exert its own political position on other member states. Beijing expects Hungary to pursue a rational and pragmatic policy towards China during that period and encourage other EU member states to do the same, Gong Tao said at the press briefing on April 30. Hungary, much like China, supports interconnectedness and connectivity, and opposes ideological approaches, he added.

Based on comments by government officials, China can rest assured of receiving support from Budapest on key issues.

Hungary is against the European Commission’s proposal to impose extra tariffs on Chinese EV imports, National Economy Minister Marton Nagy said at the recent CPAC conference in Budapest, calling the planned measures stupid and which could lead to trade wars

Hungary’s top diplomat has also warned on numerous occasions that efforts by Europe to decouple from or derisk its relations with China would be detrimental to the continent’s economy.

As for Xi’s upcoming visit to Budapest, Gong Tao provided little detail of what is to come but noted that several bilateral agreements will be signed. He chose not to respond to a query asking about the possibility of a major automotive investment.

Speculation has been circulating in the financial press for months about the construction of a new factory by Chinese Great Wall Motor (GWM) in southern Hungary. Intriguingly, even pro-government media outlets reported on these rumours; however, some of these articles had to be removed because the Hungarian government wanted to keep the story from leaking, which is another example of the direct control over the media.

Foreign Minister Peter Szijjarto's visit to China last month, his second in six months, along with the announcement of Xi's upcoming visit to Hungary, further confirmed the validity of the report. Hungary's top diplomat stated that there were HUF6 trillion (€15.3bn) worth of Chinese investments currently underway, potentially creating 25,000 new jobs.

According to some reports, Xi and Orban will travel to the southern Hungarian town of Pecs to announce the large-scale project, which would come a few months after the world’s leading NEV maker officially announced the construction of its first European production facility in Szeged from an estimated €5bn, creating 8,000-9,000 jobs.

The government reportedly lobbied against Szeged as a destination for political reasons, as Hungary’s third-largest city has been led by a popular Socialist mayor Laszlo Botka since 2002. The city’s political stability and the proximity to the Budapest-Belgrade railway line, the flagship project within the BRI, proved to be the decisive factor, according to people familiar with the issue.

The construction and upgrade of the 166-km railway between Budapest and the southern border with Serbia may also be discussed at the Orban-Xi meeting, as the project has hit an impasse. The Chinese constructor has been unable to provide the security system needed to meet EU standards. Construction costs have surged due to inflation, and the project, initially budgeted at €2.1bn, will require additional funding.

The railway line connecting the two capitals has the potential to become the main transport route for Chinese and Asian goods that arrive by sea at the Chinese-owned Greek port of Piraeus and into Europe. It also fits well with Hungary’s strategy of becoming a distribution hub for Chinese goods in Europe. Some analysts have linked the government’s intention to buy Budapest Airport to accelerate that process.

Hungary has now become the primary European destination of Chinese corporate investments, with a string of new projects in the pipeline. At the end of 2023 Hungary had the third-largest EV battery production capacity globally, which will increase from 50 GWh per year at present to 150 GWh by 2025. According to earlier reports, investments by Chinese battery manufacturers will reach €13bn in 2023.

Dora Gyorffy, an economist and professor at Budapest Corvinus University, compared the government’s strategy to make Hungary a battery powerhouse to the botched forced industrialisation in the 1950s. Communist governments at the time wanted to make Hungary the "country of iron and steel," despite its lack of raw materials or low-cost energy.  

At present, Hungary is faced with the same dilemma, as it possesses none of the resources necessary to make this strategy work, she argues. The country lacks raw materials, and has no modern energy grid to meet the rising needs of vastly energy-intensive sectors and the workforce. Companies have already signalled their need to import labour from Asia, as the country’s labour pool is insufficient to meet growing demand. Fidesz, which has campaigned fiercely against illegal migration, has opened the door to let tens of thousands of guest workers to new industrial entities.

The state-subsidised Hungarian battery industry is increasingly dependent on China, damaging the environment and undermining the country’s development potential, she says.

Gyorffy recalled that the government’s EV battery strategy was drafted a few years ago without conducting any impact assessment on what the potential energy needs are or its environmental effects.

She agrees with the main argument against the strategy that these investments are mostly assembly line jobs with little added value, as R&D is done at the HQ of parent companies.

Unlike the automotive industry, the EV supply chain is leaner and suppliers have fewer opportunities.

It is safe to say that Chinese manufacturers prefer Hungary due to the absence of stringent environmental regulations, besides its geographical location and proximity to Western markets.

By prioritising these investments as a national strategic priority, environmental regulations are circumvented. Local governments have no tools to block projects and public referenda are thwarted when the investment is given a strategic investment status. This was the case regarding a controversial battery recycling project carried out by Slovenia’s Andrada.

There have been cases of contamination by battery manufacturers already producing in Hungary such as Samsung SDI, yet the imposed fines have been unreasonably minimal.

Another pressing issue is the question of battery waste. Gyorffy argues that the establishment of the battery value chain in Hungary makes it almost inevitable that waste processing will also be in Hungary, which is an overall unprofitable activity given the currently available technologies. 

The government tries to downplay environmental concerns, but protests around the planned sites show growing public discontent. The annual water usage by CATL could equal the entire needs of Debrecen, Hungary’s second-largest city of more than 200,000. This could lead to conflicts as that part of the country is one of the most vulnerable to climate change.

Debrecen, close to the Romanian border, over the years has become the fastest-growing industrial hub in Hungary, drawing an estimated €10bn of investment since Fidesz first swept to power in 2010.

The government has generously supported these projects, not just with direct cash grants but with infrastructure developments around the area.

Direct cash grants could total 10% of the investments. In the case of CATL, Hungary offered €800mn in grants, tax breaks and infrastructural support for the company’s €7.3bn factory, which is set to be the largest greenfield investment in Hungary, apart from the expansion of the Paks nuclear power plant (NPP).

Investing in education would have a far greater return in the long term than these investments, Gyorffy argues, a notion also shared by Hungarian National Bank governor Gyorgy Matolcsy.

Another major risk, she continues, is that the current lithium-ion battery technology could become obsolete at some point and new players may emerge with a more advanced technology.

According to Gyorffy, there will be beneficiaries of the influx of Chinese companies to Hungary, namely big construction firms close to Orban.