Hungary’s New Leader Has a China Dilemma. Investing Will Be a Delicate Balance.
Outgoing Prime Minister Orban fostered strong ties, making Hungary a key European hub for Chinese manufacturing.
China invested heavily due to Hungary’s 30% to 40% cheaper labor, 9% corporate tax, and Orban’s political support, despite environmental and labor concerns.
Successor Peter Magyar seeks a balanced approach to China, welcoming investment but prioritizing environmental protection and added value.
Outgoing Hungarian Prime Minister Viktor Orban was famously Russia’s best friend in the European Union. He was China’s, too. That presents more thorny policy choices for his successor, Peter Magyar.
Beijing eclipsed Germany as Hungary’s most active foreign investor in recent years, turning the country of 9.6 million into its European bridgehead for advanced manufacturing. Fujian-based Contemporary Amperex Technology, or CATL, the world’s top electric vehicle battery maker, is slated to open a 7.3 billion euros ($8.6 billion) Hungarian plant this year. Leading EV producer BYD has committed €4 billion for its own factory. Telecom equipment giant Huawei Technologies established its European hub outside Budapest.
Part of the lure was economic. Hungarian labor remains 30% to 40% cheaper than Germany’s, says Zoltan Kiszelly, director of the Center for Political Analysis at the Szazadveg Foundation. Corporate taxes, at 9%, are the lowest in the EU save Ireland and Cyprus.
Orban added political sweeteners, vetoing or dissenting from numerous EU resolutions condemning Chinese behavior around human rights, Hong Kong or Taiwan. “The reason China chose Hungary over Poland or Czechia was the friendship factor,” says Agnes Szunomar, who heads the Institute of Global Studies at Corvinus University of Budapest.
Orban’s government may also have been soft on environmental and labor questions. Chinese workers building the BYD plant were subject to “internationally recognized indicators of forced labor,” alleges a recent report from U.S.-based NGO China Labor Watch. CATL’s neighbors-to-be are nervous about toxic waste, after revelations that Orban ignored reports of pollution from a Samsung SDI EV battery plant near Budapest.
All this comes as the EU hierarchy in Brussels pushes a “de-risking” strategy from China, though details are amorphous.
Magyar has mapped a balanced approach toward the Chinese golden goose. “I am very happy to travel to Beijing,” he told a press conference following his landslide April 12 victory. But “we will not accept foreign companies who create little added value and endanger Hungary’s land, air and water.”
Nixing the marquee investments by BYD and CATL looks vanishingly unlikely. The new premier should rather push for more EV supply chain and R&D investment in Hungary, Szunomar says. “Hungary is in an assembly trap with no tech spillover effects,” she says.
Huawei and its Chinese telecoms rival ZTE look like softer targets for a Magyar government as the EU moves toward banning them in 5G networks. “De-risking means the Chinese will be phased out and replaced by Ericsson, GE and Nokia,” Kiszelly predicts.
Magyar is also leaving himself wiggle room on whether and how to wean Hungary from Russian energy imports, which Orban maintained under an exemption from EU strictures. “Diversification needs to be strengthened, but this won’t happen overnight,” he told reporters on election eve.
The relationship with China could be more strategically important going forward. Each side has, in theory, a great deal to gain. Beijing has alienated most of the other European partners it courted through the so-called 17+1 initiative a decade ago, notes Dimitar Lilkov, a senior research officer at the Wilfried Martens Centre for European Studies. “Most of the investments fell through,” he says. “Chinese don’t like Western stuff like the rule of law.”
The flood of German investment that powered postcommunist Hungary meanwhile slowed to a trickle, making other sources essential. Magyar may need to tear out Orban’s domestic system by the roots. Ties with China require more delicate surgery.