China is winning the battle for hearts and minds in southeastern Europe as it pushes into the Balkan region, building infrastructure and investing in growth industries, rattling and disturbing western European policymakers.
Xiang Songzuo, chief economist at Agricultural Bank of China in Beijing, warned that officials, banks and policymakers in Brussels and other European capitals had “not invested enough in their southeastern neighbours.
“This is why the Chinese government is grabbing the opportunity to boost its presence in the area. The focus of western Europe’s leaders is western Europe, not eastern Europe or the Balkans. France and Germany ignore their eastern friends, and that is an error.”
Mirko Šarovic´, minister of foreign trade and economic relations of Bosnia and Herzegovina, said western Europe’s politicians and bankers needed to up their game in response to China’s strong push into the Western Balkans. “China is rather aggressive in this region, bringing companies here to do business,” said Šarovic´, speaking to GlobalMarkets at the EBRD annual meeting on Tuesday. “We have informed Brussels that if they want to invest here rather than China, we want money at better conditions to compete with Chinese funding.”
New kid on the block
China’s influence is being felt in all corners of the region. A senior official at the EBRD told GlobalMarkets that China was “increasingly seen as a threat by the EU” in the Balkans and across emerging Europe. “There is a huge new player on the ground, who we look at in amazement.
“But they create problems, because they operate so far outside the rules. We follow strict rules and they do not, building infrastructure that is good for the guy who commissions it, but not for the country.”
This was a direct dig at a 165km highway in Montenegro. The so-called “road to nowhere”, Chinese-funded-and-built, has already cost €1bn ($1.12bn), and is projected by the IMF to need another $1bn to be completed.
Charlotte Ruhe, head of central and southeastern Europe at the EBRD, said: “If the Chinese want to invest in EU accession countries and the EU, they need to play by EU rules — this is our bottom line. As long as they play by the rules, we are perfectly fine.
“[W]e have very high standards for the way projects are procured and managed. We need to ensure that projects offer value for money for the governments involved. There is a lot of sensitivity around Chinese investment in the region, and the Chinese have seen that there is pushback to their approach.”
Experts said Europe faced three major headaches in dealing in its own backyard with Asia’s largest economy. Chinese exports into the CEE region had risen four-fold since 2014, Raiffeisen Bank says, with exports into southeastern Europe up eight-fold. Six countries, including the Czech Republic, Bosnia and Herzegovina Hungary and Serbia, posted a trade deficit with China of more than 3% in 2017.
Then there is the fear of frontier states succumbing to a Chinese style debt-trap, where financially fragile countries secure cheap loans from China, then struggle to meet their obligations. “The fear we have is seeing China pay for highways, then coming to own them when a sovereign cannot repay.” said a senior development banker. “ The juice in the game [for China] is not about building a project but about the profit it makes over the next 25 years, in loan repayments, and getting the sovereign to pay for maintenance.”
Highway to China
But the far bigger fear, now felt keenly at the heart of Europe, is seeing China use the infrastructure it builds in the Balkans and beyond as a way to channel lower-cost goods directly into the region’s biggest markets.
“Western Europe sees the infrastructure being built as the thin end of the wedge,” said Charles Robertson, chief economist at Moscow-based investment bank Renaissance Capital. “Once highways through the Balkans are linked up to Piraeus Port [in Greece], they will use the route to channel low-cost goods straight into markets like Germany’s. That will be great for China, but not for western Europe’s big corporates. This is the last thing Siemens wants.”
Added Agricultural Bank’s Xiang: “China sees the Balkans as a perfect way to channel goods into Europe. Ultimately, China is investing in the Balkans because it wants to increase its influence over western Europe. The region is our back door into Europe.”
Šarovic´ said the annual meeting in Sarajevo this week was an opportunity to pitch for more investment from Europe. “From 2019 onwards, we expect more European investment in this region and in Bosnia. We are hoping for more help — it’s necessary to finance development here. That’s the point of this conference — to drive European investment here.”