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China seeks way into CEE with closer co-operation but investment remains low

CEE
By Oliver West
06 Oct 2020

Though China has increased co-operation with Central and Eastern European nations in recent years, provoking some concern in the EU, investment volumes remain muted. Non-EU nations in the Balkans, however, offer a chance to progress on the Belt & Road initiative

Eight years after the inauguration of 16+1, the platform for co-operation between China and Central and Eastern European nations, the initiative has had mixed reviews. Though Greece joined in 2019, meaning 16+1 became 17+1, an April 2020 policy paper from CHOICE (China Observers in Central and Eastern Europe) noted that 17+1 had been commonly labelled an “empty shell”, implying there was little substance behind the fanfare.

Despite the annual high-level conferences, which China has elevated from prime minister to head of state level, there are certainly signs of cracks.

Czech president Miloš Zeman had initially turned down the invite to this year’s 17+1 conference in Beijing, claiming that China had not lived up to its promises on investments. He later changed his mind, but the event scheduled for April was postponed owing to Covid-19.

Miloš Vystrcˇil, head of the Czech senate, led a delegation to Taiwan in August — provoking the ire of Zeman. Yet the numbers suggest that President Zeman’s initial assertion was right.

According to the Mercator Institute for Chinese Studies, Eastern Europe’s share of Chinese foreign direct investment into the European Union was just 3% in 2019 — well below the region’s 10.1% share of EU GDP.

While acknowledging that China is a “very important” trade partner for the region, Dan Bucsa, chief economist for CEE at UniCredit, says that Chinese investment in economies has “not been of huge importance”.

“There are some infrastructure projects that are complementary to projects in the EU, but most of the largest Chinese investments are outside of the EU, in the Balkans,” he says. “Often Chinese funding for projects is more expensive than what countries can achieve in the market.”

With the 17+1 initiative grouping 12 EU members and five non-EU countries together, the EU has appeared wary of the initiative.

“The level of Chinese investment would have been a lot larger if there had not been as much pushback from core Europe,” says Ed Al-Hussainy, senior rates strategist at Columbia Threadneedle Investments in New York.

Yet if some observers see 17+1 as part of a divide-and-conquer strategy, in reality most CEE countries remain dependent on trade and investment with EU member states.

Though the CHOICE paper found there had been a “huge uptick” in political and societal ties between China and the region, authors noted that “results in the economic domain are falling behind expectations”.

Concerns that China is buying influence in CEE therefore appear wide of the mark.

“The assumptions that CEE as a whole has become more forthcoming towards China on political issues is not supported by the evidence,” says CHOICE. “While Hungary and Serbia have supported China on political issues, they represent an exception rather than the rule.”

Most nations in CEE, therefore, are not taking sides.

“Poland and China have a relationship based on mutual respect,” says Tadeusz Kościński, Poland’s minister of finance. “We have around $950m of Chinese investment, but in an economy of our size, perhaps that doesn’t make the headlines.

“There’s no policy to stop Chinese investment, nor to actively encourage it.”


Balkan buy-in

Hungary, Czech Republic, Poland, and Romania — all EU nations — receive the bulk of Chinese investment in CEE. Yet when it comes to infrastructure, Chinese projects are focused on non-EU states, which are in greater need of funding and where investors do not have to abide by EU regulations.

These states are all in the western Balkans. Albania, Montenegro, North Macedonia and Serbia are all official EU accession candidates, and Washington DC-based think-tank the Centre for Strategic and International Studies (CSIS) calls them “an area of geostrategic competition”. Here, says CSIS, Serbia is China’s “strategic anchor”, and FDI numbers are more significant.

Chinese companies acquired Serbia’s only steel mill, in Smederevo, in 2016 and copper miner RTB Bor in 2018. These inflows “helped the economy and budgetary situation” as they were loss-making companies, says Bucsa.

Serbia is one half of a project to build a railway between Belgrade and Budapest in Hungary — part of the Belt & Road Initiative. The railway, which is part of an effort to eventually link landlocked Hungary and Serbia to the Aegean Sea, is one to watch for how successful 17+1 may be.

Hungary, which has become the hub for much of China’s co-operation efforts in CEE, has classified details of the construction of its side of the project, in a decision that Fitch Solutions called “concerning” with “wider implications for the transparency of publicly-financed infrastructure in the country”. The European Commission has previously questioned the procurement procedure.

CSIS says that the project “lacks transparency”, with questions over the “high costs as well as the eventual return on investment”.

Yet the Balkans and their access to Mediterranean ports are important to Belt & Road because of their position as a gateway to European markets. If Balkan integration with the EU wanes, the project may not be so effective.

“China’s government-to-government deal-making and pursuit of its own standards in Serbia drive Serbia further from EU integration,” says CSIS. “In other words, China is burning the bridge it is attempting to build to the EU market via Serbia by failing to fulfil its commitments to greater transparency around its economic activities or respect for EU regulations.”
By Oliver West
06 Oct 2020