China looks to Europe — through the Balkans
6 January 2015, Financial Times
In the pale sunlight of an unseasonably warm December day, Chinese Premier Li Keqiang and Serbian Prime Minister Aleksandar Vucic on Thursday cut the ribbon to open the Mihailo Pupin Bridge, spanning the Danube in west Belgrade.
Logistically, the $170m, 1.5km bridge, built by state-owned China Road and Bridge Corporation, is intended to ease traffic in and around the Serbian capital. But Li’s visit to Belgrade has a considerably greater significance – the latest steps in China’s efforts to use the Balkans as a bridge to Europe.
The Chinese premier was visiting Belgrade to attend the third summit of leaders of 16 central and eastern European (CEE) countries and China held on November 16-17. It is an increasingly high-profile event that highlights China’s growing interest in the region.
Li noted that trade between the regions now totals $50bn, a figure all parties are keen to boost. Chinese companies have become active in public infrastructure tenders in several countries in CEE, and are likely to become even more so in the coming years. The relationship is seen as a win-win: Chinese companies win contracts in Europe, establishing a long-desired footprint in the continent, while cash-strapped CEE countries get much-needed infrastructure investments at a low cost. Investments in manufacturing and other sectors are expected to pick up, too, as China looks to capitalise on the region’s markets, location and trade access.
China’s strategy is becoming increasingly clear and coherent. On December 17, Li talked of establishing an “express lane to Europe” for Chinese goods, running from the Greek port of Piraeus through the Balkans to central Europe. Chinese state-owned shipping giant Cosco Pacific has a 35-year concession at Piraeus to upgrade and operate two container cargo piers.
On November 17, Li, Vucic and Hungarian counterpart Viktor Orban signed an agreement on part of this corridor, a 370km high-speed railway line from Belgrade to Budapest. The 184km Serbian stretch alone will cost €800m, according to the Chinese Southeast European Business Association (CSEBA). Vucic said he expected the line to be complete by June 2017, a deadline that may seem optimistic to long-time observers of infrastructure “development” in the region. Further developments south of Belgrade may have to wait.
While a number of bilateral meetings were held during the summit, deals between China and Serbia have dominated the headlines and account for many of the most substantive announcements. The country’s position at the heart of the region, its status on the road to EU accession but not yet a member (and thus less constrained in trade and regulation than, say Hungary, Romania or Croatia) and its low cost base all contribute to its appeal. Chinese officials and companies will be well aware that Serbia is also one of the most fiscally challenged countries in the region, with its expected budget deficit of 7 per cent of GDP for this year set to be Europe’s largest. Of the €4bn China has invested in the former Yugoslavia, €1.8bn has gone to Serbia, most of it into infrastructure and energy, the CSEBA says.
In total, Belgrade and Beijing inked 13 memoranda and agreements, says the CSEBA. Besides the Budapest rail link, the most significant is a $608m loan from China’s Exim Bank for a new $715m, 350 megawatt unit at the coal-fired Kostalac power plant, the first new thermal power station in Serbia for 25 years. Agreements were also signed by Chinese companies Goldwind and Sinohydro, to supply wind turbines and construct part of Belgrade’s ring road, respectively. Chinese contractors are also expected to participate in the construction of the motorway from Belgrade to the Montenegrin port of Bar, landlocked Serbia’s main conduit for seaborne trade. The €809.6bn Montenegrin sector is already being funded by Exim Bank.
Chinese companies may also participate in Serbia’s promised privatisation process, which has seen more than 500 companies listed for a sell-off.
The possible part-privatisation of the national railway company may also interest Chinese players, particularly given the synergies with other transportation investments.
China’s presence is also being felt in neighbouring Romania, which has long had a cordial relationship with Beijing, dating back to the 1960s, when Bucharest’s Communist rulers started to distance themselves from the Soviet Union. In September, Romanian Prime Minister Victor Ponta said the two countries had ongoing projects worth €6bn, again mostly in energy and infrastructure.
In Bosnia, Exim Bank is funding a €668m expansion of a coal power plant in Tuzla to be executed by a consortium of Gezhouba Group and Guandong Electric Power Design, two Chinese companies. In Bulgaria, Great Wall has established the first Chinese car plant on EU soil.
Li said that China planned to set up a €3bn fund to invest in CEE, on top of a €10bn credit line announced in 2012. These plans have been greeted with some scepticism, but Sinisa Malus, CSEBA’s communications manager, told beyondbrics the ambitions were real, and that China saw particular potential in countries outside the EU.
“The Chinese strategy to become an important player in the countries which now have EU candidate status, like Serbia, Montenegro, Macedonia and Albania, might secure Beijing’s long-term presence in the region and a continuing cooperation with the enlarged EU in the future,” he said. “Besides investments, tourism and culture have important perspectives. Both Croatia and Serbia have announced direct flights to China.”
He said a recent survey by the EU Chamber of Commerce in China found that 71 per cent of Chinese businesspeople gave access to the common market as the main reason for investing in the EU. The logic for setting up in low-cost Balkan markets with free trade agreements with not just the EU, but also Russia and Turkey, is strong.
Of course, the picture is not entirely rosy. There are concerns that China may use increasing economic influence in CEE countries with weak institutions to gain influence within the EU over the longer term – a “Trojan horse” argument. China has also been criticised for its willingness to invest in environmentally unfriendly lignite plants.
“Investments in the region are much needed, especially in energy efficiency and renewable energy, but transparency needs to be improved, both in choosing the projects and in the project contractors,” says Pippa Gallop, research co-ordinator at CEE Bankwatch, an environmental NGO. “It’s alarming to see so many coal plants on the table at a time when southeast European countries should be moving towards decarbonisation, and to see contracts like Serbia’s Kostolac B3 coal plant being awarded without a tender, on the basis of inter-governmental agreements.”
Malus admits that he expects a degree of pushback from other countries with substantial investments and interests in the region, including Germany, Austria and Russia as China’s presence grows.
“Normally, the situation where infrastructure is in the hands of foreign creditors is not a desirable setting for countries receiving such investments,” he says. “Still, unlike some EU countries or Russia, China does not have geostrategic appetites in this part of Europe, but is more interested in placing its capital and expanding its economic influence in the SEE region and in Europe as a whole.”
Perhaps of more immediate concern for companies in CEE is that the direction of trade and investment is mostly one-way at the moment. Gaining a foothold in the huge Chinese market remains a challenge for most.