China’s focus on the Balkans as an extension of its Belt and Road Initiative has intensified. Aleya Begum reports on how this attention has manifested.
Chinese President Xi Jinping’s Belt and Road Initiative (BRI) is marching on with its grand Eurasian strategy that seeks to connect Chinese trade with the rest of Asia, Africa, the Middle East and Europe. For the Balkan nations, the ambitious project, which comes accompanied with deep pockets and increasingly sophisticated technical know-how, could be transformational. But what are the longer-term implications of Chinese capital into the region? And should there be cause for concern for the European Union, which is drafting a new foreign investment screening process to satisfy political demands to get tough on Chinese capital?
The Balkan Silk Road (BSR) is the transport route and logistics corridor China has begun to establish in the Balkans under the BRI. The route starts in Budapest, travels through Belgrade and Skopje and extends to the Greek port of Piraeus. For countries along the route, the advantages of Chinese investments are obvious. Not being prime investment destinations, but in desperate need of development, the countries are mostly embracing China’s presence.
“Investments are badly needed in that region, particularly after the civil war in Kosovo,” says senior researcher at the European Trade Union Institute (ETUI), Bela Galgoczi.
“It is certainly a benefit for them that Chinese investments are coming in. Infrastructure investment and train and railway construction are absolutely needed.”
In May 2017, Xi’s Belt and Road Forum for International Co-operation, which was held in Beijing, launched a raft of initiatives that will allow BSR countries to broaden their ties with China and see major infrastructural developments in their respective countries (see fact box on page 125).
Funding frenzy
Under the umbrella of the BRI, in 2012, China created a ‘16+1’ initiative, which sets out to boost trade and economic relations between China and 16 countries in Central and Eastern Europe (CEE), including Southeast Europe. The countries are Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia and Slovenia. Poland hosted the inauguration summit in Warsaw, during which the US$435mn China-CEE Investment Co-operation Fund was launched. Its two main investors are the Export-Import Bank of China and the Exim Bank of Hungary.
In 2016, a second Sino-CEE Investment Co-operation Fund was launched by Premier Li Keqiang during the group’s fourth summit in Riga, with a total volume of US$11bn, with Industrial and Commercial Bank of China (ICBC) as the main funding contributor. The fund will seek to raise €50bn in project finance for infrastructure, high-tech manufacturing and consumer goods sectors.
Data shows China’s outward foreign direct investments into the 16 participating countries went up from US$400mn in 2009 to roughly US$3bn in 2016. Funding to six countries – Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia – represented 95% of that.
In 2016, China also became a shareholder in the European Bank for Reconstruction and Development (EBRD), holding a 0.096% capital share. As of June 2017, China-EBRD investments stood at €1.7bn. The EBRD has arranged a number of syndications with Chinese banks and invested with many Chinese sponsors, while 15 Chinese banks have joined its trade facilitation programme (TFP).
What makes Chinese financing particularly attractive for countries in the Balkans are the terms. Chinese financing comes with preferential below-market lending rates and, unlike most development banks, China is less concerned about the long-term economic feasibility of all its projects. One such example is a US$600mn highway linking Belgrade and Bar in Montenegro. The economic impact of the road is expected to be minimal and therefore financing from European lenders would have been unlikely. However, China Export-Import Bank provided the investment.
Ultimately, governments in the Balkans are driven to embrace Chinese investment due to a lack of sizeable alternatives and the opportunities they hope a more connected region will bring.
For China, the region offers cheaper acquisitions, a high demand for capital and cheaper labour. Combined, it’s an attractive potential manufacturing hub that’s close to the EU. With a collective population of 100 million citizens, where income levels are on the up for some, the 16 countries also offer a sizeable market for Chinese goods.
Notable projects
Chinese investment has poured into the port, logistics, tourism and energy sectors in Greece, which acts as a bridge between the BSR and Southeastern Europe corridor. One of China’s most significant investments in Greece was the acquisition of 51% of the Pireaus Port Authority – one of Europe’s biggest ports in terms of container volume turnover. In August 2016, China Ocean Shipping Company (COSCO) bought a 51% stake for €280.5mn. The sales agreement stipulated that should COSCO fulfil certain investment conditions up to €300mn in the next five years, it can pay an additional €88mn and increase this to 67%. COSCO has since embarked on a two-fold strategy to turn the port into a major cruise hub as well as a transhipment logistics centre – boosting both travel and trade between Asia and Southeastern Europe.
In February 2017, the China Development Bank announced plans to expand its presence in Greece by financing infrastructure projects in the energy sector. The bank said it would provide up to €1bn of financing options to Greece’s Public Power Corporation, which had signed a strategic co-operation agreement with China Machinery Engineering Corporation in October 2016. The enormity of the investment is largely seen as a door opener for similar Sino-Greek collaboration, which could expand into the energy sectors of neighbouring Balkan countries.
The investment came on the heels of China’s State Grid Corporation, the world’s biggest utility, purchasing a minority 24% stake in Greece’s power grid operator ADMIE. State Grid has taken similar minority shares in electricity companies in Portugal (25% share in REN in 2012), Italy (35% share in CDP Reti in 2017) and Spain (bidding for German utility E.ON’s northern Spain grid). Such activity is all the more remarkable, points out former chief economist for the European Agency for Reconstruction, Jens Bastian, who is currently an independent economic consultant and financial sector analyst for Southeast Europe, in a report, as “it is China-led and contrasts with the low level of cross-border grid investments across the EU by European companies”.
In the rest of the region, China has embarked on, or committed to, numerous road and railroad projects. Among them is the flagship Budapest-Belgrade railway upgrade. Construction was originally due to start in 2015 but has been delayed due to a probe by the EU on its tendering processes. The EU argues that the project not only lacks long-term economic feasibility but that it must follow the bloc’s procurement rules that require public tenders to be offered for large infrastructure projects. The completed rail line is positioned to become the main gateway for Chinese goods shipped to Europe via the Greek port of Piraeus and will cut the current eight-hour journey to under three.
China has also made a number of investments in thermal power plants in Bosnia Herzegovina, and the steel and automotive sectors in Serbia and Macedonia.
Trade balance or imbalance?
While the benefits of Chinese capital into the region are clear, what’s less apparent is to what extent they will be realised for countries along the BSR. In a best-case scenario, the opening up of trade opportunities could be transformational for individual countries and lead to the revival of the entire region. An increase in its own exports will link the region to the global value chain, which in turn will lead to greater efficiencies, greater governance, higher productivity and ultimately could see a shift in better access to finance.
Trade flow data compiled by Bastian shows that total trade volume between China and the western Balkan economies of Bosnia and Herzegovina, Macedonia, Serbia, Albania, Montenegro and Kosovo reached €3.3bn in 2016.
Serbia accounts for almost half of that total. Meanwhile, China’s ranking as a trading partner in 2016 was in the top five for Bosnia and Herzegovina, Macedonia, Serbia, Albania, Montenegro and Kosovo. For all of these countries, the trade flow is heavily skewed in favour of exports from China. A similar picture is painted for Greece where the value of goods from China is steadily increasing while exports decline.
“Right now there is work to be done on the balance of trade flows,” says managing director for economics, policy and governance at EBRD, Mattia Romani.
“At the moment there is a lot of work to be done to ensure that these projects do not just pass through countries. For countries in the western Balkan region we want to see value-added activity to the goods and services that go through their borders. Connectivity doesn’t just mean railroads and ports – it also means ICT (information and communications technology), it means cultural training, science, innovation centres – things that can really help create value in countries.”
While much onus is often put on trade balance, this is not always necessary or an accurate way of putting things in perspective, says Galgoczi of ETUI: “Central Europe has trade surpluses with Western Europe and overall trade surpluses, so if they get into deficit with China that would not in itself be a problem. With China being a huge market there is big potential for these countries.”
The critical question then becomes how open China will be to Balkan goods travelling to its own markets. The issue of reciprocity in its trade relations has been a sore one for the EU as some of Europe’s biggest businesses have been forced to share ownership and know-how with Chinese companies if they want to sell or operate in China. Meanwhile, in Europe, Chinese investors are free to buy up strategically important companies. The EU is in the midst of drafting a proposed new framework for screening foreign investment, namely to implement a tougher approach to Chinese investment in the bloc. The proposal is currently with member states for review before it progresses to ratification.
Concerns have also been raised on China’s imbalance in hiring local staff on projects, as well as fears that Chinese companies ultimately serve as proxies for the state. Moreover, the favourable lending agreements offered could see the Balkans countries over-burdened with large debt obligations.
Romani summarises scepticism over the BRI and Chinese investments into three main reasons.
“Firstly, people are concerned about the sheer weight of China in the global economy and therefore how possible it will be to protect and ringfence interests of much smaller economies,” he says. “The second concern is about the Chinese development model and whether China will export its way of doing business to the rest of the world. That concerns countries that see their democratic institutions as weak, therefore the concern is that this alternative model may weaken them further. The third is concern about standards, particularly environmental and social standards – will Chinese investment come with Chinese labour and standards and not international standards?”
It is clear that China’s capital flows into the region provide Beijing with leverage and goodwill. With several Balkan countries in line to join the EU in the next few years, China is positioned to have more friends at the decision table in Brussels. In June 2017, Greece blocked an EU statement at the United Nations that criticised China’s human rights record, a decision EU diplomats said undermined efforts to confront Beijing’s crackdown on activists and dissidents.
It was the first time the EU had failed to make its statement at the UN’s top rights body. The incident illustrates how China is gaining influence in the region and why the EU needs to step up its attention. Some German diplomats have even voiced concerns that, like Russia, China could become a threat to stability in the region.
But Romani is optimistic. He argues that Chinese investors in the region are aware of the strong connection the Balkans has with the EU, and that the fact that the Chinese government has reached out to the EBRD for guidance in respecting these historical connections, is a positive sign. Further, President Xi’s speech in May described attributes the BRI should have that resonated very strongly with the qualities that the EBRD enforces, such as competition, good governance and resilience. But he acknowledges there is still work to be done.
“This is the first time since the EBRD was created where we have a common vision of growth, development and innovation cutting across all of our countries of operation – countries that are sometimes forgotten by the rest of the world and countries that are not part of the global economy,” he says.
“[But] does this mean that everything is sorted and everything is hunky dory and nothing needs to be done? Of course not. These are early stages. We need to encourage sharing of experience and knowledge. But the direction of travel is very much the right one and BRI-supporting institutions such as the EBRD play a crucial role in translating China’s vision into actions that are aligned with the principles they outline.”
Agreements made with Balkan Silk Road countries at the Belt and Road Forum for International Co-operation in Beijing in May 2017
At the forum, the Chinese government signed economic and trade cooperation agreements with the 30 governments, among which are Belarus, Azerbaijan, Georgia, Armenia, Albania, Bosnia and Herzegovina, Montenegro and Serbia.
The ministry of commerce of China signed memoranda of understanding concerning SME co-operation with the ministry of industry and trade of the Czech Republic and the ministry of foreign affairs and trade of Hungary.
The ministry of agriculture of China signed the memorandum on determining the action plan on agricultural trade and investment with the ministry of agriculture and environment protection of Serbia.
Sinosure signed co-operation agreements with the export credit agencies in Belarus and Serbia.
The ministry of education of China signed agreements on education cooperation with the relevant departments in Bosnia and Herzegovina.
Greek corporate representatives signed an agreement for the construction of a fibre-optic network in the country.
President-elect Aleksandar Vucic from Serbia held talks about a Sino-Serbian industrial park and negotiations about direct flights between China and Serbia.
The Export-Import Bank of China signed a loan agreement with the ministry of finance of Serbia regarding the modernisation of the Hungarian-Serbian railway line.
The Export-Import Bank of China also signed a loan agreement on a telecommunication project with Telekom Srbija of Serbia.
