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Economy

China paves its latest silk road into Eastern Europe

Four years ago, Beijing reached out to governments in Central and Eastern Europe with a formal offer to boost trade with the region. It set up a 17-member organization comprising 11 countries within the European Union, five still outside it and China itself. Called the China-CEE, or 16-plus-One, it opened a secretariat in Beijing and launched its own investment fund that now has $435 million committed.

     China-CEE holds annual summits. The latest in November was hosted in Suzhou by Chinese Premier Li Keqiang who declared the theme of "New Beginning, New Fields, New Vision" amid a flurry of statistics that trade between China and the CEE had increased more than 50% to $60 billion since 2012.

     In the latest of a series of leadership visits, Chinese President Xi Jinping has opted to go to the Czech Republic in March, the only European stop on his way to the U.S.

     Compared to Japan and South Korea which are much longer-standing East Asian trade partners in this part of Europe, China remains very much a minnow. But Beijing's recent advance has taken on significance because these specific European countries were all formerly under the Soviet umbrella and several are now becoming publicly impatient with the detailed rules and democratic vision of the European Union.

Ideological sympathy

Hungary is leading the way, with Prime Minister Victor Orban declaring his country to be an "illiberal state." Hungary has been an EU member for 12 years, and Orban, in power since 2010, is actively testing his country's resolve on key elements of democracy and the rule of law. He says he is looking at the Chinese model to forge a "different, special, national approach" to government.

     At the same time, Chinese Foreign Minister Wang Yi has proclaimed that Hungary is "a bridgehead in Chinese-European cooperation," with his Hungarian counterpart, Peter Szijjarto, adding: "We would like Chinese companies coming to Europe to consider Hungary as their base and also Hungary to become the main transit route of Chinese goods intended for the European market in the long run."

     Hungary is far from alone. It is one of the EU's Visegrad, or V-4, group that includes the more developed eastern European countries of Poland, the Czech Republic and Slovakia. The group has a collective population of 65 million, or more than 10% of the EU's total, while all 16 CEE countries have a collective population of 119 million.

     "There is more and more talk of playing the China card," says Damian Wnukowsuki of the Polish Institute of International Affairs. "Given our past with the Soviet Union, dealing with China is comparatively straightforward because the primary relationship is the economy."

     Beijing's investment is targeted, careful and already having an impact in places from Tirana to Prague and beyond. At present the emphasis is on mergers and acquisitions in the electronics and infrastructure sectors.

     Some 5,000 Chinese companies operate in Hungary alone. Among the biggest is the Yantai Wanhua Group which now owns the chemical company Borsodchem. Others include such established global names in electronics as Huawei, ZTE and Lenovo, together with rising stars such as BYD and Comlink.

     A $1.6 billion Chinese bond is due to finance a railway project between Hungary and Serbia, and among other infrastructure investments is the Xanga Investment and Development Group's 75-year license to operate the international airport in Hungary's second city Debrecen.

     There is also a relatively large Chinese diaspora in Hungary, about 40,000 people, which has attracted the Bank of China to open a regional center in Budapest, as well as lead to the establishment of Sino-Hungarian bilingual primary and secondary schools.

     After a cautious start, the first significant contract with the Czech Republic came in 2014 between Czech-Slovak J&T Financial Group and the private Chinese conglomerate CEFC, which was valued at $750 million, and which was followed in early September by CEFC's deal to acquire a 10% share in Czech airline Travel Service Airlines and its announcement of plans to acquire a further 39.92% stake. 

     In Poland, the Pinggao Group, a subsidiary of the State Grid Corp. of China, has won contracts to build electric transmission lines, and $84 million from the China-CEE investment fund is being used for wind energy projects. Chinese companies have also funded Wolka Kowowska, a sprawl of popular shopping malls north of Warsaw.

Bumpy road

As with China's forays into Africa and Latin America, the road has been bumpy and marred by broken contracts, frustrating negotiations and cultural clashes. The 2009 collapse of a Polish road-building project being carried out by the huge China Overseas Engineering Group (COVEC) is now embedded in local business folklore. COVEC was unable to fulfil its $447 million contract for a 50km highway from Warsaw to the German border, having put in a bid that undercut by more than 50% its Polish rivals, who filed formal protests in Warsaw and Brussels, alleging incompetence, price dumping and cheating.

     The eastern edge of Europe still has to punch above its weight to make itself a significant hub for inward Chinese investment.

     "The major hubs of Germany and the U.K. remain easier entry points to invest across Europe," said Kerry Brown of King's College, London, and author of "The New Emperors: Power and the Party in China."

     "But Central and Eastern Europe is very much in its sights. China is looking for long term opportunities," she said.

     Overall, it is clear that what began as a purely trade-driven initiative is fast gathering a political edge, not because of any changes by China, but because of the shifting views among the most powerful of the CEE countries.

     In 2008, the World Bank praised the V-4 governments for building democratic institutional government with rule-of-law and respect for human rights. But now the European Commission has officially put Hungary and the new conservative Polish government, which won a landslide victory in 2015, under observation. It fears EU laws are being contravened by changes both countries are making within their judiciary, media and other institutions.

     It is as if two separate journeys that began a quarter century ago are bringing both Chinese and CEE societies full circle. In 1989, both China and CEE embarked upon very different paths. After the Tiananmen Square protests, China launched its authoritarian economy-led policies, while CEE, inspired by the collapse of the Berlin Wall, looked towards the EU as its beacon for democratic reform.

     That may no longer be the case.

     Orban, once a democracy activist, now describes political liberalism as the god that failed. "The stars are Singapore, China, India, Turkey and Russia," he said.

     This is a very long way from Hungary declaring it wants to leave the EU, but it marks a distinct change in atmosphere. For its part, Beijing has long experience of exploiting divisions within Europe, whose reputation has already been weakened by financial and immigration issues, and Britain's upcoming June referendum on whether even to remain an EU member.

     One by one the CEE nations are putting in place their "Look East" policies as China is now viewing the region as a natural extension of its New Silk Road.

Humphrey Hawksley, an Asia specialist, is author of "Democracy Kills: What's So Good About Having The Vote?"

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