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As CEE warms to China, experts warn of risk

Beijing is keen to use European markets but the feeling is not reciprocal

PRAGUE -- As Chinese Premier Li Keqiang stood before leaders from Central and Eastern Europe at the China-CEE "16-plus-One" summit in November in Riga, Latvia, he announced an ambitious economic agenda that defied decades of icy relations between the two regions.

With a focus on improving trade, China reaffirmed its support for the building of ports in the Adriatic, Baltic and Black seas, a massive, multi-billion-dollar project that could create a commercial windfall for cash-strapped countries like Latvia. And to show that Beijing means business, Li simultaneously launched a $11.15 billion fund for new investment projects in CEE countries, with hopes of raising a total of $53.94 billion for new infrastructure in the region.

The new commitment marks an unprecedented expansion of Chinese involvement in the region, but experts are warning about the consequences of allowing China to buy its way into Europe.

"FDI [foreign direct investment] is a vehicle for expanding [EU] market access for Chinese exports, and this will cause rising trade deficits and job losses in the EU, especially in manufacturing industries," said Robert Scott, senior economist at the Economic Policy Institute, a Washington-based think tank.

Among its growing list of commitments in the region, China has already pledged $1 trillion to build railways, highways and ports in Eurasia as part of its "One Belt and Road Initiative" economic and development initiative. In addition, China is currently buying up companies across Europe in another economic plan called "Made in China 2025," which aims to turn the country into a global manufacturing leader.

Overall, Chinese investment in Europe could top $28.5 billion for 2016, the European Commission estimates.

But China's mission is being criticized as self-serving, and is being treated by many as a serious threat to development in CEE, especially if cheaper, Chinese-made products are allowed to flow into local markets unchallenged.

Mikko Huotari, head of a program on China's foreign relations at the Berlin-based Mercator Institute (Courtesy of Mercator Institute)

"China is setting up infrastructure policies in ways that don't align with Europe," said Mikko Huotari, head of a program on China's foreign relations at the Berlin-based Mercator Institute, noting that Chinese imports would undercut European producers, which could in turn affect the region's labor market.

"It is one way China is expanding, by making trade relations that were once balanced no longer balanced, as most of the products would be coming from China," he said.

No quid pro quo

While European countries are hoping to offset such losses by expanding their export base eastward, there has been little move by China to reciprocate by allowing greater access to its markets. The growing imbalance is seen as protectionist and "not politically sustainable," the EU Chamber of Commerce in China said in September.

Trade between China and the CEE countries reached $56.2 billion in 2015, up 28% since 2010, according to Chinese state-owned media. At the same time, Chinese investment in CEE countries exceeded $5 billion, while CEE nations have invested just $1.2 billion in China.

"China is replicating its regional approach to foreign policy that it has already tested in other areas of the world here in Central Europe. It's surprising to say the least," Huotari said.

For China, the timing of its CEE push could not be better. Europe is mired in political uncertainty amid the rise of nationalism and growing doubts about the integrity of regulatory bodies such as the European Commission. The result creates opportunities for peripheral countries and governments viewed as antagonistic by Brussels to stray from the herd.

Such was the case at the Riga 16-plus-One summit, where Serbia signed a commercial contract with China to build the first section of a railway line running between its capital Belgrade and Hungarian capital Budapest. The move has reinforced the two countries' shared ambition to move away from the EU and toward China.

"This should send a strong message to Brussels at a time of tense relations within the EU and doubts about the immediate future of the Union," Dragan Pavlicevic, a lecturer in the Department of China Studies at Xi'an Jiaotong Liverpool University in Suzhou, wrote in a joint research paper with the European Council on Foreign Relations, a London-based think-tank.

Experts have noted that the nature of such dealings between China and disgruntled countries like Hungary have become increasingly opaque. They havealso raised concerns that the jobs to be created from major infrastructure projects may wind up in the hands of Chinese contractors.

"The [Belgrade-Budapest railway] project is characteristic of the unease that Chinese investment in and around the EU provokes, and, indeed, it could easily be depicted as chiefly serving China's interests," wrotePavlicevic.

But, that deal is only the most recent sign of a trend that is seeing China's interests gain a foothold in CEE countries that once stood against them after the fall of communism in Europe.

"Railway diplomacy"

"Many of these countries [feel] somewhat let down by the West...and disillusioned by Germany following the migrant crisis, said Philippe Le Corre, a visiting fellow at the Brookings Institution and co-author of a new book, "China's Offensive in Europe," told the Nikkei Asian Review.

"Many [CEE countries] have been successfully 'seduced' by Chinese geo-economics, including 'railway diplomacy' [and] international finance," he continued. "The Czech Republic, for example, was for years staunchly against it, but there has been a cumulative softening among these countries."

In July, the vice-speaker of the Czech parliament, Vojtech Filip, came out in support of China's maritime claims in the disputed South China Seas, saying that arbitration with rival claimant the Philippines was "premature." It is a far cry from the days of Vaclav Havel, the country's first president after the fall of communism, when the Czech Republic would host Nobel Peace Prize reunions that included Chinese dissidents and the Dalai Lama.

"The change is quite striking," Le Corre said.

The pressure for CEE countries to align with China on policy will likely only continue to mount unless the EU is able to step in, a prospect that is far from certain, say analysts.

"Countries of the CEE are certainly in danger of falling under the political influence of China," said Alexandr Lagazzi, a China specialist at the Prague-based think tank, EUROPEUM.

"Arguably, the EU as a whole would need, in the near future, to pay good attention to Chinese strategies in CEE, possibly pushing the Union to develop a unified response framework to Chinese investments in the region."

Good deals

Still, while many in Europe are skeptical about the nature of China's foray into Central Europe, some of those involved in the process are painting a very different picture. Frank Brandmaier, head of corporate media relations for the German multinational forklift manufacturer Kion Group, said his company has benefited from the arrangement. About 40% of the company was sold to China's Weichai Power in 2012,

"Through Weichai Power we have improved our Chinese market access, which is globally the biggest single market for our products. We have begun to use Weichai engines in our Baoli brand forklifts. Also, we are using the tight-knit sales network of Weichai Power to generate sales leads we otherwise wouldn't have," he said.

Bill Fawkner-Corbett, an investment director with CEE Equity Partners, an investment adviser for the majority Chinese-backed China-CEE Fund, which has helped facilitate many such deals, said that the terms and conditions of similar partnerships have been more than fair.

"I think it's very balanced. Particularly for the manufacturing deals, we have done a deal or at least are looking at deals...The benefit of kicking back to the Chinese market is very important, but it is still very much a two-way street," he said.

The China-CEE Fund, which was established by China Exim Bank in partnership with other institutional investors, has a portfolio of $435 million dedicated to developing partnerships with CEE-based companies in the energy and infrastructure sectors, with another $1 billion is set to kick in in the near future.

While he recognized a certain stigma within some countries about doing business with China, Fawkner-Corbett also said that China was taking some risk in investing in the region, given the current political landscape.

"The EU is a bit questionable at the moment. You could make an argument that the CEE route is less developed in Europe and therefore that more risk involved," he said.

Indeed, heightened polarization for China skeptics in CEE governments, as well as resistance from the EU itself, have fueled a backlash against Chinese investments that adds a level of unpredictability.

In September, the Czech Interior Ministry rejected cooperation with Chinese telecommunications group Huawei over fears that such cooperation would involve a high risk of espionage,; and in December, EU chiefs launched an investigation into whether Chinese manufacturers is selling steel into Europe at unfairly low prices.

The backlash comes amid China's efforts to attain coveted market economy status in Europe, which would provide exemption from certain high tariffs and treat China as a free market equal when it comes to resolving trade disputes. However, even as Beijing aggressively pursues this status, its meteoric rise in Europe is unlikely to stop.

"Anti-dumping and CVD duties [countervailing duties, also known as anti-subsidy duties] are applied to only a tiny share [less than 3%] of total imports in the EU, as I recall," said Scott of the Economic Policy Institute. "So the China [market economy status] issue will have little impact on the bulk of these imports."

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