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China: Beijing's Investment in Europe Reveals Long-Term Strategy

2nd December 2013
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China is making inroads into Central and Eastern Europe. In recent years, as the crisis in the European Union bears down on Western Europe's economic vitality, the capacity to fund and invest in peripheral regions like the Balkans and Baltics has waned. As a result these countries have begun to seek supplemental sources of capital, technology and trade. The countries of Central and Eastern Europe are looking to develop low-level commercial ties outside their immediate neighborhood in order to reduce their near-total reliance on Russia and the EU.


Chinese investment in Central and Eastern Europe is sure to grow in the coming years, but will be constrained both by logistical and political-administrative factors, as well as the region's basic geopolitical reality. In the near term, China looks to Central and Eastern Europe primarily as a market for its own strategic industries and perhaps another window into Western European markets. In the long term, it may seek to utilize rail and other infrastructure investments into the region to build more integrated trans-Eurasian transport systems.


Whether investment from China or other outsiders (notably the United Arab Emirates and Qatar, which have growing interests in Serbia and Croatia) will affect Central and Eastern Europe's basic geopolitical predicament remains to be seen. For historically embattled and vulnerable countries like Serbia or Estonia, however, the prospect of investment from China is a welcome reprieve. China is capital rich and ready to spend and, when compared with most other prospective investors in Central and Eastern Europe, its money comes with few strings attached, at least in the short term. The actual amount Chinese companies already put into Central and Eastern Europe is in the low billions of dollars, with further lines of credit stretching to $10 billion. Although small compared with investments in energy, mineral extraction and infrastructure in other areas, namely Central Asia, North and South America and parts of Africa, the sums are not negligible for Central and Eastern European countries. Perhaps most important is what these investments portend: improvements in the infrastructural connectivity and competitiveness of Central and Eastern Europe.


The $10 billion credit line was just one of 12 proposals for further economic cooperation put forward at the China-Central and Eastern Europe leaders' summit (only the second ever held), in Bucharest, Romania, on Nov. 25. Other proposals include joint projects in tourism and education, as well as expanding trade delegations between China and the region. Only time will tell what prospective agreements and deals come to fruition. Many proposals will face immense political, technical and administrative constraints in the host countries -- not to mention the threat of diplomatic and economic coercion from Russia, especially as Chinese investment in the region grows. Nevertheless, as this year's summit attests, the interest is real and growing for both sides.


Present at the summit was China's 1,000-company strong business delegation, headed by Premier Li Keqiang himself. In attendance were Chinese state-owned giants China General Nuclear Power Group, China Huadian and Sinohydro as well as private wind energy provider Ming Yang Wind Power Group and Huawei Technologies, the largest telecommunications equipment maker in the world. The delegation approved numerous memorandum of understanding for projects in the nuclear, telecommunications and high-speed rail sectors and signed an agreement concerning wind power in the region. China also agreed to build a high-speed rail line linking Hungary to Serbia and pledged to help Romania develop its high-speed rail industry.


China's interests in Central and Eastern Europe are manifold. In recent years the Chinese government has pushed aggressively to expand its global market share in sectors it identifies as strategic, such as rail and port development, telecommunications, agriculture, mining and energy. For the most part, it has sought to do this through investment in peripheral or fringe markets, from international pariah states like Myanmar and North Korea to emerging economies in East Africa and South America. China has carefully targeted countries with a strong need for investment and comparatively underdeveloped and competitive markets. Seen through this prism, Central and Eastern Europe are suitable investment opportunities. While the region is not as energy and resource rich as Turkmenistan, Kazakhstan, South Sudan or Ecuador, it does have commodities that China needs, specifically ores, metals, agricultural products and potash. In 2012, China imported 8.65 million tons of iron ore from Ukraine (with a market value of $2.4 billion), while Belarus supplied nearly one-sixth of total Chinese potash imports by quantity.


A Strategy of Sustainment


Most of China's investment plans for Central and Eastern Europe are ultimately designed to help meet increasing domestic food and resource demand. However, a large portion of investment goes to projects with no immediate tie to Chinese consumption. From high-speed rail projects in Hungary, Serbia and Romania to cooperation on wind power and telecommunications with private corporations Ming Yang Wind Power Group and Huawei, these ventures serve a different set of purposes from other investments, such as energy extraction by strategic state-owned enterprise PetroChina in countries like Venezuela.


The Chinese government seeks to cement its place as the global leader in lower-cost versions of higher value-added technologies like high-speed rail, telecommunications and renewable energy (wind, solar and hydro power). Much like Japan and South Korea before it, China wants to expand its international economic presence to encompass more than just resource extraction. This is a politically sensitive subject, especially as China slowly overtakes the United States as the world's largest energy consumer and one of the most important drivers in global energy demand.


China has sought to enhance its position in traditional areas like electronics and automobiles, as seen in global pushes by Lenovo or Chinese automaker Chery. But more often, China has sought to capitalize on technologies that meet strategic needs at home (such as combating air pollution with wind and solar power) while exploiting relatively less competitive markets internationally. This facet of Chinese investment is "strategic" in the loose sense because it generates market share (and capital) for Chinese companies in important and growing global markets, therefore serving broader Chinese national interests. However, these sorts of investments are made primarily for commercial gain, rather than overriding political or strategic interest.


Nonetheless, there is a sense that the investment agreements between China and Central and Eastern European countries serve low-level strategic interests for both parties. Beijing knows it can only ever be a minor player in Eastern European power politics but sees value in positioning itself as a wedge or buffer between competing interests in regions where it has comparatively little at stake -- for now at least. Furthermore, the Chinese government may view these investments -- especially those in telecommunications and high-speed rail -- as tentative steps on the way to building a more comprehensive, integrated Eurasian trade and communications corridor under China's guidance. Such a network, if ever realized, would eventually link together disaggregated investments from inland China and Xinjiang to Central Asia, the Middle East, Russia and on to Western Europe. Needless to say, the constraints on building overland ties across Eurasia -- and especially through South Asia and the Middle East, as envisioned in China's long-discussed Iron Silk Road plan -- are enormous, both logistically and politically. But then so were the constraints on the Great Wall.


This edited version of “China: Beijing's Investment in Europe Reveals Long-Term Strategy” is reprinted with permission of Stratfor

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