China’s Balkan Gamble

By Dr. Valbona Zeneli

December 15, 2014

Why is China investing so much in the debt-burdened Balkans? 

Chinese Premier Li Keqiang will soon visit Europe again to participate in the Central and Eastern European (CEE) – China Summit to be hosted in Belgrade. This visit is a continuation of last year’s 16+1 initiative held in Bucharest which appeared to offer considerable promise. At that meeting, leaders called for wide-ranging multilateral cooperation aimed at doubling trade and investment in five years.

The outcome of last year’s forum was a four-point proposal for a comprehensive, friendly and cooperative partnership. The main pillars of the proposal included enhancing political trust between China and CEE countries, exploring economic and trade potential, creating a large number of cooperative projects, and strengthening cultural and people-to-people exchanges.

One must ask why China seems so interested in the Balkans. Although some countries – Greece and Serbia are examples – may seem to have some appeal, China is in fact showing an overall interest in the region.

That interest appears to go beyond markets – in fact, the Balkan markets could be considered insignificant for trade. It also seems to go beyond the need to secure a source of commodities, although the Balkans are rich in natural resources. Rather, it appears that China is focused on infrastructure and access to Western European markets.

China’s long-term strategy views Serbia as a strategic partner in the region, and it believes that Belgrade can fill the role of a European transportation hub. An agreement to construct a high-speed railway between Belgrade and Budapest was signed in November 2013. With construction set to begin in 2015 and finish in just two years, the railway highlights China’s interest in infrastructure projects. The project, worth 2.5 billion euro ($3.112 billion), will be financed by the China Development Bank and executed by Chinese state-owned enterprises. Of note is the number of Chinese workers engaged in the project.

Take a closer look, and this approach suggests a Chinese strategy of ensuring greater access to Western Europe to promote its own commercial activities. One of Beijing’s aims is to advance the New Silk road project by accelerating investments in regional infrastructure links and creating a large network of ports, logistic centers, and railways to distribute Chinese products and bolster the speed of East-West trade.

The starting point in this network is the port of Piraeus in Greece, which has attracted continued and significantChinese investment since 2009, partly through COSCO Pacific, a global shipping giant. Piraeus has subsequently become the main entry point for Chinese goods in Europe, shortening normal shipping times by one week. China has also shown interest in the port of Thessaloniki (Greece), among others in the region, including Bar in Montenegro.

China’s efforts to set up logistics bases started with the Thriasis hub in Greece and then continued in other countries of the region. A new and efficient railway route through the Balkans is the perfect picture of a speedy distribution network.

However, given the low productivity of the Balkans, we can surmise that China is prepared to sacrifice short-term profits while it focuses on pursuing a trade-substituting investment strategy. This approach would allow the Chinese to set up shop on the edge of the EU. That in turn could potentially allow Chinese companies to circumvent trade restrictions and export products directly to a market of 800 million people, thanks to free trade agreements that Balkans countries enjoy with the EU.

China also has an interest in uncovering the Balkan Peninsula’s unexploited business potential through long-term strategic investments. It is aiming to do so by penetrating local strategic markets, not only in infrastructure but also in energy, telecommunications and agriculture.

Especially attractive is the Balkan’s energy sector, where major Western utilities are unwilling to make risky investments. This market is giving China the opportunity to roll out its green expertise and compete on a global scale, aiming to become a leader in the clean energy market niche, based on the Green Credit Directive, which just celebrated its second anniversary.

In fact, China has already initiated many investments in the energy sector in Serbia, where an agreement worth 2 billion euro was signed with EPS, Serbia’s power utility. Agreements have also been made in Bosnia and Herzegovina, through the Stanari project, worth 350 million euro, among others in the region.

On the other hand, the debt-burdened Balkans, in urgent need of major rescue packages and infrastructure investment, are courting foreign investors. Lack of greenfield investment has been the main problem for the transitioning Balkan economies, which have received less than 1 percent of the world total. The loose regulation practices, lax public procurement rules, and labor regulations of the Balkans make the picture more appealing.

The CEE-China initiative looks similar to other Chinese market penetration strategies, one example being the China-Latin America Permanent Forum.

Chinese trade with Latin America has grown more than 20-fold over the last ten years, with China overtaking the European Union as Latin America’s second biggest trade partner. In this region, China has the largest share of two-way trade, imbuing the markets with Chinese exports and importing natural resources back home. Chinese investment in Latin America is also expanding, principally in the energy and natural resources sectors, with the objective to get closer to the big market of the United States.

It is clear that the Balkan economies are in bad shape and urgently need investment. China seems to recognize this, but setting up shop on the edge of EU is the first step towards striking deals inside it. Beijing is building assets and buying future stocks in a region closely linked with Western Europe. Capital rich and ready to spend, China might be outplaying many Western rivals in the Balkans. Chinese investment will no doubt present opportunities to buy influence – a fact that will need to be carefully assessed by EU concerns.

Valbona Zeneli, Ph.D. is a professor at the George C. Marshall European Center for Security Studies. The views presented are those of the author alone and do not necessarily represent the views of the DoD.

http://thediplomat.com/2014/12/chinas-balkan-gamble/