Monday

20th Nov 2017

Column / Crude World

Chinese road to riches or road to ruin?

  • Many of the much vaunted ‘Chinese trains’ are largely full when they arrive, but empty when they return. (Photo: DB Schenker)

News emerged earlier this week that the EU is looking to more rigorously screen foreign takeovers of European companies.

The move comes amid growing concerns about an influx of Chinese investment into Europe’s manufacturing, energy and infrastructure sectors.

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Since 2013, Beijing has been throwing all of its weight behind rolling out its ‘New Silk Road’.

The ‘Belt and Road Initiative’, as its called nowadays, encompasses over $900 billion in planned investments of infrastructure across Central and South Asia, the Middle East, and Central and Eastern Europe (CEE).

However, behind all of that money coming to Europe, there are some major strategic concerns lurking in the shadows.

Expectations gap

Beijing’s principal aim with respect to the Belt and Road project is to develop a series of trade and economic corridors and to use Chinese companies to help China develop domestically. It exports industrial overcapacity abroad.

In that respect, the new Silk Road should be seen as a tool that contributes to sustained economic growth at home - something that is viewed by the Chinese leadership as a crucial condition for domestic stability.

Chinese investment interests within Central and Eastern Europe appear strongly related to ongoing privatisation opportunities, including large-scale infrastructure projects and public procurement opportunities. That does not always match with domestic priorities in the host countries.

Already there is a growing expectations-gap, given that countries in the Central and Eastern Europe (CEE) region are primarily looking to draw in Greenfield investments, a form of foreign direct investment, and wish to see an increase in their own exports.

So far, the number of Chinese Greenfield investments that have actually produced jobs, however, have been small in number and many of the much vaunted ‘Chinese trains’ are largely full when they arrive, but empty when they return.

Playing by the rules?

The message being sent by Europe appears to be one akin to telling Beijing to ‘play by the rules’. But this is not without reason.

There are issues with the extent to which China is said to be abiding by European rules and standards when it rolls out its Silk Road related investments.

The investigation by the European Commission into the tendering procedure surrounding the Belgrade-Budapest high speed railway is a good example in this regard.

The extent to which countries are concerned about this issue rose to the surface during the two-day Silk Road Summit held in Beijing in May of this year.

France, Germany, Estonia, Greece, Portugal and the UK were among the countries that refused to sign up to the final summit text. Concerns included a lack of transparency on public procurement and social and environmental standards.

The warning issued by Germany’s economy minister in which she states that “more guarantees from Beijing on free trade, environmental protection and working conditions are needed before the EU will be able to sign a joint statement on China's 'One Belt, One Road' trade initiative”, is further illustrative of these tensions.

The issue of debt

To support the Belt and Road, China has been doling out lavish sums of money to countries along the proposed route.

Although sometimes granted under soft conditions, the loans inadvertently lead to an increase in these countries’ debt burden.

Given that most countries in the Western Balkans and the former Soviet Space run a current account deficit, it is difficult for them to repay the debt, particularly if the projects primarily serve China’s domestic agenda and are of dubious economic rationale for the region itself.

In addition to the potentially negative effect on economic stability, the influx of Chinese companies will reinforce difficulties surrounding the establishment of a domestic industrial base for these nations.

It should also be stressed that, through these loans, China will be able to exercise leverage, should these countries get into financial difficulties. And there is ample precedent for this.

For years, China has provided loans - up to around half of all foreign credit provided - to Venezuela.

Beijing was looking for new export and resource markets, as well as friends in the western hemisphere. Caracas happily obliged.

The loans were hardcore commercial loans with a hefty interest rate - already under Venezuelan revolutionary Hugo Chavez, the country was considered a risky investment.

Now under president Nicolas Maduro, after years of mismanagement and with oil worth half of what it was in mid-2014, Caracas has a problem.

However, the Chinese have refused to renegotiate the country’s debt burden.

Explosive cocktail in the making?

With looser rules in place for prospective EU members, regarding procurement and tendering, the temptation to bend the rules is arguably higher in the Western Balkans than it is within EU countries.

Bending the rules inadvertently means upsetting the playing field and undermining decades of work to ensure a greater convergence of laws between EU and non-EU states. This risk is further aggravated in light of the decreasing attractiveness of the EU narrative in the region.

With EU membership more off the table than on it, this is to the benefit of countries such as Russia and Turkey, which seek to exploit historical and cultural ties in the region and undermine the process of European integration.

Taking into account that the economies of the Western Balkans - Serbia, Bosnia and Albania in particular - are vulnerable to economic shocks and have a negative trade balance with China, Europe is possibly facing an explosive cocktail of political (Russia, Turkey) and financial (China) meddling in its backyard.

Revitalising the prospect of EU membership therefore has never been a more pressing issue.

The Crude World monthly column on Eurasian (energy) security and power politics in Europe’s eastern neighbourhood is written by Sijbren de Jong, a strategic analyst with The Hague Centre for Strategic Studies (HCSS), specialised in Eurasian (energy) security and the EU’s relations with Russia and the former Soviet Union.

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