Xi Jinping Promotes One Belt and One Road in Central and Eastern Europe
By Alvin Cheng-Hin Lim

Xi Jinping Promotes One Belt and One Road in Central and Eastern Europe

Jun. 22, 2016  |     |  0 comments


Chinese President Xi Jinping’s state visits to Serbia and Poland in June 2016 follow his state visit to the Czech Republic just 3 months earlier, underscoring the importance China places on the markets of Central and Eastern Europe (CEE). The countries of the CEE are likewise interested in Chinese trade and investment. Chinese foreign direct investment (FDI) in Europe reached EUR 20 billion in 2015, and while most of this FDI went to the UK, Germany, and France, the CEE countries are seeking to increase their share of Chinese FDI. Recent Chinese economic engagement with the CEE include an agreement for China to construct a high-speed rail line between Belgrade and Budapest, a recent EUR 46 million acquisition of a Serbian steel plant, and China Everbright Group’s investment in Albania’s international airport (“China’s Xi to,” 2016; “Xi’s upcoming trip,” 2016).


The Czech Republic


President Xi’s state visit to the Czech Republic in March 2016 saw the signing of 30 business agreements — in sectors like automobiles, energy, finance, and tourism — that are expected to increase Chinese FDI this year in the Czech Republic by almost USD 4 billion. China is currently the Czech Republic’s third largest trading partner, and Sino-Czech bilateral trade stands at USD 21 billion. The business agreements signed during President Xi’s visit include a EUR 5 billion energy, finance, and industrial investment fund jointly run by Ping An Bank of China and the J&T Finance Group of the Czech Republic and Slovakia; a EUR 1.1 billion industrial investment fund jointly run by CEFC Energy Company and Hengfeng Bank Company of China, and Zeleziarne Podbrezova of Slovakia; and a EUR 111 million Chinese order for 20 L410 aircraft from the Czech Republic’s Aircraft Industries. These business agreements reflect the pro-business attitude of Czech President Milos Zeman, which stands in contrast to the deep emphasis on human rights held by the country’s late President Vaclav Havel, who famously had a close personal friendship with the Dalai Lama. Nonetheless, President Xi’s visit was met with human rights protests from groups including Tibetan Buddhists and the Falun Gong. At the diplomatic level, Sino-Czech bilateral relations were raised to a strategic partnership during President Xi’s visit, and Presidents Xi and Zeman committed to pushing for the China-EU comprehensive strategic partnership and the China-EU investment agreement. President Zeman also committed to transforming the Czech Republic into a “gateway for China to the EU” (Janicek, 2016a; Janicek, 2016b; Muller & Lopatka, 2016; “China, Czech Republic,” 2016).


Serbia


Serbia was the first country in the CEE to raise its bilateral relations with China to a strategic partnership, and President Xi’s visit saw the further elevation of Sino-Serbian bilateral relations to a comprehensive strategic partnership. China sees Serbia as another key gateway into the EU, and the 370 km Belgrade-Budapest high-speed rail line, which is expected to be completed in 2017, is seen by the Chinese government as one of China’s “express lanes” into Europe. China hence supports Serbia’s application for accession to the EU. In turn Serbia supports China’s “Belt and Road” initiative — the development framework for China’s global infrastructure megaprojects like the Belgrade-Budapest high-speed railway — and was in fact one of the earliest countries to get involved with the “Belt and Road” initiative. Indeed, before President Xi’s visit, China had already invested over USD 1 billion in a range of energy and transportation infrastructure projects in Serbia, including a bridge in Belgrade over the Danube River, and China is considering a selection of new projects including a port on the Danube. President Xi’s visit saw the signing of 22 business agreements in sectors ranging from finance to energy and transportation infrastructure. China is also investing in Serbian heavy industry, which was highlighted by President Xi’s visit to the Smederevo steel mill. This steel mill had been acquired for EUR 46 million by HeSteel Group of China earlier this year, and HeSteel plans to invest a further EUR 300 million in the plant for its expansion and revitalization (Gec, 2016; Vasovic, 2014; “China Railway Group,” 2015; “China, Serbia lift,” 2016; “China promotes EU,” 2016; “China’s Xi highlights,” 2016; “Silk Road,” 2016; “Xi’s upcoming trip,” 2016; “Xi visits Chinese,” 2016).


Poland


On June 17, 2016, two days before President Xi’s state visit to Poland, the Wall Street Journal published an article analyzing the Chinese government’s claim of international support for its position on the UN arbitration initiated by the Philippines on the South China Sea dispute. In particular, the article highlighted Poland’s denial of China’s claim of Polish support for its position, and quoted the Polish Foreign Ministry’s statement that the Chinese claim “did not accurately reflect Poland’s position on the issue of the South China Sea” (Page, 2016). This instance of miscommunication however did not derail Sino-Polish efforts to establish deeper practical cooperation, and President Xi’s visit was the occasion for the raising of Sino-Polish bilateral relations to the level of a comprehensive strategic partnership. In terms of economic engagement, Poland currently remains the largest trading partner of China in the CEE, while China remains Poland’s largest Asian trading partner. Sino-Polish bilateral trade increased almost six times between 2004 and 2015, when its value exceeded USD 17 billion. The establishment of key transportation infrastructure across Eurasia — like the transcontinental rail links between Chengdu and Lodz, and between Suzhou and Warsaw — have facilitated this increase in trade. Poland is also involved with the new institutions China has established for the “Belt and Road.” In particular, Poland is the only nation in the CEE to be a founding member of the Asian Infrastructure Investment Bank (AIIB). During his state visit, President Xi advised Poland to take “full advantage” of not just its founding membership in the AIIB but also trade along the network of Eurasian rail links with China for its economic growth. Indeed, Poland’s Deputy Prime Minister Mateusz Morawiecki revealed during President Xi’s visit that Poland has been negotiating “massive investments” worth “multi-billion sums” with China, while Polish Deputy Development Minister Radoslaw Domagalski stated that Poland is ready to establish special investment zones to facilitate Chinese investment in the Polish market. President Xi noted that China is especially interested in “railway network upgrade, port construction and industrial zone projects,” and Chinese investors and traders are interested in a wide range of Polish goods including “food products, electronics, renewable energy technology, auto manufacturing and white goods” (“Business booms,” 2016; “China, Poland raise,” 2016; “China’s Xi weaves,” 2016; “Demonstrations greet,” 2016; “Xi’s upcoming trip,” 2016; “Xi’s visit to,” 2016; “Xi calls for,” 2016).


Headwinds


Observers have noted that, apart from the Belgrade-Budapest high-speed rail line, China has not made much headway in the CEE in terms of the infrastructure megaprojects that characterize its “Belt and Road” initiative, and that one of the reasons is that these countries tend to be politically divided between groups that are friendlier to the West and those that are friendlier to Russia or China. This stems from their history after the end of the Cold War, when the West supported their movement towards democracy but failed to provide sufficient support for their economic restructuring. This created an opening for Chinese economic engagement. However, each of the CEE countries has its own particular set of economic interests which tends to differ from China’s infrastructural prescriptions. This in turn has created an urgent need for harmonization between China’s and the CEE nations’ economic assessments of what each can offer the other, especially since recent challenges faced by China in markets in Asia and the Americas have underscored the importance of regional markets like the CEE which China has yet to fully penetrate (Pavlićević, 2016).



Countries in the CEE tend to be politically divided between groups that are friendlier to the West and those that are friendlier to Russia or China.



In the lucrative high-speed rail sector, Japan is posing a significant challenge to China in global markets. The Indian government, for instance, has recently selected Japan’s shinkansen for its Mumbai-Ahmedabad high-speed rail line, and Japan is competing against China for the proposed high-speed rail line between Singapore and the Malaysian capital of Kuala Lumpur (“Japan focuses on,” 2016). In Thailand, disagreements between China and Thailand over the financing of the proposed Sino-Thai high-speed rail line led the Thai government to decide in March 2016 to reject Chinese financing and to finance by itself a truncated high-speed rail line between the Thai cities of Bangkok and Nakhon Ratchasima, and to decide later on the remaining extension of the line through Laos to the Chinese city of Kunming. The Thai government is also considering the Japanese shinkansen for other high-speed rail lines in the country, including one between Bangkok and Chiang Mai (Tan, 2016). Myanmar had cancelled its high-speed rail plans with China in 2014, and the Laotian government has still not agreed on terms of financing from China for the USD 7 billion Sino-Lao high-speed rail line (Goh & Webb, 2016). The Laotian government may have been inspired by the example of Indonesia to seek the most generous financing package it can get from China. In September 2015, Indonesia unexpectedly cancelled the proposed Jakarta-Bandung high-speed rail line which both Japan and China had been bidding for, due to reasons of cost. China successfully responded with a counteroffer of a public-private partnership to construct the high-speed line without the need for the Indonesian government to provide funding or guarantees (“China funding derailed,” 2016). Following this decision, countries considering high-speed rail projects from China would certainly seek to negotiate for the same generous financing terms China offered to Indonesia.


In Indonesia, the commencement of the construction of the Jakarta-Bandung high-speed rail line was delayed by over a month due to regulatory problems, and experts expect further challenges to the construction to arise from key issues like “land acquisition, resident relocation and environmental protection.” In addition, the generous financing package that China offered to Indonesia may lead to budgetary challenges impacting the financial sustainability of the project (Liu, 2016; “Govt yet to,” 2016; “Japan loses Indonesian,” 2015). In the meantime, the Indonesian government has invited Japan to construct a medium-speed rail line between Jakarta and Surabaya, and also the port of Patimban in West Java. This turn to Japan should concern China, as the Indonesian government had earlier considered Chinese FDI for the development of its transportation network, including maritime port construction (Lim, 2015a, p. 37; Budiman, 2016; Vatvani, 2016). As yet it is unknown if the South China Sea dispute, of which Indonesia is one of the claimant states, is a factor in this seeming turn away from Chinese FDI.


In the Americas, China has also encountered challenges to its infrastructure megaprojects. In the US, China’s joint venture to construct the Las Vegas-Los Angeles high-speed rail line was abruptly terminated in June 2016 when its US partner XpressWest cancelled the partnership, citing concerns over the Chinese consortium’s “ability to move the project forward timely and efficiently” (“XpressWest, seeking,” 2016). In Venezuela, work on the 468 km Tinaco-Anaco high-speed rail line was abruptly cancelled following Venezuela’s economic crisis which has ended the ability of its government to pay the Chinese consortium (Goodman, 2016). Likewise, political turmoil in Brazil has raised doubts on China’s proposed transcontinental railway connecting the Atlantic and Pacific oceans through Brazil and Peru, while the private Chinese initiative to construct a transoceanic canal across Nicaragua has been delayed following major financial losses suffered by the Chinese developer (Lim, 2015b; Watts, 2015; Gillespie, 2016). These recent headwinds faced by Chinese infrastructure megaprojects in Asia and the Americas highlight the importance for China to continue nurturing markets in relatively untapped regions like the CEE.


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