Is Eastern Europe up to Chinese investment? | Business | Economic and financial news from a German perspective | DW

Other Hawkish observers argue that China’s foreign investments are – by definition – corrosive and have a corrosive impact on smaller, often only nominally democratic and market-oriented nations, including those on the eastern periphery of the European Union (EU). Others are less convinced that Chinese investments are a real threat. The EU members in Eastern Europe are at a crossroads in their relations with Beijing and Brussels.

“These investments will have an impact across the EU,” Eric Hontz, who leads Washington’s Center for International Private Enterprise (CIPE) work on corrosive capital, told DW.

Corrosive Capital: Trick or Treat?

“Corrosive capital” – a concept developed by CIPE – refers to external funding sources that lack transparency, accountability and market orientation.

“It typically comes from authoritarian regimes like China and Russia and exploits gaps in governance to influence politics in recipient countries,” says Matej Simalcik, director of the Bratislava-based think tank Central European Institute of Asian Studies (CEIAS) DW.

In the case of Slovakia and the Czech Republic, Beijing has managed to establish significant ties with local oligarchs who have financial interests in China. The two countries are sometimes referred to as “captured”.

“These links were later instrumentalized to promote policies that serve Chinese interests,” said Simalcik. “By focusing on the oligarchic class, China has actually been able to influence both countries at the same time,” he added.

As a result, Chinese companies have been able to exert influence in areas such as state communications networks.

A recent report from CEIAS shows how the Chinese government managed to get involved in the Czech Republic and Slovakia through a banking company called CEFC China Energy, which was set up as a minority shareholder in the Czech-Slovak financing group J&T Finance.

Hungary agrees, while Poland continues

Hungary has the highest share of Chinese investments in Eastern Europe after Serbia and is planning several new projects, including the construction of the controversial campus of Fudan University in Budapest.

The political elite of Visegrad member Poland is in a unique position with regard to their relations with China and the EU.

“On the one hand, Poland is criticized by the EU for its democratic setbacks, on the other hand, it is suspicious of Chinese investments because of a historical struggle similar to that of the Baltic states,” said Hontz.

Poland’s attitude towards China is shaped by the state of US-Chinese relations, as Warsaw has typically played the role of a loyal and committed partner to Washington. It has already shown its compliance with US 5G policy.

“However, the actions of Poland may not always be completely predictable, as the assertion of national interests and identities are ideologically in the foreground and can lead to policies that run counter to its European and American allies,” said Rumena Filipova, co-founder of the Institute for Global Analytics in Bulgaria, commented.

Nevertheless, Poland maintains significant economic ties with China, particularly with regard to rail transport, as Poland is an important transit country for rail freight transport from China.

“It would not be surprising if China succeeded in breaking new ground and injecting more caustic capital into the country in the coming periods,” argued Simalcik.

Lithuania is fighting back

Lithuania boycotted the 17 + 1 (Eastern European countries + China) summit in February, saying it wanted the EU to negotiate with China only at the 27 + 1 level.

“Lithuania’s tougher stance on China is workable as Lithuanian-Chinese bilateral financial and trade ties are not of any appreciable size,” Filipova said.

“In addition, Lithuania is politically and security-politically shielded by its membership in the EU and NATO. Nevertheless, the assertive stance of Vilnius is remarkable,” she added.

“The case of Lithuania shows that Chinese influence in CEE is indeed fragile, as it is only concentrated on selected parts of society and politics,” explains Simalcik.

It remains to be seen whether and to what extent the other two Baltic states will emulate Lithuania.

According to Simalcik, Estonia appears to be more likely to follow this pattern, albeit probably more diplomatically than Lithuania. “As for Latvia, it will likely be the most reluctant of the three countries to engage in critical China policy, partly due to public demand as Latvians are among the European nations with more positive perceptions of China,” he said.

Typically, ties would only be made with government coalitions and not with opposition parties, he continued. As a result, wherever previous coalitions lost parliamentary elections and ex-opposition came to power, as in the case of Lithuania and Slovakia, governments have become increasingly critical of Beijing. “Similar trends can be expected in the Czech Republic and even in Hungary if the opposition manages to influence the referendum,” said Simalcik.

“Lithuania has, so to speak, lifted the mask for the EU in order to see China as a more mercantilist power with a zero-sum approach to politics,” concluded Hontz.

Bulgaria and Romania

In 2018, Chinese President Xi Jinping upgraded Sino-Bulgarian relations to a strategic partnership, although US pressure later caused Sofia to change course somewhat.

However, the inflow of Chinese capital into Bulgaria and Romania has been less than in the case of Central Europe, and both have prioritized the EU and NATO.

“I would not say that Bulgaria and Romania are less affected by the corrosive Chinese capital than the Czech Republic and Slovakia, but in different ways,” said Hontz.

“The political elite in these countries may also be a little more aware of the potential negative impact these investments can have on their own ability to influence the nation’s political economy.”

Bucharest has passed a memorandum blocking the award of public infrastructure contracts to companies from countries that do not have a bilateral trade agreement with the EU. In 2019, Bucharest banned the Chinese telecommunications company Huawei from its networks. Cooperation with China on the construction of the Cernavoda nuclear power plant has also been discontinued.

Exaggerated Concerns?

A recent study by the Central and Eastern European Center for Asian Studies (CEECAS) suggests that governments in the region tend to overlook China’s presence. He also notes that China’s FDI positions in CEE countries are modest.

According to data from China Global Investment Tracker, of Chinese investments worth $ 129 billion in Europe, only $ 10 billion went to CEE countries in 2000-2019.

The value of Chinese direct investment in Europe fell from $ 13.4 billion in 2019 to $ 7.2 billion in 2020, according to Baker McKenzie. Hungary bucked this trend. Bilateral trade between China and Hungary reached $ 5.35 billion in the first half of 2020, up 9.8% year over year. Total Chinese foreign investment in Hungary was $ 5 billion, led by companies like Huawei, Wanhua and the Bank of China.

By comparison, Bulgarian exports to China in 2020 were $ 870 million and imports were $ 1.7 billion. China increased its share of total Bulgarian exports from 0.6% to 2.7% between 2006 and 2020. Chinese investment in Bulgaria is less than 1% of FDI. In 2019, Romanian exports to China were $ 850 million, while imports to Romania were $ 5 billion. In terms of FDI, China is not among Romania’s top investors. The value of Chinese direct investment in Romania between 2000 and 2019 was $ 1.4 billion.

“Two years ago, I was more concerned when Chinese investments were seen as more of a purely commercial matter,” Mikael Wigell, director of the global security research program at the Finnish Institute for International Affairs, told DW.

“Now I think Europe is aware that China is using its investments to gain influence and drive a wedge into the EU. Huawei was a wake-up call, “added Wigell.

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