Is China losing Eastern Europe?

When Polish authorities arrested a Huawei employee for espionage in December, under heavy US pressure, Central and Eastern Europe’s relationship with China flitted – albeit briefly – onto the world’s news screens.

But when reporters honed in on the story, it soon turned out to be about how little Poland and the CEE region actually matter in the emerging geopolitics of Sino-EU relations.

“Any geopolitical ambitions China may have in CEE would be no more than securing friendly passage into the economic and political heart of a wider Europe rather than winning over lesser consequential parts of it,” Bob Savic, Senior Research Fellow at the Global Policy Institute in London, said.

Poland was publicly admonished by Beijing and then ridiculed in the Chinese press as a country with nothing worth stealing.

But Beijing’s ire represents a new phase in a relationship that seemed to be going places in 2012, when the then Chinese premier Wen Jiabao announced the start of the so-called ‘16+1’ initiative, a strategy for encouraging trade between China and Eastern Europe. The goal he set out was to hit $100 billion in mutual trade between China and 11 EU member states in the CEE and SouthEastern Europe (SEE) and five aspiring ones by 2015. At $90 billion it was almost there in 2018, but with most of it going one way, some CEE countries are now starting to ask if it was worth it after all.

Beijing looking at Berlin, not Warsaw

Germany remains Beijing’s principle target, both politically and economically, and Berlin’s decision on what to do about Chinese telco Huawei’s involvement in its 5G new generation internet rollout is far more important to Beijing than anything that happens in Warsaw, Prague or Belgrade.

The Polish government has in turn grown frustrated by lack of progress in economic cooperation with China. A large trade deficit and barriers to access to the Chinese market have become key issues and Minister of Internal Affairs Joachim Brudziński said recently that a ban on Huawei equipment in the Polish market is under consideration.

“Polish officials deny any connection between the detention and statements on Huawei’s position in the Polish market. But the coincidence in the timing of the events looks hardly accidental,” says Łukasz Sarek, a researcher and China market analyst in Warsaw.

“The 16+1 format was considered as a China-led bloc with the EU and western powers excluded and lackluster progress on economic issues would be partially offset by political benefits,” he says.

Meanwhile, Poland and Hungary and the others believed in return they could leverage their position within the EU and use the Chinese card to press Brussels and Berlin for concessions.

“But China’s offer is less attractive than that provided by the EU,” Sarek goes on. “And cooperation with China comes with risks such as the increased activities of Chinese intelligence, pro-Chinese lobbyists, Chinese companies penetrating critical industries and murky Chinese business operations,” Sarek says.

In fact, he adds, China has gained more influence in western European countries such as Italy, Portugal than in the CEE region.

“After Brexit Beijing’s main partners in the EU are Berlin, Brussels and Paris. Chinese leadership does not want to endanger relations by being too active with the creation of a pro-Chinese bloc within the EU.”

Lack of spring in Prague’s step

It is similar in the Czech Republic. There have been a number of Chinese acquisitions in the country worth around 1 billion euros. Even some Czech businesses have been relatively successful in China, such as the traditional Czech car maker (owned now by German VW) Skoda and financial company Home Credit.

However, as in Poland, there has been a similar realization that attempts to profit from improving relations with China are largely futile. The Chinese acquisition spree in the Czech Republic was conducted by a single entity – the CEFC – and was driven by debt-financing. In 2018, the company’s chairman, Ye Jianming, was arrested in China.

The National Cyber Security Center issued a warning in December against Huawei and ZTE products based on the legal and political conditions in China that require those firms to cooperate with intelligence services. Huawei had already been precluded from competing in a tender to build a tax portal.

“The common denominator for both Poland and the Czech Republic is the perception that they have few economic results to show for six-plus years of attempts to develop ‘pragmatic cooperation’ with Beijing under the umbrellas of the 16+1 platform and the Belt and Road Initiative (BRI),” Alicja Bachulska, who works as a Chinese politics analyst at the Asia Research Centre, War Studies University in Warsaw, said.

China gets what China wants

“The Chinese Communist Party ensures State Owned Enterprises and private strategic industries make foreign investments that support the country’s economy, foreign policy, and internal security,” Nicholas Eftimiades, a lecturer at Penn State Harrisburg School of Public Affairs, says.

“This policy was made clear by Xi Jinping. Major Chinese investments in Europe, as was the case with Greece, are designed to be economically profitable and support China’s foreign policy aims. This goal is ensured by the internal Communist Party Committee required in all large private companies and State Owned Industries. This is quite a different concept from the West where private investment practices and government goals and objectives can be at odds with each other.”

Beijing wants political support over its human rights record and abuses in Xinjiang and Tibet, conflicts on South China Sea, growing rivalry with US, Taiwan status, reshaping and reforming international institutions (UN Security Council and various agencies, IMF, World Bank, WTO), Arctic and Antarctic status.

But Chinese investment is less than 1% of overall foreign direct investment (FDI) in the CEE region, and more than 90% of Chinese FDI into the EU goes to Western Europe.

In the developed world, China attempts to gain access to top-notch technologies and brands; in the developing world access to raw materials and infrastructure building projects. Central Europe stands somewhere in between the two, with unclear potential and a little-known environment.

Most of China’s relations with individual CEE states tend to be lower-ranked partnerships, such as “friendly cooperative relationships” with Bulgaria and Romania, a “friendly cooperative partnership” with Hungary. China ascribes slightly higher level relations with the Czech Republic in the form of a “strategic partnership” and higher still with Poland, Hungary and Serbia entitled as a “comprehensive strategic partnership.”

EU and 16+1: are they compatible?

A prosperous, united and strong Europe is in China’s best interest, the Chinese envoy to the EU said recently. Zhang Ming, in an interview with The Financial Times had been asked if China was trying to use the “16+1” mechanism to divide the EU.

Not everyone is convinced. EU Commissioner Johannes Hahn last year warned of the danger that Balkan states risked becoming “Trojan horses” for Chinese influence.

And others are even more blunt in their assessment. “One of the reasons why China is engaged with Eastern European countries is to break up the EU,” says Marcin Przychodniak, an analyst at Asia-Pacific program at the Polish Institute of International Affairs in Warsaw.

“If you define the EU as a loose, a la carte, political club then 16+1 is not necessarily against the bloc, but if you define it the way the EU defines itself as a closely integrated club with specific standards, rules and policies then the 16+1 system is not compatible with the EE,” Vuk Vuksanovic, a Ph.D. researcher in International Relations at the London School of Economics, says.

China, furthermore, prefers to pursue projects based on direct agreements with governments and these tend to include provisions on credit lines with state guarantees of repayment and selection of Chinese contractors, which use Chinese materials and labour. Construction projects in the EU require public calls for tenders and China’s use of credit lines to finance the projects is also troubling, being neither an investment nor a grant, as EU rules stipulate.

For CEE countries whose EU funding will slowly be ending after 15 years, high Chinese interest rates on loans and ongoing access to EU structural funds may push Warsaw and Prague back into Brussels love nest.

Sea-change in the EU

Meanwhile, China’s relationship with the EU encountered a number of setbacks in 2018, the latest being the tightening of foreign direct investments by the European Commission. In December Germany made it even harder by establishing new rules against foreign acquisitions of German companies in technology.

Overall Chinese investment volumes in Europe last year fell by 46% to reach $31.2 billion (€27.3 billion). Roughly one-third of that money flowed to Germany where the Chinese invested $10.7 billion, marking a 22 percent decline.

Serbia and Hungary remain Beijing’s gateway

But China still seems to have a foothold in Hungary and Serbia.

Hungarian Prime Minister Viktor Orbán said recently that China was in pole position while the CEE region would become the “engine” driving Europe’s economy in the next 5-10 years. He said China should not be handled with any ideological prejudices. “It should be accepted that we are different and manage our countries differently,” he said, adding that the point was “not to pass judgement but promote mutual interests.”

Meanwhile, Beijing has engaged in a number of massive projects in the Balkans, although the most high-profile one, the Belgrade-Budapest high-speed railway, has failed to materialize so far.

“It would not be immodest or wrong to call Serbia China’s main partner in Europe,” according to Minister for Construction Zorana Mihajlovic.

He declined to mention the small fact that China exports $1 billion in goods to Serbia, whereas Serbia exports $1 million of goods to China.