China’s investments: billions for a good start, and promises of more to come

(Xxjkingdom, CC BY-SA)

China plans to establish a EUR10bn fund for investments projects in CSE, declared the Chinese Prime Minister Li Keqiang during a summit in Riga in November 2016.

The amount is not particularly impressive in relation to China’s potential, but according to Beijing’s declarations, it is supposed to quickly increase to EUR50bn. The Chinese money will mainly be used to finance infrastructure projects, high-tech branches of the industry and the sector of consumer goods in CSE, although it is possible that investment may also expand into other European countries.

In addition to China the “16+1” group includes: Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Hungary, Romania, Bulgaria, Slovenia, Croatia, Serbia, Bosnia and Herzegovina, Montenegro, Albania, and Macedonia.

Poland’s Prime Minister Beata Szydło, who was present at the summit in Riga, said that Poland is primarily interested in communication and infrastructure projects. “Poland has high hopes for the development of economic cooperation with China. (…) We want to build transportation, maritime and railway projects together. We are prepared for this, and we will submit relevant proposals,” declared the Poland’s PM.

Finance management

The fund will be managed by the largest bank in the world and China’s largest lender – the Industrial and Commercial Bank of China (ICBC) – through a company established a few months ago. The latter is headed by Jian Jianqing, the former chairman of that bank. He announced that although the fund is supported by the state, “in contrast to previous Chinese investment in the region the new fund will mainly focus on infrastructure, will be market-oriented and intends to invest in profitable projects such as logistics, clean energy and pharmaceutical manufacturing.” The goal of the fund is to strengthen the economic cooperation between China and the countries through which the transport corridor from China to Europe will run.

The Chinese super-project, which has not been well-defined until now, is gradually beginning to be underpinned by institutions and financial instruments. The first newly established institution was the Asian Infrastructure Investment Bank (AIIB), which was joined (read more) by Poland (along with 60 other countries) and which is initially supposed to finance the Asian section of the Chinese route to the Old Continent.

Now a new fund is being launched. And all that in order to help China build a land and sea route, in which the countries of Central Europe play an important role, even though Beijing will dictate the terms of cooperation, and the majority of contracts for the construction of roads, railway lines, airports and sea ports will be awarded to Chinese companies.

Declarations of cooperation

At present Chinese media describe everything that concerns the relationship between the countries of CSE and China in the context of the project that we know as the New Silk Road and which is called One Belt One Road in China (read more). They emphasize (Xinhua) that “at the current moment, no other similar initiative in the world can measure up” to their plan.

As a reminder, the New Silk Road is supposed to connect China and Europe with a network of land corridors (read more) which is already taking place in the case of railway connections (read more), because Chinese freight trains are already running from 16 Chinese cities to over a dozen European cities (including Łódź and Kutno). The second part of the New Silk Road is a maritime route. However, China is mainly interested in land connections, because these would allow Beijing to become independent from the sea routes, through which the majority of China’s trade is now carried out.

Only two years ago there were many voices in the Chinese press that the countries of the “16” should show initiative and become more proactive when it comes to the New Silk Road. Today, such voices are absent, and the newly launched fund with EUR10bn confirms the fact that China has recognized the willingness of its Central European partners.

Yang Yanyi, the Head of the Chinese Mission to the EU, said that the markets of the CSE countries are seeking foreign investment to modernize local infrastructure, and that China is now attempting to meet these expectations. Zhang Monan, an analyst at the think tank “China Centre for International Economic Exchange”, argues that China and the 16 CSE countries are complementary and together possess an “enormous untapped potential”.

In this context Beijing is citing data according to which the last few years have indeed been characterized by robust growth in mutual trade, the value of which reached USD43bn in the first nine months of 2016, which marks a 4 per cent increase y/y. The Deputy Minister of Commerce Gao Yan informed, that in the 2015 Chinese companies have invested EUR5bn in CSE (read more), and that in accordance with the plans regarding the new fund these investments could increase as much as tenfold.

Beijing’s recent moves also indicate that the Chinese concept of the New Silk Road providing for the construction of new transport corridors, along with the logistics facilities, will be (rather quickly) complemented with something that could be described as a new trading platform with the CSE countries. Huge infrastructure, and especially transport projects scheduled for years to come (there is even talk of three decades) will be a culmination of that project.

China is investing in the CSE region

China has confirmed (which should be seen as a new geopolitical move and which is not recognized in Poland), that it is time to become directly involved as a new player in the region of Central and Southeast Europe, where it has had little presence thus far. This objective is implemented through the push for the project of the New Silk Road, although it is by no means limited to the construction of road or sea connections to Europe.

There are dozens of countries situated along the New Silk Road, including Poland. They are now more or less openly beginning to compete for China’s favor, and the Chinese are aware of it. Even if we were to add up their economic potential, the thing that the countries of CSE Europe can bring to the Chinese project mainly consists in the recently declared openness to Chinese investment and the geographic location. It is China, however, that has the adequate resources (money, global banks, influence and its own huge market) to implement the plan.

Relations with the EU and the USA

Brussels is taking a reserved approach to Beijing’s initiative, because the group of 16 CSE countries also includes EU member states. It has even been said that the New Silk Road is a Chinese Trojan Horse, and that China mainly seeks easier access to the lucrative EU market. The CSE countries are supposed to help in this regard, acting as an outpost for further penetration.

This is, in a way, globalization going in the opposite direction than previously, although Beijing is trying to dispel these concerns at every turn. It has even declared its accession to the so-called Juncker Plan, i.e. the European Fund for Strategic Investments (EFSI), which provides for the investment of EUR315bn into the EU economy over three years. However, as indicated by the recent audit of the EFSI, even though by the middle of 2016 the program was launched in 26 of the 28 member states, as much as 91 per cent of the support was allocated to the 15 “old EU” (belonging to the EU before the 2014 enlargement) countries. Only 9 per cent of the funds went to the remaining thirteen member states, primarily composed of the countries of Central and Southeast Europe. The report notes that the CSE region has “less capacity to develop large projects”. The question therefore arises of whether this region will be able to cope with the large-scale Chinese projects?

Poland’s advantages – if it’s going to join the Chinese plan more actively – include the large internal market, the geographical location and the fact that the country is the largest economy in the CSE, and China’s major trading partner among the 16 countries. However, Beijing has not singled Poland out in any particular way, and seems to appreciate Hungary, the Czech Republic, Serbia and the small Latvia more with regard to their involvement in the whole project.

The fate of the One Belt One Road plan can also be indirectly influenced by the US politics.  During the campaign Donald Trump has repeatedly promised to take a hard stance in relations with China, such as imposing high import tariffs on Chinese products. As noted by the media, Beijing is considering the possible deterioration of the accessibility of the US market for Chinese products. At the same time Chinese media are warning that a trade war would be a double-edged sword.

As a result Beijing may step up its plans to build new transport corridors to Europe and that it will not end with EUR10bn, or even the announced EUR50bn for investments in the CSE region.