The old Keynesian principle states: if you want to kick-start the economy, you should focus on investment. The Chinese have been putting this into practice for three decades.
As a result, they have modernized their infrastructure, built motorways, airports, new cities and settlements, and recently also introduced high-speed trains. They further accelerated the program in response to the crisis of 2008, allocating a special package of USD600bn for this purpose. According to their own estimates, in the period 2010-2013 they consumed more cement than the United States throughout the 20th century. This shows the scale of their investments, which is visible and tangible everywhere in China.
However, the path of rapid growth (with double-digit annual growth rates) has led to a dead end. Entire ghost cities have emerged (Ordos), and throughout China there are many empty, uninhabited buildings. The clearly visible bubble in the real estate market was just one of the reasons why something had to be changed fast.
This path of rapid growth also led, of course, to increased potential and resources, until a truly Copernican revolution took place at the turn of 2013 and 2014: inward investment to China, which was huge from at least 1992, was exceeded by Chinese investment abroad. Huge capital surpluses emerged in the People’s Republic of China, which had to be utilized somehow.
Indeed, a decision was made to develop the country’s internal market and the middle class, but the response of the prudent and still distrustful Chinese society to government calls for investment has so far failed to provide the expected results. Mindful of their own bitter history over the last decades, Chines citizens still prefer to save rather than spend. The appeals of the authorities are useless, especially now, after the crash on the Chinese stock market, which was in fact also the result of other appeals – to invest in the stock market in order to boost the internal market. The Chinese played the game and then millions of people lost. Now they have burned their fingers, and are dissatisfied, and of course, still wary.
These are, among many others, the factors behind the geo-strategic projects from 2013, known under the imaginative name One Belt One Road (OBOR), which needs a good strategy. Both these New Silk Roads, the land route and the sea route, are directed to Europe. And the land route, stretching from central China through Kazakhstan, Russia and Belarus, goes to Poland, to eventually reach Berlin or Rotterdam.
Poland is in China’s interest
And in this way Poland emerged on the grand map of China’s sweeping plans. According to the Chinese, the New Silk Road cannot be fully implemented without Poland (at least in the case of the land route). And this means that perhaps for the first time in China’s long history, entering Poland lies in China’s strategic interests. Poland still seems not to be fully aware of this, even in the context of the significant visit of President Xi Jinping to Warsaw in 2016.
At the governmental level Poland welcomes the new Chinese initiatives with distrust, its actions are only reactive, the country never takes the initiate, and its reactions to the events are delayed, even in terms of statistics. According to official data from Poland’s central bank NBP, the influx of Chinese foreign direct investment (FDI) to Poland amounted to only USD66.4m in 2014 (other data provide a figure of approx. USD72.4m), and only USD3.7m in 2015. According to the NBP report, in 2014 there was no Chinese FDI, thus China is not even included in this summary.
There are signs that these investments will soon find their place in many statistics and reports. As part of the implementation of the OBOR Beijing wants to organize a special summit (as the project involves as many as 65 countries ), which is to have an even larger scale than this year’s G20 summit in Hangzhou, and for which the cost of the spectacular Convention Centre alone exceeded USD1bn.
What and for how much will they show in 2017? This is worth asking in the context of the statement made by Prime Minister Li Keqiang, who said, that if necessary, China is ready to spend even up to USD3 trillion for the purposes of the OBOR project. That’s almost as much as the value of all of China’s foreign exchange reserves (over USD3.3 trillion). This objective has for years been served by two major Chinese banks, the China Development Bank and the Export Import Bank of China, and starting from 2016 they are to be supported by the Asian Infrastructure Investment Bank (AIIB), established specifically to aid projects implemented as part of the OBOR. It is Asian in the name only, and fully Chinese in terms of portfolio and the strength of the weighted votes.
It is no wonder, therefore, that in the Polish context they have not been discouraged by the loud failure of the company Covec a few years ago, when different business mentalities crashed so spectacularly. Poland is situated in the center of Europe and that’s all that matters.
More trains, more trade turnover
The first significant obstacle in the mutual relations was overcome in such a way that following in the footsteps of the Polish airlines LOT, starting from September 2016 a second direct connection with Beijing was launched, operated by the state-owned Air China. For some time now there have been discussions of a possible third connection to China, perhaps to Shenzhen. This is very important in the context of Polish exports, the bulk of which is carried out by small and medium-sized enterprises. However, even more important is the fact that everyone who boards the plane connecting the capitals of Poland and China is surprised that almost always 80-90 per cent of the passengers are Chinese. Where are they coming from, where are they going, and what is the purpose of their journeys?
It turns out that they end up going all over the place. Not only to Łódź (in central Poland), where the company Hatrans went and even – which is very rare – got ahead of the OBOR projects by sending cargo trains to Chengdu, the capital of the most populous province of Sichuan, from 2013. This was front page news in Poland and the symbolic first train was welcomed at the train station by the two presidents – Xi Jinping and Andrzej Duda.
The thing is that the (previous) mayor of Chengdu, who visited Warsaw and presented the Chinese vision of this rail link to Europe, with Łódź (and the city of Kutno) as important communication hubs, was not satisfied with the achievements so far, that is, three trains per week. He provided the following schedule: 2016 – 10 trains per week (over 400 per year), 2017 – 24 trains per week (over 1,000 per year) and 2018 – 50 trains per week (more than 2,500 per year).
The problem is not so much whether Poland will implement this plan, but whether it will be able to fill up the containers going to China. So far Poland has been able to overcome Chinese resistance and – after lengthy negotiations – Polish apples, as well as poultry are now exported to China alongside the previously existing large-scale exports of Polish powdered milk. This bodes well for the whole of Polish agricultural and food industry, which is highly valued in China, because it provides clean and high quality goods.
They do acquisitions, while Poland pursues greenfield investments
After the previous two major investments, that is, Liu Gong’s investment in construction machinery in Stalowa Wola (Lesser Poland) – the Chinese invested USD75.2m but the investment is not going as planned and employment has just been reduced, and the acquisition of the bearings factory in Kraśnik (also Lesser Poland) in 2013 (also for USD75.2m), in 2016 Poland has seen the floodgates of new contracts opening.
Because progress at the governmental level was not satisfactory, the Chinese focused on the local authorities. There is an increasing number of new projects, agreements and contracts. The president of Kutno Zbigniew Burzyński boasts about the huge container terminal in his city and plans its rapid development – thanks to the Chinese.
The authorities of Opole (Lower Silesia) have just signed an agreement with the Chinese company Hongbo for the sale of an 8-hectare property for USD78m, intended for the construction of a LED lamp factory – much to the discontent of the existing Polish company Auto Power Electronic, which, as a result, may be threatened with an acquisition.
There are many other examples. Recently, China Coal, together with the Australian company Prairie Mining, signed an agreement on cooperation in the construction and financing of the Jan Karski mine located in the Lublin Coal Basin. The investment will reach over USD630m. Production is supposed to start in 2023.
The Chinese have long been interested in the purchase of at least one power block in the Kozienice power plant, but have been unsuccessful until recently. And when success finally came, it was not in Kozienice, but near Gdańsk (Pomerania), where the company Pinggao, owned by the giant State Grid Corporation of China (one of the largest corporations in the world, with annual revenues over USD300bn and assets of USD50bn), has won several tenders for the modernization or construction of the transmission networks, along with the flagship project of the Żarnowiec-Gdańsk Błonia line. The company has spent a total of over USD150.4m.
Another Chinese giant – the company Sinohydro, known among others for its great involvement in the construction project of the largest dam in the world (the Three Gorges) – has recently signed a contract for USD150.4m for the construction of a 67-km long section of the electrical line connecting Chełm with Lublin.
The latest example is the acquisition (for more than USD37.6m) of the Mława-based (central Poland) company Novago which is involved in the production of energy from alternative sources, including waste-to-energy, which is very important for the heavily polluted China. Last year, the Chinese took over a substantial part of the assets of the insulin producer Bioton from Ryszard Krauze. This substance is extremely important for China, because it has millions of diabetics in its population.
This shows a trend that is noticeable not only in Poland, but across Europe, where the Chinese have become very active in recent years. According to data from Baker & McKenzie and the New York-based Rhodium, in 2010 the Chinese invested USD6bn on the old continent. In 2014, this figure went up to USD55bn. They are keen on pursuing M&As, particularly of companies that are the most important for them – in the field of advanced technologies, innovative companies (the high-profile acquisition of Kuka, the German manufacturer of industrial robots, for more than USD4.6bn), or – like Bioton or Novago – companies looking for new technological solutions, or industries important from the point of view of Chinese interests and the Chinese market.
The Chinese are pragmatic, relentless negotiators with their feet firmly planted on the ground. One of their main objectives, within the One Belt, One Road project, is to promote innovation in their own market, hence the desire for mergers and acquisitions.
Poland’s goals are and will be different: to use Chinese capital, which they have a surplus of, for the modernization of Polish greenfield investments from their foundations, so that Poland has some lasting effects.
One thing is certain: the Chinese have already arrived to Poland and it’s worth getting used to this new state of affairs.