Wednesday, October 11, 2017

Where Europe meets China: The Balkan Silk Road

https://www.wort.lu/en/business/investment-where-europe-meets-china-the-balkan-silk-road-59dc959156202b51b13c4efe

Photo: View of the port in Piraeus in Greece (Shutterstock) 

Paolo Balmas explores the European Union's increasing wariness of China's huge programme for infrastructural development across Eurasia.

European Commission President Jean-Claude Junker's warning in his recent State of the Union speech that foreign direct investment (FDI) in the European Union (EU) should be made "with transparency, scrutiny and debate" was directed mainly towards China and its aggressive acquisition strategy in Europe. Junker's warning followed a call from German, French and Italian leaders this summer to find ways to "screen investments" from third parties and preceded an increasingly protectionist posture, which has led to the decision, on September 27, to issue an anti-dumping duty for Chinese-imported barium carbonate.

Concerns have been growing within the EU since 2013, when Chinese President Xi Jinping unveiled a huge programme for infrastructural development across Eurasia, known as the Belt and Road Initiative, or the One Belt, One Road project. This project aims to develop a vast network of energy hubs and transport corridors by air, land and sea. In the meanwhile, Europe has become the top destination for Chinese FDI, accounting for 23% of the total in 2013. In 2016, the US exceeded the EU by just $2 billion ($48 billion versus $46 billion), according to Baker McKenzie.

High-speed freight trains run from China to Europe and back again. In June of last year, the first freight train from China reached Budapest through Kazakhstan and Russia, the same route trains from China bound for Germany, the Netherlands and the UK use. Although it is not yet clear to what extent, Eurasian trade by land is certain to take business from the traditional sea routes, and this, in turn, will have a major impact on the world economy. Before 2013, China had already focused on the development of infrastructure on the Mediterranean Sea to speed up operations, increase port capacity and improve links between Europe's shores with the railway network on the mainland.

Balkan Silk Road

One of the main One Belt, One Road corridors in Europe will be the so-called Balkan Silk Road, which will connect the Greek ports of Piraeus and Thessaloniki to Budapest, Hungary, through the Former Yugoslav Republic of Macedonia and Serbia. The EU is working on a similar project within the framework of the Trans-European Transport Network, which will connect the same two Greek ports to Budapest but through Bulgaria and Romania, both of which are EU member states. China is essentially developing a shorter, faster alternative route through Macedonia and Serbia, both of which are candidates for EU membership.

Although China has directed its investment in the EU mainly towards the energy sector (28%), as opposed to the transport-infrastructure sector (4%), there is evidence of great interest in Beijing in financing projects in Macedonia and Serbia. Even in 2009, before the One Belt, One Road was announced, the Chinese strategy in the Balkan region was already taking shape. That year, Chinese FDI in Macedonia skyrocketed by 955% and in Serbia by 1,008%.

At the same time, the state-owned Chinese port and logistics giant operator, China Ocean Shipping Company, invested in two of the three Port of Piraeus terminals, boosting its capacity and container operations. Between 2010 and 2015, the Port of Piraeus quadrupled its Twenty-Foot Equivalent Unit (TEU), used to measure a ship's cargo-carrying capacity, to 3.36 million TEU. On a wave of privatisation, the Greek government in April 2016 sold to COSCO a 51% stake in the Piraeus Port Authority for $350 million. In August that same year, the stake was increased to 67%. COSCO has also set aside another $350 million for Piraeus infrastructure investment over the 2016-25 period.

In Serbia and Macedonia, a bridge over the Danube river, a section of the European Corridor X motorway and sections of the high-speed rail from Athens to Budapest, among other projects, are all under construction by means of Chinese capital.

Hungary

Container ship COSCO Fortune at anchor. 
Photo: Shutterstock

At the core of the Chinese expansion into the Balkans is Hungary, the third-largest destination of Chinese FDI in Europe, with nearly €2 billion having been invested between 2000 and 2015. In 2012, China and Hungary launched the China-CEE Investment Cooperation Fund, registered in Luxembourg. Its main investors are Exim Bank of China, with €400 million invested, and Exim Bank of Hungary, with €25 million. The fund aims to support projects in the Balkan region, but its activities go far beyond transport infrastructure. It recently invested in two Slovenian companies specialising in public lightning and signalling solutions.

Key to the implementation of the Balkan Silk Road project will be the trans-shipment hub moving the containers of Piraeus onto freight cars, as well as the first section of the corridor that connects the Port of Piraeus with the Port of Thessaloniki, on the northern shore of Greece. Rumour had it that, in 2016, COSCO was interested in getting its hands on this project, but, in January, Italian railway operator Ferrovie dello Stato acquired it for €45 million.

The railway under construction by Greek rail company TrainOSE, which is developing this first Athens-Thessaloniki section, will support container transport on the first section of both European and Chinese projects, so Italy will have a certain amount of leverage on the Chinese project of the Balkan Silk Road. Any delay on this section would delay the Chinese project. So, the coordination and cooperation of Chinese and European companies in Greece – and the Balkans as a whole – is going to be a fundamental testing ground for the future relationship between the EU and China when it comes to Europe and its neighbours.

Although the two EU membership candidates of Macedonia and Serbia are not under geopolitical threat from China – they are not going to be removed from the EU and NATO's area of influence, in other words – and the investments from China have so far had a positive and immediate impact on Balkan economies, Brussels is still worried about the long-term effects.

On the one hand, state-backed Chinese companies are accused of having an unfair advantage, as they can offer services more cheaply when participating in international bids. On the other hand, the growing level of Chinese investments will increase the dependence of European countries on debt to China. Excepting Germany, the balance of trade in goods, services and capital will also be disproportionate.

For one thing, the fortunes of the four Balkan Silk Road countries will, in part, depend on debt to China, while the balance of trade will continue to be extraordinarily in favour of the latter. After the acquisitions of strategic high-tech firms – Germany's Kuka, for example – by Chinese companies, the EU has begun to feel under threat, as it lacks any specific institution aimed at preventing unwanted foreign investments. The lack of such an agency makes it hard to define a common policy toward China, as the member states' interests differ drastically on the matter.

In any case, it's now clear Europe needs investment for new energy and infrastructure projects, as the European financial institutions are more focused on basic infrastructure modernisation, energy innovation and SME business support in EU-candidate countries, such as Serbia and Macedonia. China's intensive FDI campaign in Europe provides ample opportunity for reflection on the EU's real-economy investment strategy.

(By Paolo Balmas, wort-en@wort.lu, +352 4993 9721)

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