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Subsiding Promises, 16+1

Since the launch of the ‘16+1’ mechanism that was initiated by China and countries from Central and Eastern Europe in 2012, the promise of large investments from Beijing has become a hugely alluring prospect for much of the region.

Chinese money has brought in a much-needed boost for some of these nations and a way of reducing their dependency on the European market, even though some are beginning to discover that much of these expansive and lucrative projects have been more talk than action.

In 2016, China set up a 10 billion euros investment fund to finance projects in Central and Eastern Europe through which it is aiming to raise 50 billion euros in project finance for sectors such as infrastructure, high-tech manufacturing and consumer goods.

The main motive behind China’s investment in this region is in connecting its Belt and Road initiative which seeks to link with Central Asia, the Middle East, Europe and Africa, through a network along the lines of the old Silk Road, for which Central and Eastern Europe is a key connecting point.

That is why so many of these projects are in the areas of transport, particularly railway networks which will become vital in the trading of goods between Asia and Europe.

Spectrum of industries

Viktor Orbán

The deal signed between Hungary and China for the modernisation of the railway link between Budapest and Belgrade was the first major Chinese infrastructure deal inside the European Union, with an estimated cost of a little under 2.6 billion euros.

This is just a snapshot of the wider ties that Hungarian Prime Minister Viktor Orbán’s government has forged with China across a wide spectrum of industries, which has raised alarm bells in the European Union, yet not as much within the nation itself.

Across the Hungarian political landscape, there seems to be a common agreement regarding the importance of Chinese development, with little to no backlash from any prominent figures.

The Hungarian media’s coverage of China, and thus public discourse, tends to brush past the more controversial aspects of its human rights record or other questionable practices and instead talks up its economic successes, leaving security or political concerns unmentioned.

Orban has little interest in appeasing the EU or in how Hungary is perceived on the continent, having regarded Western economies as being “based on speculation” while talking up China’s model of a “work-based society” as a suitable one for his own, which “undertakes the odium of stating that it is not liberal in character”.

The Czech Republic appeared to have a similarly unflappable bond with China, but it has seen a spanner in the works of late.

In the not too distant past, Chinese investment in the Czech Republic was thriving, kicked off by President Miloš Zeman after taking a group of Czech businessmen to Beijing in 2014.

That year, Czech-Slovak financial services J&T and the Chinese Energy Company (CEFC) agreed to 1.4 billion euros investment which spelt a wave of strategic takeovers, from football clubs to airlines.

Like Orbán, Zeman has demonstrated his pro-China stance not only in a business sense but also on an ideological level, several times declaring that he wanted to learn “how to stabilise society” from the country’s Communist Party.

Yet relations between Prague and Beijing have become strained since Zdenek Hrib, a doctor by trade who underwent a medical internship in Taiwan, became mayor of the Czech capital in 2018 and has repeatedly challenged Zeman over his links with China.

Hrib took it upon himself to sever the sister city agreement between Beijing and Prague, because of pressure to conform to the ‘One-China’ policy. And on January 2020, Zeman even admitted: “I don’t think the Chinese side has done what it promised. I’m talking about investments.”

Faltering ties

Despite the promise of a thriving relationship, Poland has also seen its ties with China falter in recent times.

Vice-President Mike Pence

As with most nations in the region, China’s arrival was seen as favourable by Poland, with a 2016 agreement signed which was said to make the pair “long-term and stable strategic partners”. Bilateral trade in 2018, which exceeded 22 billion euros and signified an increase of 15.5 per cent over the previous year, looked to be a clear sign of this.

But the arrests in January 2019 of a Huawei executive and a Polish national in Warsaw on allegations of spying sparked a turning point in Sino-Polish relations. This would prompt Polish President Andrzej Duda to say that he was opposed to investment from Beijing in strategic infrastructure, including seaports and airports.

Poland has been gravitating more towards the US of late, particularly in the area of defence. The Trump administration has forged close ties with Duda’s government, marked by a visit of US Vice-President Mike Pence to Warsaw in September where the bond between the two nations was reiterated.

While there were high hopes of large scale cooperation in nearby Slovakia, having been one of the first EU nations to sign a Memorandum of Understanding with China in 2015 in line with its Belt and Road Initiative, Beijing has had a relatively limited presence, with its investments accounting for just one per cent of total FDI which equates to around 245 million euros.

The planning document for the development of China-Europe Railway Express did not even list Slovakia as sitting on the major route, symbolic of how the Visegrad state is far from a top priority, even though a stronger relationship had been constantly talked up in the political sphere.

That was until the election of President Zuzana Caputova in 2019, which scuppered the idea of flourishing ties with China after she voiced her concerns about Beijing’s human rights protection, the detainment of lawyers and activists, as well as the treatment of ethnic and religious minorities.

Little other option

In the Baltic states, there is a more uniform acceptance of Chinese investments as they are met with little other option to boost their faltering economies.

A key Chinese connection to Europe arrived via Latvia, which became the first Baltic nation to benefit from the creation of a direct rail freight route with Beijing.

This has made Latvia a prominent part of Beijing’s plan as it has identified the small Baltic nation as becoming the northern European logistics and distribution centre in the Eurasian land bridge.

Lithuanian Railways and the China Merchant Group signed an agreement confirming freight services from China via Belarus to the Baltics, and the focus for Lithuania is to be part of a transit route to its neighbour in the north via rail, and towards the south of Europe, but it attracts far fewer Chinese investments overall.

China’s Touchstone Capital Partners initiated a train tunnel linking Helsinki with Estonia’s capital Tallinn with a 15 billion euros injection of finance which, as all of its railway agreements in the region, is an infrastructure investment in the Belt and Road Initiative plan.

Yet while various trade agreements and takeovers can be put down to mere business, the next chess game between east and west over the Central and European states in the battle for 5G implementation is an even bigger area of concern which remains largely unaddressed.

5G – the new frontier

Rather than just a tug of war over construction contracts and railway links, the quest for which of the Western countries and China can wrap up 5G contracts is the new frontier for the fourth industrial revolution.

The battle over 5G goes beyond just faster internet, transcending every aspect of daily living of the residents of the smart cities over which these networks will govern.

The ties between Huawei and China’s government, and thus the CCP’s potential ability to spy on citizens, although downplayed in Beijing, has polarised the discussion on 5G.

While the volume of investments China so boldly claimed it would offer back at the start of the 16+1 project initiation haven’t been met, the allure of its 5G capabilities represents an avenue back into the hearts, and pockets, of Central and Eastern European nations.

A 180 million euros investment is bringing the construction of the second-largest Huawei supply centre in the world near Budapest, with Hungary’s loyalty to China showing no sign of wavering.

Czech President Miloš Zeman

Zeman publicly criticised warnings from National Cyber and Information Security Agency of the Czech Republic against Chinese providers ZTE and Huawei, mentioning that it would harm the latter’s plan to invest 330 million euros in 5G networks across the country.

Serbia, in collaboration with Huawei, has implemented the most intrusive police surveillance system in Europe, while the Chinese company now commands a 50 per cent share of the Greek telecoms equipment market and Slovakia has also continued to talk up collaborations with Huawei over 5G.

Warnings from the US have, however, clearly had an effect on some. Poland dealt a blow to Huawei by signing a deal with the US to strengthen cooperation on 5G while Romania, in a joint statement with Donald Trump, mentioned it would “seek to avoid the security risks that accompany Chinese investment in 5G telecommunications networks”.

European concern

One of the EU’s major concerns regarding China’s activities in Central and Eastern Europe is due to the fact that these transport networks are set to become a major terminal for the Chinese Belt and Road initiative.

Yet it is not just from a business perspective that some are worried as the more agreements and investments made between Beijing and its Eastern European counterparts buy more political influence within the continent.

This has been evidenced in Hungary’s repeated blocking of EU statements criticising China’s rights record. Greece, in 2017, vetoed an EU statement at the United Nations expressing condemnation of China’s human rights record while Serbia has seen public support to join the EU drop from 70 per cent in 2012 to just 34 per cent today.

Even though these countries are undoubtedly aware of the political influence that it provides Beijing, it is a price that they seem more than willing to pay. And, although in some rare cases ideological alignment or admiration seem to be a factor, the main motive for the recipients of Chinese money seems to be purely financial.

COVID-19 impact

The outbreak of COVID-19 has left the global economy shrouded in uncertainty and concern, no less in Central and Eastern Europe where those countries are intrinsically linked with and dependant on large-scale Chinese investments.

A report from Erste Research Group (ERG) warned that a worst-case scenario could put Europe into recession if the spread of the coronavirus was not contained in the near future, and could translate into an even more rapid dip in growth for CEE nations.

A downward turn of average CEE growth of about 0.3 per cent, with revisions of as much as minus 0.5 per cent for Romania, or even more for Croatia, is estimated by the report.

Due to the volume of activity between CEE countries and Chinese investments, there is also significant potential for disruption to the supply chain of this region.

Using OECD data, analysts from Raiffeisen Bank International (RBI) estimate that Slovakia will be the most exposed country in the region, with a share of 45 per cent of foreign value-added in exports.

While Germany plays the biggest part in the supply chains of CEE economies, China plays a significant role, accounting for around 3.5 per cent of value-added in terms of exports for many nations in the region.

Bloc loyalty

With the EU market stagnating and with many of these nations feeling little need to uphold any kind of loyalties to the bloc, Central and Eastern European nations are focusing more on the benefit of their own nations rather than being swayed by external influences, threats or dogmas.

The EU still holds concerns over possibly losing its grip on a number of Central and European states.

But largely due to healthy debates and scepticism about Beijing’s plans and its inability to live up to many of the initial promises, there is no longer such an aligned approval of China’s activities in the region.


This article is part of the #DemocraCE project.


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