China’s New Silk Road Encroaches on U.S. Turf in Eastern Europe

Updated on
  • Former communist countries woo Chinese money as U.S. retreats
  • Eastern Europe provides gateway into EU for China’s Xi

China Plans to Reshape World Trade

In the 19th century mansion in central Belgrade where bureaucrats plan some of Serbia’s important overseas projects, 64-year-old Ivan Mrkic is busy unpacking boxes teeming with the books, research papers and maps he needs to become an instant expert on China.

Mrkic, a one-time foreign minister, anticipates investors from Hong Kong and Beijing will pour tens of millions of euros into eastern Europe and he wants Serbia -- among the poorest -- to be ready. For decades, U.S. money has powered steel plants and carmakers in post-Communist Europe, but the region is now hanging its hopes on China stepping into the void created by Donald Trump’s isolationist turn.

Ivan Mrkic

Photographer: Misha Savic

“Sometimes it takes time for the Chinese to take a position, but once they do, the speed of realization is fascinating,” said Mrkic, who’s been tasked along with former President Tomislav Nikolic to set up a one-stop shop to facilitate trade and investment from the world’s second-largest economy. “We decided we’d better create a special office to make sure everything works well.”

From Poland on the Baltic Sea to Slovakia, Hungary and Bulgaria along the Danube river, governments are wooing Chinese investors to, in some cases, replace U.S. companies that are pulling out. It’s a sign of what’s in store with Trump’s America relinquishing its role as the world leader on issues from climate change to free trade and Chinese President Xi Jinping championing internationalism.

Xi’s Gateway

For Xi, the 16 central and eastern European nations and their more than 110 million consumers are a stepping stone into the European Union. Eleven are members already and the other five, among them Serbia, are vying for inclusion in the 28-nation bloc.

Forging a route into the continent is integral to Xi’s plan to build a modern-day Silk Road to carve out new export markets for local businesses as the Chinese economy slows. In keeping with that vision, Beijing in November pledged to plough 10 billion euros ($11 billion) of capital into central and eastern European countries, many featuring among the more than 60 nations targeted by Xi’s Belt and Road initiative.

For more on the Belt and Road initiative, click here.

The cash-starved countries of emerging Europe, including Poland, the Czech Republic, Hungary and Slovakia, have keenly reciprocated the advances, sending top officials Beijing this year to curry favor just as equity markets in four of the region’s capitals, including Warsaw and Sofia, are ranked among the top 10 performers worldwide this year.

Struggling Villages

“My wish is that the Chinese will help and employ as many of our citizens as possible," said Julius Beluscak, the mayor of the eastern Slovakian village of Velka Ida, where United States Steel Corp. has run a factory for 17 years and is now in talks to sell it to Hong Kong-based Hesteel Co.

Speaking at the City Hall overlooking the village’s main, pot-hole ridden road, Belascuk said the condition of the plant has been deteriorating for years and pollution is the worst in the country. He hopes the new owner will invest in greener technologies. Hesteel already bought a Serbian factory in Smederevo for 46 million euros almost a year ago, and is in negotiations to take over U.S. Steel’s plant in Kosice, Slovakia, too.

“I wouldn’t say the village is benefiting” any longer from U.S. Steel’s presence, Belascuk said.

Eastern Europe’s leaders are pulling out all the stops to charm the Chinese. When Xi embarked on a regional tour through various capital cities last year, he was welcomed in Prague with a parade through the Czech capital’s main boulevards. They were decorated with red-and-yellow Chinese flags for the occasion, some of which were defaced by protesters decrying China’s policies in Tibet.

“There may be more willingness to put human-rights issues with China on the back burner,” said Ian Bond, the director of foreign policy at the Brussels-based Centre for European Reform and a former British diplomat. “In many respects, economically, there is a lot of concern in Europe about the direction the U.S. is heading in.”

Dividing Europe

The camaraderie between eastern Europe and China is making some in western Europe uneasy. The EU has been pressing Xi to give its companies the same free access to do business in China that the Chinese get in Europe. Many also worry Beijing is seeking to gain greater political clout by driving a wedge between the bloc’s founding and newer members.

At odds with the European Commission over a range of issues including rule of law and migrant policy, Poland’s ruling Law and Justice party has also been chumming up with Trump, who got a warm reception during a visit to Warsaw last week. Czech President Milos Zeman, meanwhile, wants stronger ties with China and Russia rather than NATO and the EU.

But alienating their more advanced neighbors by courting China may not even be worth it, according to Kerry Brown, an associate fellow at Chatham House in London and a former first secretary to the British Embassy in Beijing.

Unrealistic Expectations

Chinese foreign direct investment into the region still pales in comparison to the U.S. and the EU. In Poland, the largest of the economies, U.S. investors poured a net 62.2 million euros into the country in 2015 versus a net outflow to China. Barely any of the $3.9 billion of investments Zeman predicted would materialize in 2016 actually did.

“Eastern European expectations are high and I wonder if that isn’t a big problem,” said Brown. “The Chinese are not just there to hand out aid and money. There is a big expectation that China is a charity. I just don’t think that is very realistic.”

While China’s no-strings-attached approach to investment is generally welcomed by developing countries, they often have poor credit ratings and questionable governance. China has struggled to recoup loans in Venezuela and Africa, and several projects in Central Asia have spurred protests.

“There are also challenges for China, for instance the culture gap and also political risks,” said Wang Huiyao, director of the Beijing-based think tank Center for China and Globalization. “Chinese companies are not good at cross-cultural adaptation, and they really have to hone their management skills and build themselves into truly multinationals.”

Airports, Spas

A steady stream of new deals is developing nonetheless. Chinese companies are in talks to invest in a factory manufacturing LED lighting and a coal mine in Poland, as well as a high-speed rail upgrade linking the Hungarian and Serbian capitals. Hungary’s government also signed a deal in May with Bohong Group Co., a maker of car components and exhaust systems, while Chinese conglomerate CEFC bought a stake Travel Service AS and brewer Pivovary Lobkowicz in the Czech Republic.

Back in Belgrade, Mrkic and about two dozen colleagues moved into the first-floor mansion hall in late June that previously housed the directorate responsible for Serbs displaced by years of war, which was pushed to the ground floor.

Mrkic said he planned to hire experts and interpreters to help make it easier for Chinese investors to learn about the opportunities in Serbia. Among the deals in the works is one to refurbish the Belgrade airport and another to buy a stake in copper mine RTB Bor. A Chinese investor is even considering purchasing a network of spas in Serbia, well known for tourist resorts featuring geothermal springs and medicinal mud.

“We’re in an embryonic stage,” Mrkic said. “I know that many countries in central and eastern Europe vie for the Chinese attention, some may have been more efficient” than Serbia, “but our projects with China have really flourished.”

— With assistance by Radoslav Tomek, Piotr Bujnicki, Marton Eder, Maciej Martewicz, Misha Savic, Gordana Filipovic, Elizabeth Konstantinova, Andras Gergely, Samuel Dodge, Miao Han, and Marek Strzelecki

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