China’s Expanding Presence in Southeast Europe

Since its launch in 2013, governments across Europe have made their interest in the Belt and Road Initiative (BRI) clear. At present, 17 EU member states are members of the China-led Asian Infrastructure Investment Bank (AIIB). The 16+1 framework — established by China in Central, Eastern, and Southeast Europe — includes eleven EU-member states and five countries from the Western Balkans. Greece has officially applied to join as the seventeenth member of the framework.

Beijing’s economic footprint and regional connectivity objectives in Southeast Europe are expanding and the objectives and projects of the BRI in the region have evolved in parallel. Consider a number of examples within countries across Southeast Europe during 2018. In Serbia, the Chinese company Shandong Linglong plans to invest $994.4 million to construct a tire factory in the Zrenjanin Free Trade Zone. Construction of the factory will officially start in April 2019.

Zijin Mining Group, China’s largest gold miner and one of the country’s top copper producers, acquired the Serbian copper mining and smelting complex RTB Bor for $1.26 billion, a 63 percent equity stake. Located in eastern Serbia, RTB Bor is the second Chinese acquisition of a firm in the country after China’s Hesteel acquired a steel plant in Smederevo in 2016.

In Greece, CHN Energy is participating in the tender for the privatization of the state-owned Public Power Corporation’s (PPC) four lignite-fired plants in Meliti and Megalopoli. If successful, it will constitute the third Chinese investment in Greece’s energy sector. China’s State Grid acquired a 24 percent equity stake in ADMIE, the country’s independent power transmission operator. Furthermore, the Copelouzos Group and Shenhua Group signed an MoU in May 2017 to invest in four Greek wind parks and PPC’s Solar Solutions.

In Croatia, a Chinese consortium was awarded the tender to construct a bridge across the Mali Ston Bay, giving Croatia a direct land link to the Peljesac Peninsula instead of having to reroute traffic through a small stretch of Bosnia and Herzegovina. Building bridges in European countries (EU and non-EU states) with Chinese companies has its precedents.

In December 2014, the “Friendship Bridge” was inaugurated over the Danube in Belgrade, having been built by China Road and Bridge Corporation (CRBC). Similarly, in December 2018, China’s Sichuan Road and Bridge Group (SRBG) celebrated the official opening of the Hålogaland Bridge in the Arctic town of Narvick, Norway, built in cooperation with the Serbia-based company VNG. At a total length of 1,533 meters, it is Norway’s second largest bridge and the longest suspension bridge within the Arctic Circle. It is the first successful Sino-Serbian bridge construction consortium in Europe!

The SRBG-VNG cooperation carried out the steel construction and was responsible for the mounting of the bridge, which significantly cuts travel time on the European Transport Corridor route E6 — the main north-south road through Norway and the west coast of Sweden. Unlike Croatia, neither Serbia nor Norway are EU member states. The former is a candidate country currently negotiating membership with the European Commission. The latter has an Association Agreement with the European Union since 1994 in the European Economic Area (EEA).

Apart from individual country cases, China’s presence is also expanding on a regional scale. During the past five years, numerous BRI projects in Central, Eastern, and Southeast Europe have been framed in the context of the 16+1 initiative. This hybrid framework of participating countries includes EU members, NATO members, and Euro-area members, as well as candidate countries for EU membership. The meetings take place on an annual basis, most recently in Sofia, Bulgaria in July 2018. The 2019 meeting will be held in Zagreb, Croatia, and in 2020 China will host the gathering for the second time in five years.

The 16+1 network provides the institutional setting for China to engage primarily on a bilateral basis with countries from the three aforementioned regions. Operating since 2012 and headquartered in China, the 16+1 network is a top-down, state-led framework that agrees on project cooperation on a transactional basis ranging from transport infrastructure, to educational initiatives, to industrial park construction.

The 2018 meeting in Sofia was significant because China sought to reassure the European Commission in Brussels that the 16+1 format underlines the “complementarity” of Sino-EU relations. This reassurance appeared necessary as EU member states such as Germany, France, and Poland, as well as the European Commission itself, raised concerns about the substance of the proceedings.

Implications and Challenges

Three trends can be identified behind these developments. First, the BRI is further expanding and consolidating in Southeast Europe. While the focus remains primarily on transport infrastructure and energy, a gradual shift from primary to secondary infrastructure projects in the region is also taking place. Ports, railroads, and highway construction remain at the forefront, but projects focusing on energy diversification, equity investments in sectors such as tire manufacturing, tourism, and logistics are increasing in visibility and volume.

Second, BRI projects in Southeast Europe are becoming more international in regard to co-financing, risk sharing, and environmental impact. The successful bid for the bridge project in Croatia marks a turning point for Chinese companies in Europe. For the first time they succeeded in winning a public procurement contract for a major infrastructure project in an EU member state. The 357-million-euro project is 85 percent co-financed through structural funds earmarked in the EU budget. The remaining 15 percent is provided by Croatia itself.

When considering various BRI-related projects in the region, Chinese investors are proactively seeking cooperation with multilateral, international organizations operating in Southeast Europe. Chinese outreach is most visible with regard to the European Investment Bank (EIB), the EU delegations in the region, and the London-based European Bank for Reconstruction and Development (EBRD). The EBRD has an extensive network of representative offices across the region and multi-decade experience in transitioning economies. Since January 2016, China is a shareholder in the EBRD with a token but symbolic stake of 0.096 percent.

Thus, new Chinese investments in Southeast Europe over the course of 2018 are partly focused on traditional BRI infrastructure projects, but they also seek to incorporate local economic considerations and the diversification of project financing. This new approach toward local economies is illustrated by the fact that in Serbia, Zijin Mining promised $200 million to settle RTB Bor’s debt and said it would keep all 5,000 local workers.

Diversification is being pursued by Chinese policy banks such as China Development Bank and Exim Bank through local currency lending for BRI projects. In this area of project finance, synergies with the EIB and/or the EBRD are feasible and would positively impact the reputational capital of Chinese policy banks operating in the region.

Jens Bastian is an independent economic consultant based in Athens, Greece and Stuttgart, Germany. In 2017 he authored a report for the European Bank for Reconstruction and Development in London on the Balkan Silk Road.

The second brief in this series by Jens Bastian looks at reactions to China’s growing presence at the European level. What policy responses are being formulated? What can we expect next? Read the full article here.