China Ventures into Europe

Meanwhile, China moved in the opposite direction. State Grid was formed in 2002 as an experiment in state capitalism. The galloping pace of China’s economy over the past two decades helped ensure its growth. It is now the world’s largest utility by revenue (it operates 60 subsidiaries in China alone). Released into the free market world, State Grid has been devastatingly effective. Its ambitions have made it a stakeholder in electricity generation and transmission in Brazil, Australia, and the Philippines. Today it has revenues of $315 billion and controls assets of almost half a trillion dollars. Most of these assets are still in China, but it is halfway to its goal of buying up to $50 billion in assets abroad by 2020.

This clash of economic agendas has also exposed Europe’s private sector to competition from other state champions. Last September, the continent’s two largest train manufacturers, France’s Alstom and Germany’s Siemens, announced that they would merge their rail operations in order to fend off competition from another Chinese state giant, the China Railway Rolling Stock Corporation (CRRC), today the world’s largest manufacturer of rail transit equipment. “A dominant player in Asia has changed global market dynamics,” announced Siemens’s chief executive, Joe Kaeser.

Until the turn of the century, investment between Europe and China was virtually nonexistent. European firms started investing in China in 1992. China entered Europe in earnest with strategic timing—after the 2008 financial crisis had drained investment capital from the continent—and it has moved with speed and purpose. Plotted on a graph, the investment relationship looks like a pair of crossed swords. Europe’s outbound investment to China peaked at 12 billion euros in 2012, just as China’s took off. In 2016, Chinese investments in the E.U. reached a record 35 billion euros, while E.U. investments in China fell to 8 billion euros. It is this asymmetry that is keeping European policymakers awake at night. That’s because it is increasingly clear that while Europe welcomes the economic benefits of China’s strategic initiative, the political implications are potentially destructive to Europe’s inchoate political union.

Two axes of Euroskepticism

Almost half of Chinese investment in Europe has taken place along two axes. One runs north from Greece to Poland, through the former Yugoslavia and Warsaw Pact countries. The other runs west, from Greece to Portugal—the northern Mediterranean rim targeted by State Grid.

China has included both axes in its Belt and Road Initiative, a global, trillion-dollar investment program in port, road, and railway infrastructure aiming to lower the cost of Chinese exports to the rest of the world, in Asia, Africa, and Europe. In 2008, the China Ocean Shipping Company (COSCO) bought a lease to operate most of the container traffic through the port of Piraeus and has already increased it sixfold (see my article “Shipping News” in this magazine’s issue of August 7, 2017). Within the next five years, Piraeus is expected to rival Hamburg and Rotterdam, Europe’s busiest ports, in container throughput. Chinese companies have already committed roughly 8 billion euros on port infrastructure, roads, and railways designed to help ship those containers from Piraeus as far north as Budapest, a route called the Balkan Silk Road.

On a purely practical level, China is funding badly needed public works. Eastern Europe is estimated to need infrastructure investment of four times the 150 billion euros the E.U. has spent there. Beginning in 1994, the E.U. designed transport corridors crisscrossing the continent, envisioning hundreds of projects in road, rail, air, logistics, and waterway infrastructure; but it can only afford grants subsidizing a fraction of the work. States must supplement these, and banks would in theory finance competitive private bids for the remainder. Since 2008, though, governments have often chosen to award these projects to Chinese contractors, for the simple reason that these contractors could finance 85 percent of the cost or more with Chinese state bank or government lending.

Eastern Europe’s “financial needs are much bigger than the E.U. can offer, in terms of funding,” and the funding comes with “plenty of red tape and all those Brussels procedures, which are really off-putting,” says Plamen Tonchev, head of the Asia Unit at the Institute of International Economic Relations in Athens. “The Chinese turn up with their checkbooks and suitcases full of money, very few questions asked, and that’s what matters.”

In former Yugoslav Macedonia, for example, Sinohydro Corp. is building two motorways along the corridor linking the Black Sea to the Adriatic. As in many Chinese overseas projects, the financing is provided by China’s Export-Import Bank (Exim), based in Hong Kong, to the tune of 574 million euros.

In Serbia, the Chinese government has directly provided 350 million euros in official lending to construct part of a motorway corridor that will eventually connect Belgrade to the Montenegro port city of Bar, on the Adriatic. In Montenegro, the China Road and Bridge Corp. (CRBC) is working on a 75-mile stretch of the same highway thanks to 680 million euros that Montenegro has borrowed from China’s Exim. Controversially, Montenegro sacrificed 50 million euros in loans from the World Bank in favour of the massive loan from Exim, despite warnings that this would put it in China’s debt.

The European Union is belatedly taking notice of the political symbolism of Chinese finance and engineering dexterity on its turf. What were once European Union corridors are being rebranded as parts of the Belt and Road Initiative. What was once a symbol of European connectivity and federalization is now a display of Chinese connectivity and largesse.

China has taken this symbolism a step further. In 2012, it launched a political forum called the 16+1, comprising all 16 countries of Central and Eastern Europe (CEE) and the Balkans, plus Greece as an observer. It created two China-CEE Investment Co-Operation Funds worth 10.5 billion euros and launched a series of mutual high-level visits with CEE leaders. When China launched its Asia Infrastructure Investment Bank in 2015 to finance Belt and Road Initiative projects, 14 E.U. member states became shareholders despite U.S. exhortations to ignore it.

Independent economist Jens Bastian has discovered that the return on these investments has an enormous indirect benefit for China. In a July 2017 report for the European Bank for Reconstruction and Development, Bastian details a correlation between the amount of Chinese investment in a country and that country’s trade deficit with China. During the last five years, Eastern Europe’s trade deficit with China rose from 26 billion to 44 billion euros.

From the European Union’s point of view, there is a more unsettling correlation. Some of the countries benefiting most from Chinese investment are also among the most Euroskeptic. Poland, Hungary, and the Czech Republic are at odds with Brussels over a slew of issues. All three have rejected an E.U. scheme to resettle incoming refugees from the Middle East and Africa. Poland and Hungary are undermining freedom of speech in the media, and Poland’s government has defied the E.U. in passing a law allowing the government to dismiss senior judges.

China seems to be exploiting the very fault line the George W. Bush administration exploited in 2003, as it searched for European allies in the second Gulf war. Already assured of E.U. membership, Poland, Hungary, and the Czech Republic broke ranks with the E.U. majority and sided with Bush, in a clear setback to a common E.U. foreign and defense policy. China quietly took note.

“I think there is a sense of, ‘We can finally again be part of something bigger, and we know the Europeans won’t give it to us, but we can find it elsewhere, and that will open windows of opportunity,’ ” says Bastian of Eastern Europe. “This sense of constantly being lectured by the Europeans and ‘Look how smooth sailing it is to do business with the Chinese,’ and then getting this impression of, ‘Look, they’re rolling out the red carpet for us, they’re inviting us to the forum in Beijing .  .  . they’re setting up a China-CEE cooperation forum—they want us. Do they in Brussels really want us?’ ”

Both for Southern and Eastern European countries, the mere suggestion of being in parlance with Beijing appears to bestow a certain mystique, which could translate into political leverage with Brussels and Washington. Governments have competed to win China’s favor.

In March last year, Chinese leader Xi Jinping and Czech president Milos Zeman signed a memorandum for projects worth a fantastical 231 billion euros—a sum greater than the country’s annual GDP. Among them is a scheme to insinuate the Czech Republic into China’s Belt and Road Initiative by connecting the Black Sea with the Baltic through the construction of canals linking the Danube, Oder, and Elbe rivers. Zeman’s China pivot came with an anti-Western attitude. During an interview with China Central Television, he described Czech policy towards China as no longer being “submissive to pressure from the United States and the European Union.”

No country in Eastern Europe, however, seems to have made more headway in winning Chinese favor than Hungary. Prime Minister Viktor Orbán allowed Hungary to issue a government bond in April last year denominated in Chinese currency, and in July this year to issue another such bond in China. This made Hungary the first country to have sold renminbi-denominated debt onshore as well as offshore China.

“You look at the specifics in terms of how it is structured, in terms of maturity, interest rate—and you say, okay, it’s not exorbitant, but it’s not cheap either,” says Bastian. “You could place a U.S. dollar bond or a euro bond .  .  . on cheaper conditions than you’ve done it with China. Why are you doing this? Because you obviously want access. You want name recognition. You want also first-mover status. And Hungary is at the forefront. Poland is following close behind.”

The relatively small size of the bonds—a mere $154 million each—seems to confirm that the point of issuing them was political symbolism. Hungary receives European Union funding of about 3.5 billion euros a year.

The Bank of China may have been rewarding Orbán by choosing Budapest last year as its regional headquarters. “They are showing financial markets but also they are showing the E.U., multilateral organizations like the [European Bank for Reconstruction and Development], the [International Monetary Fund], the [European Investment Bank], ‘We are looking for and are successfully finding alternatives,’ ” says Bastian.

Europe’s south: The politics of debt

After 2008, the sovereign debt crises of Greece, Spain, Portugal, and Ireland demonstrated the raw political power of creditors over debtors, opening a new fault line across Europe. The eurozone’s wealthier north imposed a diet of fiscal discipline on all four, a move that framed the dilution of national sovereignty as a punitive act rather than a cooperative measure in a political union. The European Court of Auditors is the most recent body to have found serious flaws in the design, management, and effectiveness of the adjustment programs that were imposed, and those flaws have hurt the authority of Brussels.

China’s Belt and Road Initiative investments in Europe thus have the potential to bring Beijing foreign policy benefits as well as increased trade. Greece most dramatically demonstrates how disaffection with the E.U. can pay dividends to its new infrastructure partner. In June 2016, China lost an arbitration brought by the Philippines to the International Court at The Hague over fishing rights in the Spratly Islands—a disputed territory between the two. Greece, which had recently sold the Piraeus Port Authority to COSCO, blocked a common E.U. statement calling on China to respect the International Law of the Sea.

Then, last summer, Greece blocked a common E.U. statement at the U.N. Human Rights Council in Geneva calling on China to respect freedom of speech. It was the first time the E.U. had failed to make its unanimous annual statement.

Greek foreign minister Nikos Kotzias told The Weekly Standard that other E.U. member states “accused us of doing this for China because we have economic interests. But we have 0.7 percent of China’s investments in the European Union. Britain has 25 percent. Germany has 20 percent. Why do we have economic interests and not them? .  .  . For them it’s business as usual, but if we sell something it affects our political stance. This is hypocrisy and doublespeak, and I have told them so.”

Kotzias went on to state a more startling position: “I respect that the Chinese have a different opinion on human rights. There is a philosophical issue here. Are human rights as the West perceives them generally applicable? Or do some people have a different understanding? One has to respect that. We believe that they are generally applicable. But not everyone believes what we believe.”

Greece has consistently in the past called upon others, especially neighboring Turkey, to respect international law and human rights. Its modification of both standards within a year is unprecedented.

The E.U. fights back

Europe’s indignation at Chinese encroachment is neatly summarized by a remark from German foreign minister Sigmar Gabriel in September. “If we do not succeed .  .  . in developing a single strategy towards China, then China will succeed in dividing Europe,” he told a gathering of French diplomats. He cited the disunity on The Hague’s South China Sea ruling as an example.

The E.U. is beginning to fight back. In his state of the union address, also in September, Jean-Claude Juncker, president of the European Commission, announced that he would look into setting up a common investment screening process. “We are not naïve free traders,” Juncker said. “If a foreign, state-owned company wants to purchase a European harbor, part of our energy infrastructure, or a defense technology firm, this should only happen in transparency, with scrutiny and debate. It is a political responsibility to know what is going on in our own backyard so that we can protect our collective security if needed.”

As if to fire the starting gun on the screening process, the commission launched an investigation into a 2 billion euro Chinese contract to build a high-speed rail link between Belgrade and Budapest. This contract had bypassed the E.U.’s mandatory competitive bidding process. The result was dramatic. Last December, Hungary’s Orbán unilaterally scrapped the deal and opened the project to new offers.

Juncker is also greasing the wheels of integration. The commission is doubling the size and duration of a European Fund for Strategic Investments Juncker created, whose aim is to close the investment gap, to provide at least half a trillion euros in investments by 2020. In October, Juncker targeted the Balkan region, saying the EFSI would back a freight-rail link stretching from the Danube to the Black Sea and the Aegean, linking three Greek ports with three Bulgarian ones.

Europe is also hardening its diplomacy towards Beijing. Last year, the E.U. and Washington refused to recognize China’s transition to a market economy 15 years after joining the World Trade Organization. During the first Belt and Road Forum in Beijing this year, Germany, France, and the U.K.—recipients of half of Chinese investment in Europe—rejected a final summit statement on trade because it did not clearly address the need to uphold environmental and social standards.

These are not just diplomatic slaps in the face. Last year, the European Commission put in place 21 anti-dumping measures against Chinese steel products. This year, the European parliament toughened those measures.

E.U.-China cooperation

Unlike the United States, however, the European Union does not feel it can go too far down the road of protectionism. Until the turn of the century, the E.U. and China were worlds apart. Mutual trade was worth only 1 percent of the E.U.’s GDP, and mutual investment was virtually nonexistent. Last year trade topped half a trillion euros, making the E.U. China’s top trading partner and China the E.U.’s second largest after the United States, while mutual investment was worth 43 billion euros. The E.U. is so heavily invested in the globalized economy, it is now the leading source and destination for foreign direct investment, topping even the United States.

Since Donald Trump’s election, the E.U. is more openly engaging in positive reinforcement in areas of agreement with Beijing. Preserving the openness of trade and investment through multilateral organizations and treaties, rather than returning to bilateralism, is an area in which many Europeans now see greater hope of collaboration with Xi Jinping than with Trump. “The [Chinese] are not interested in becoming the world’s policeman as the U.S. was in the early 1990s. They’re interested in globalization with Chinese characteristics,” says Tonchev. “The U.S. is on the back foot, that’s clear. The Chinese are stepping into the void, that’s also clear.”

As Trump announced that he would pull the United States out of the Paris climate accord on June 1, the E.U. and China issued a joint statement saying that climate change “will become a main pillar” of their relationship.

China, for its part, shows some signs of easing on protectionism. This year it cut the number of restrictions on foreign investors from 122 to 95—a number the West still considers unacceptably high. More substantially, in the wake of Donald Trump’s November visit, Beijing announced that it would allow foreign investors to own majority stakes in Chinese financial institutions.

“There’s a growing degree of pragmatism in Europe,” says Tonchev of the E.U.-China relationship. “It won’t be a walk in the park. There will be disputes. That’s a given. It does not mean we should neglect or downplay important areas of common interest, where we can join hands with the Chinese—climate change, globalization. We have to live with that disagreement.” In seeking to teach the Chinese how to invest in Europe and to learn from Chinese strategy, the E.U. seems to be embracing that complicated relationship. How far China will reciprocate is the unanswered question.

John Psaropoulos is an independent journalist who has covered Greece and the Balkans for two decades. He writes and broadcasts for, among others, the Daily Beast, the Washington Post, the American Scholar, and Al Jazeera English. His blog is thenewathenian.com.