China stakes claim in Central and Southeast Europe

By bne IntelliNews December 18, 2014

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A Chinese agreement to finance a high-speed railway from Belgrade to Budapest was one of around $10bn worth of investments, mainly in the energy and infrastructure sectors, signed during a China-Central and Eastern Europe summit this week. By funding the railway, Beijing hopes to establish a rapid connection from Greece’s Pireaus Port through the Balkans to the EU member states of Central Europe.

Several agreements on the €1.5bn railway, which will be financed by soft loans from state-owned China Exim Bank, were signed between China, Hungary and Serbia on December 17. When the line is operational, the travel time between Belgrade and Budapest will be slashed from the current eight hours to just 2.4 hours. Macedonian counterpart Nikola Gruevski was also in attendance as there are plans to extend the line south to Macedonia and Greece in future.

Chinese Prime Minister Li Keqiang, who headed a 200-strong delegation to Belgrade, said he expected the line would benefit both China and the countries of Central and Eastern Europe and the EU, according to a Serbian government statement.
Chinese shipping giant Cosco Pacific took over the management rights to half of Piraeus port and is now expanding two container terminals under a 35-year concession agreement, with the aim of turning the Greek port into one of Europe’s top five container ports. However, to take full advantage of Cosco’s investment in Piraeus and its potential to become a gateway to the CEE region, investments into transport links across the Balkans are needed.

"We will propose construction of a rapid land and maritime route based on the Budapest-Belgrade railroad and the Greek port of Piraeus to improve regional connectivity," Li told journalists in advance of the summit, South China Morning Post reported.

Investments into infrastructure to transport raw materials into China and Chinese manufactured goods to foreign markets is nothing new. Closer to home, Beijing is looking to fund a railway across Central Asia to create a direct rail link between its factories and the massive wholesale bazaars of Kyrgyzstan and Uzbekistan. Further afield, in May 2014, China signed an agreement in Kenya to build a new line from Mombasa to Nairobi that will extend to four other East African states in future.

While land rail routes across Eurasia to Europe are also being developed, sea shipping remains the cheapest route from the Far East to Europe, and Piraeus is a convenient entry point to the continent. While growth in the region has been patchy since the recent global economic crisis, in the longer-term the EU member states of Central and Eastern Europe and future entrants from the Balkans are expected to converge with longer-established EU members from Western Europe in terms of spending power.

Since 2012, when the first China-CEE summit was held in Warsaw, Chinese attention on the region has steadily increased, with a focus on energy and infrastructure. Aside from the access to new markets, there are further commercial benefits for China, as Chinese companies are selected for lucrative construction contracts on projects funded by Chinese state-owned banks.

On December 16, the opening day of the summit, Li told the 16 regional leaders to attend that China would launch a $3bn investment fund for the region.

Also on December 16 Albania signed a deal with Exim Bank on funding for the completion of construction works on the Arber motorway that links the capital Tirana with Macedonia.

In the energy sector, Serbian and Chinese officials have signed a loan agreement for the second stage of the Kostolac B thermal power project, which includes the construction of a new 350MW plant and the expansion of the adjacent Drmno open-pit coal mine. The value of the project is expected to be $715mn, of which $608mn will come from a 20-year China Exim Bank loan.

In neighbouring Bosnia, Eximbank has signed an agreement with the Bosnian Federation government for a €667.8mn credit to fund construction of the 450MW unit 7 at the thermal power plant Tuzla. China's Gezhouba Group is expected to build the unit.

The timing of the summit, amid a sharp falling off of Russia’s influence, may also have helped China extend its influence in the region. With some exceptions, notably Serbia, most of the would-be EU member states in Southeast Europe have opted to join EU and US sanctions against Russia over Ukraine. Tit for tat sanctions imposed by Moscow caused trade between Eastern Europe and Russia to drop, a trend that is likely to continue amid the new economic crisis in Russia. Meanwhile, in a further retrenchment from the region, Russian President Vladimir Putin announced on December 1 that Russia will scrap the planned South Stream pipeline that would have supplies numerous states across the region with gas.

China, meanwhile, has no political axe to grind in Eastern Europe, but hopes to take advantage of Russia’s weakness to make further inroads commercially. Poland and other countries in the region are, for example, looking to China as a potential market for food products following the Russian embargo.

This would add to already booming trade ties. According to Chinese Commerce Minister Gao Hucheng, trade between China and Eastern Europe may top $60bn in 2014 - five times its 2003 level, AFP reported.

However, not everyone has welcomed the growing Chinese presence in the region. In advance of the summit, Serbian police arrested eleven human rights activists from Bulgaria, Finland and Slovakia, who were planning to take part in peaceful demonstrations against the Chinese treatment of Falun Gong practitioners. A December 17 statement from Amnesty International voices concern “that the Serbian authorities are acting unlawfully, and urges them to immediately end any detention based solely on the persons’ intention to exercise their right to peaceful assembly.”

Several of the energy sector projects to receive promises of Chinese funding are also a cause for concern as they increase the use of coal within the Balkans region. CEE Bankwatch Network warned in July 2014 that planned new lignite power plants including Tuzla unit 7 in Bosnia and Kostolac in Serbia risk breaching EU pollution limits.

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