CEE–China summit review and investment prospect

By Vito Petan

Chinese Premier Li Keqiang attended the sixth meeting of heads of government of China-Central and Eastern European (CEE) Countries during his official visit to Hungary and attended the 16th meeting of the Council of Heads of Government. Some $3 billion in Chinese investments to the region were promised during the event, which was more than welcome by the attending countries. The mechanism of "16+1 cooperation" between China and the Central and Eastern European countries (CEEC) has been established five years ago and serves as an economic bridgehead of the “One Road, One Belt” initiative. 

Chinese Premier Li Keqiang (L) holds talks with Hungarian Prime Minister Viktor Orban in Budapest, Hungary, Nov. 28, 2017.[Photo: Xinhua]

The 16 CEE countries within the “16+1” cooperation mechanism are the countries on the last stretch of the New Silk Road have big strategic importance for the Chinese goal of linking China and Europe with big infrastructure projects for the sake of improving trade and economic ties. Bilateral trade between China and CEE countries rose to $58.7 billion in 2016, up 11 percent from 2011, and some 4 million Chinese tourists visited the region last year. Since 2012, Chinese companies have announced an estimated $15 billion in investments in infrastructure and related industries in CEE countries, according to CSIS.

Chinese interest in investing in these countries should be viewed from economic, but also political perspective. The way both sides view it, Chinese investments benefit both sides. On the Chinese sides, the benefits could be summarized with 3 main reasons: 

•Improved infrastructure on the trade routes to Europe means more exports and better access to the markets for Chinese products.

•More projects for Chinese companies eager to showcase their technological advancements in the face of a slowdown in the Chinese economy.

•Improved political ties with the region

It is perhaps the political part that most bothers the European Union, that views Chinese investments in the region with a fair share of skepticism, as countries such as Hungary and Czech Republic that are most friendly with China tend not to blindly follow EU’s foreign policy towards China, and may use the friendship with China for a stronger negotiating positions against Brussels.

On the CEE side, the main benefit is the badly needed investment into infrastructure, which is light years behind that in China. While China has in the past decade built the world's largest high-speed railway network, most of the railway network in CEE countries were built when these countries were still part of Yugoslavia and the Soviet Union, and badly need modernization.

The biggest Chinese investment in the region and a flagship project is currently Belgrade-Budapest railway, the 350 km long project that was announced back in 2015. It will reduce the travel time between the two capitals from 8 to 3 hours and will be built by China Railway Corporation. Hungary published a procurement tender on Monday for its part of the railway that is expected to cost $2.1 billion, while construction of the Serbian part of the project symbolically started on Tuesday. The whole project will cost about $3.8 billion and will be 85% financed by Chinese Exim Bank.

Other deals signed include Bosnia’s autonomous Serb Republic concession with the China Shandong International Economic and Technical Corporation and SHS Group investment in Slovenian Airport Maribor. The deal in the Serb Republic will allow the Chinese company to charge a toll on a part of 100 km road it plans to build for $382 million, which will connect Banja Luka with the Croatian border and will be the first road-construction concession for a Chinese company in the Balkan region. The same company will also reconstruct a railway track alongside the planned road at a cost of $286 million.

Chinese backed SHS Group signed a memorandum of understanding with China State Construction Engineering Corporation for a $783 million for modernizing and enlarging of Maribor Airport in Slovenia. The idea for the airport in the second largest Slovenian city is to become a regional hub for passengers and cargo to and from China. However, the announcement received a lot of skepticism in Slovenia, as the airport currently does not have a single regular line.

Nevertheless, the cooperation between China and CEE should be cheered and supported. The Chinese side has the capital, technology, and experience needed to build infrastructure projects, while CEE countries are in a bad need of infrastructure improvement. Only time will tell if these projects will be fully realized, but they are a good launching pad for future cooperation.       

(Vito Petan is a Slovenian analyst at Guotai Junan Securities)