China's Investment in the Balkans under the Belt and Road Initiative: A Chinese Perspective.

• Author: Zuokui, Liu
• Position: COMMENTARY - Report

Introduction (1)

In 2013 and 2014, China successively launched the "One Road and One Belt" initiative, which gradually became "the Belt and Road" initiative (B&R). It became an important platform to guide China's opening up, promote global governance, and build a community with a shared future for humankind.

As an important platform for promoting B&R in Europe, "16+1 Cooperation" plays an important role in promoting Chinese enterprises to "go global" and promote China-EU connectivity. Since the launch of the "16+1 Cooperation" in 2012, China's infrastructure, energy, industry capacity, and other projects have been initiated in the Balkans. Typical examples are: China's Hegang Group's acquisition of the Serbian Smederevo steel mill; China Road and Bridge Corporation (CRBC) building the Hungarian-Serbia Railway; COSCO Group's acquisition of the Greek port of Piraeus; China Communications Construction Group building the highway in Montenegro; China Road and Bridge Company's successful bid for the Croatian Peljesac Bridge project that is financed by the EU; Shanghai Dongfang Electric building the Bosnia and Herzegovina thermal power station project in Stanari; and the North Macedonian highway project undertaken by Power Construction Corporation of China.

The launching or landing of the above projects have accumulated valuable experience for Chinese enterprises to "go global," and helped China's technology, manpower, and capital to move to Europe and enhance competitiveness in the international market and gain greater market benefits.

China's Basic Policies for the Balkan Countries

China's policy towards the Balkans has a degree of continuity from the history to the present. Historically, China and Yugoslavia maintained mutual learning, friendly cooperation for a period of time. After the Yugoslavian war, China maintained friendly relations with countries such as Serbia, while it interrupted diplomatic relations with North Macedonia due to the Taiwan issue, but later restored the relationship. In essence, the Balkans is a special region and China basically retains the "one country, one policy" tradition with there being no overall policy for the region. The core of the Chinese policy to each country in the region is to maintain friendly relations and cooperation, while actively promoting economic, trade, and investment cooperation. This policy is not expected to be substantially changed in the long-term future. Moreover, in terms of trade and investment cooperation, China is a newcomer and, until recently, successive investment activities have not occurred.

Since 2012, China has begun to have a platform for cooperation in the Balkans. It has developed relations with the Balkan countries under the "16+1 Cooperation" and "the Belt and Road" initiatives. "16+1 Cooperation" aims to build a platform for cooperation between China and 16 countries in Central and Eastern Europe to promote two-way trade, investment, and cultural exchanges. B&R is mainly based on connectivity with Europe. As the Balkans is located in a critical and important position in Europe, it has the potential to play a greater role. Driven by the above two initiatives, China's investment activities in the Balkans have increased significantly, and cultural exchanges have become increasingly popular.

Progress, however, in investment cooperation between China and the Balkan countries has been limited. Following the disintegration of Yugoslavia, due to the continuous conflict in the Balkans and the deterioration of the business environment, China's investment in this region has been relatively small. At the same time, Chinese companies did not focus on the Southeast European market, but in Western, Northern, and Southern Europe, where they have a good technical base and a developed industrial chain. Chinese companies still attach more importance to their investments in developed markets and have only seen significant growth in infrastructure and energy projects in the Balkans.

The aim of actively promoting infrastructure enterprises is to "go global" and promote connectivity within the Balkan region. The significant increase in investment by Chinese infrastructure companies in the Balkans is related to national policy priority and business needs. China's equipment manufacturing industry has experienced more than 30 years of reform and opening up, accumulating technological advantages and first-mover advantages, but these are mainly in the domestic market, lacking international experience, and being unfamiliar with the international market. Therefore, infrastructure enterprises want to "go out," testing themselves in new overseas markets, sharing the "cake" of the international market, and promoting the internationalization of enterprises. After B&R was put forward, it provided a broad space for infrastructure construction and trade between countries and regions along the route, and also set up a new cooperation platform for Chinese enterprises to "go global" bringing new markets space. According to the 2017 and 2018 assessments of B&R National Infrastructure Development Report, the Central and Eastern European countries are clearly at the forefront of B&R countries, regardless of actual demand, business environment or development potential. (2) Of course, this is also related to the greater demand for infrastructure in the Balkan countries. Due to the war damage and the sluggish economic development, most of the Balkan countries have poor infrastructure conditions and urgently need to improve this in order to develop industries and tourism. Taken together, China's infrastructure investment mainly focuses on the comparative advantages of the Balkan countries. Although the risks are not small, the investment value is higher in the medium and long term.

Rationale to Chinese Policy in the Balkans

There are a number of reasons as to why China has chosen to increase its activity in the Balkans. The first is the market advantage of the Balkans. Although most of the Balkan countries have not joined the EU yet, they are backed by and deeply embedded in the EU market in terms of systems and rules, facilitating trade, and investment. The geographical location is also very important with some countries in the Balkans being important transit points to Europe, the Middle East, and even Africa. For example, when Chinese companies invest in Serbia, they do so knowing that the products that are produced in Serbia can easily reach the markets of the European Union, Russia, Turkey, and Africa.

Secondly, the cost of production in the Balkan countries is more competitive. Although the region has recently experienced war, it is basically calm and there is a low possibility of another major war. Admittedly, there are sporadic regional low-intensity conflicts, however the possibility of wide-spread regional conflict is low and the business environment is improving.

Thirdly, compared with other markets, the Balkan infrastructure market has an important role as an emerging market with large investment opportunities. Government governance and legal regulations in the Balkan countries are moving closer to EU standards. Chinese companies operating in the Western Balkans can familiarize themselves with EU market rules and gain market access, accumulating experience to enter the EU market.

Therefore, promoting China's high-quality and advantageous industry capacity to "go global" and serve the local economy is in China's interests. The "go global" of China's...