In light of slowing growth in exports and trading, China unveiled an enormous project, today known under the name the Belt and Road initiative (“the Initiative”). The project aims at boosting trade and stimulating growth across Asia and beyond, and pushing forward the economic transition from basic manufacturing to high-end manufacturing. China is attempting to achieve this goal by financing country-based and cross-border infrastructure investments in Central and South-Eastern Europe to enhance trading with the region, and further using this as a gate to the Western European market.
In order to materialize the Initiative, China is financing transport and energy infrastructure in the SEE region, establishing trade links, and making direct investments.
When it comes to infrastructure, China signed a memorandum of understanding with Hungary and Serbia in 2013, in order to build a high-speed rail connecting Belgrade and Budapest, which will help Chinese-manufactured goods pass through Eastern Europe into Western Europe. Another example is the Adriatic Highway, which will link Albania, Montenegro, and EU members such as Greece and Italy. In Serbia, a Chinese construction company was the main contractor for the construction of Belgrade’s newest Pupin’s Bridge over the Danube, and China’s Exim bank supplied most of its financing.
Foreign direct investment occupies a huge portion of the Initiative. China is creating a sea shipping route from the Piraeus port in Greece through the Balkans to European Union markets, by investing in the Piraeus Port Authority. Besides, China is one of the largest foreign direct investors in the SEE region, including Serbia.
For example, a Chinese company (He Bei Iron & Steel, HBIS) bought Serbia’s sole steel mill Železara Smederevo. China has also made other significant investments in the corporate sector – Mei Ta Group, a company that produces engine and automotive parts, opened a new plant in Serbia. Huawei, an IT solutions provider, opened a global services centre in Bucharest, and CEFC, a private enterprise providing energy and financial services, took over KMGI in Romania.
As for equity investment, China has created two funds for investment in Eastern Europe. In 2015, China set up the China-Central and Eastern Europe (C-CEE) Investment Corporation Fund which focuses on infrastructure and specializes in manufacturing. In 2016, it was announced that a new fund of $11.5 billion is to finance projects in Central and Eastern Europe. The two investments are expected to bring about improvements in infrastructures, development of the energy sector and increase in employment in the region.
Despite all the positive predictions, it is uncertain to what extent the Belt and Road Initiative will benefit South-Eastern Europe. China’s direct investment into EU countries in the region has accounted for about 8 percent of all such funding in Europe in recent years. Among the 8%, 40% goes to Hungary and 20% goes to Poland.
Besides, there is a chance that the projects under the Belt and Road in non-EU countries will slow down the accession process for EU candidate countries. This is because the China-backed investment projects may violate EU law and trading policies, by requiring Chinese companies to be the main contractors and Chinese labour to implement the projects. The Belgrade-Budapest railway project is one of the examples.
The EU has made positive comments on the economic development of Serbia, but structural obstacles remain a challenge to the country’s growth. To secure continuous investment from China and to maintain sustainability of the economy, the EU has given several suggestions to Serbia, including increasing efficiency of the energy sector and targeting active labour market measures to vulnerable groups and introduce dual learning in education.