Why is China interested in Central Europe? Because Sino-European relations are top priority in the plan to promote China’s diplomacy. China is concerned with the Central and Eastern European countries (CEEC) collectively, not the Central European countries exclusively. Additionally, due to the recent refugee crisis, the importance of the Balkan countries should not be understated. Then, why does China attach a high importance to CEEC?

This question is not so easy to answer because different people in China have different considerations. For example, decisions made by the older generations are influenced by their memories of the countries from the former Soviet Union and Eastern Europe and their ideas on the necessity of restarting these relationships. The younger generations, on the other hand, have little to no motivation in developing these associations. Shared economic interests and concrete benefits should be, however, China’s major incentives to push the relations forward with CEEC.

Investment and trade opportunity windows

Following the 1989 drastic systemic change in Central Europe, the region offered a comparatively big investment opportunity for China. Later, an emphasis in CE was placed on ‘returning to the West’, and these opportunities gradually disappeared.

Restricted by investment capacity, China failed to issue relevant investment strategies at that time. But they did encourage migrants to actively participate in the market development of the CEEC, mainly with short-term investments. From 2005 to 2011 China’s investment in the stock of some companies in the CEEC had been rising (see table 1). However, the base number has remained comparatively low and the investment potential of CEE has not been fully exploited by China.[1],[2]

Unit: Million US dollars

Year Country 2005 2006 2007 2008 2009 2010 2011 Hungary 2.81 53.65 78.17 88.75 97.41 465.70 475.35 Poland 12.39 87.18 98.93 109.93 120.30 140.31 201.26 Czech 1.38 14.67 19.64 32.43 49.34 52.33 66.83 Bulgaria 2.99 4.74 4.74 4.74 2.31 18.60 72.56 Romania 39.43 65.63 72.88 85.66 93.34 124.95 125.83

Table 1: The investment stock of China in major CEECs from 2005 to 2011.

With China’s opening-up policy in full swing and the launching of the ‘Going Out’ strategy in the Tenth Five-Year Plan period (2000-2005), China began to seek investment opportunities in the global market. However, the CEEC always regarded the EU countries as their primary resource for collecting investment. Adding to this disregard was China’s unfamiliarity with the rules of the EU market place and the CEEC’s history of dynamic borders; both rendering it difficult for China to find suitable investment opportunities in this region. But, in the Eleventh Five-Year Plan period (2005-2010), Chinese investors began to realize the investment potentiality of the CEE region.[3]

In 2010, the Greece sovereign-debt crisis triggered continuous turmoil in the eurozone which then exerted significant influence on the economic development of the CEE. In terms of investment opportunities, this constituted a ‘window period’ for China.

First, the debt crisis in the eurozone directly harmed the CEE by slowing down economic growth in the region. As a result, many countries looked to foreign direct investment (FDI) as a way to promote economic growth and in order to attract this kind of attention changes were made in 2011 to the investment environments of some countries, making them more conducive to the interests of foreign investors. The proportion of countries that adopted restrictive policies to FDI decreased from about 32% in 2010 to 22% in 2011; while policies for investment liberalization and promotion became increasingly focused on the industries of electric power, gas and water supply, transportation, and communications.[4] These statistics support the observation that the CEEC has used investment promotion as a means to stimulate economic growth.

Secondly, due to the impact of the debt crisis, eurozone countries have found it difficult to sustain their investments in CEEC. This has resulted in a large number of poorly managed assets; providing the needed opportunities for foreign investment to step in. The spill over from the eurozone crisis has seriously affected the economic growth and social stability of CEEC. It now seeks closer cooperation with eastern partners, such as Russia and China, out of necessity. CEEC has managed to improve transport infrastructure, promote the construction of electric power and other clean energy as well as develop information technology and communication industries. In light of the foundation of good investment present in these industries, the early-development advantage, and the abundant foreign exchange reserves of China, some members of CEEC have sought investment from China; and these opportunities have now reached an unprecedented level.

To seize this ‘window period’ is very important for both China and the Sino-EU trade relations. Currently, investing in CEEC would allow China to upgrade its exports and extend the investment value chain. But choosing inaction would result in a missed opportunity to occupy the market.

The European debt crisis has shrunk the economies of EU countries, which has resulted in a decline in demand in general. Since mid-2010, the growth rate of Chinese exports to the EU has continued to wane. What’s worse, negative growth occurred in 2012 – 1.8% in the first quarter and 0.8% in the second quarter.[5]

China cannot expect, or wait, for the recovery of the EU economy to compensate the losses incurred. On the contrary, China should focus on enhancing the competitiveness of its export products in the EU market and promote the products so that they move upstream on the value chain. With CEE’s foundation of solid investment in labour, capital, and industry, including its integration into the EU technology sector, it is a place that presents good investment opportunities which can produce lots of added values.

[1] MOC, National Bureau of Statistics of China (NBS), and State Administration of Foreign Exchange of PRC(SAFE): 2011 Statistical Bulletin of China’s Outward Foreign Direct Investment, China Statistic Press, 2012.8, page 37-38.

[2] According to statistics of the MOC, as of 2011, the investment stock of China in the 16 CEECs totaled 1.00877 billion U.S. dollars, far less than the investment to Sweden (1.53122 billion U.S. dollars). And the gaps between the major investment countries in Europe are even larger: France (about 3.7 billion), Germany (about 2.4 billion), and Russia (3.8 billion). The investment stock of Luxembourg, the largest investment from China in EU members was about 7.1 billion, and that of the Netherlands, the second largest was about 6.6 billion, which were 6 to7 times more than the investment in the 16 CEECs. Data sourced from the above.

[3] According to MOC, NBS, SAFE: 2011 Statistical Bulletin of China’s Outward Foreign Direct Investment.

[4] UNCTAD, World Investment Report, 2012, p.xix.

[5] See the statistical data of MOC: http://ozs.mofcom.gov.cn/date/date.html

Liu Zuokui is director of the Department of Central and Eastern European Studies, Institute of European Studies, Chinese Academy of Social Sciences and a visiting scholar of the Polish Institute of International Affairs.

This article originally appeared in Visegrad Insight Issue 7: “Allied Solidarity”.