Is Winning Over Germany The Real Objective Behind China’s CEE Diplomacy? – Analysis

China has been ramping up its political and economic ties with Central and Eastern Europe “CEE” in recent years. But, beyond the growing skeptical media attention pointing to China’s ambitions in competing with the European Union “EU” and major western European states for influence in CEE, does Beijing actually have a long term game plan in place for the region? Alternatively, could there be a more ambitious and less recognized agenda at play?

The China-CEE regional forum

The main platform for relations between China and CEE is embodied in a multilateral forum somewhat quirkily-entitled “16 + 1”, consisting of 16 CEE states and China. Under the forum’s auspices, there have been seven top-level annual summits. The last one was held in Bulgaria, in 2018, where China looked to expand relations with CEE by signing numerous cooperation agreements covering industry, trade, cultural and educational initiatives.

Even so, despite China’s rising involvement in the region, through this forum, amid its various bilateral relations with individual states, all 16 CEE governments have essentially pinned their hopes for their economic and political development through their membership or prospective membership of the EU.

In addition to critical international media reports concerning China’s role in CEE, various American and European think-tanks have also critically highlighted China’s geopolitical ambitions in dominating both CEE and Greece – a country which sits at the southern end of the CEE region and the first point of call, on continental Europe, for Beijing’s grandiose Belt & Road Initiative (BRI).

China denies that it is geopolitically motivated to undermine the role of the EU in its cooperation with CEE and Greece. Instead, Beijing insists that it wants a prosperous and stable EU that would be secure and financially rewarding for its investments in CEE and further afield across Europe.

Where do China’s geopolitical interests in Europe really lie?

A close examination of Beijing’s largely state-driven investment and trade strategy reveals it to be more inclined towards expanding economic and political ties with wealthier western Europe. This has become increasingly more evident in China’s championing ever closer ties with Germany – Europe’s economic powerhouse.

To this extent, where China’s financially-savvy leaders are putting their money is likely to be a more genuine reflection of where Beijing’s real interests lie. For example, in the first three quarters of 2018, CEE’s combined exports to China totalled US$17.6 billion. This is a record high, and up by over 20% on the previous year. Yet, it’s dwarfed by Germany’s exports to China, over the same period, amounting to US$81 billion. Germany is also the only European country to run a rapidly ballooning trade surplus with China. By contrast, CEE has been stacking up a soaring trade deficit with the Asian nation.

China’s appetite for Germany’s manufacturing prowess, and the longer term benefits its machinery and luxury goods makers provide to China’s value-added industry upgrading and rising consumer services sector has been manifested in its growing desire to own more companies in Germany, and nearby German-speaking countries.

Over the first half of 2018, for instance, China’s European mergers and acquisitions “M&A” amounted to US$22 billion. This was on top of recent years’ record-breaking mega-acquisitions of German companies, including China-based Midea’s controversial buyout of German robot-maker Kuka for €3.7 billion and ChemChina’s purchase of Swiss-based Syngenta for US$43 billion.

China’s fading interest in CEE companies

CEE’s corporate landscape has, by contrast with western Europe, proven to be of relatively muted interest for Chinese state-owned and private sector players, alike, amounting to around $10 billion in acquisitions since the 16 + 1 forum began several years ago.

Consequently, whatever China’s leaders had expressed in the way of raising equity-related investments into the region, in recent times, has seen little realised on-the-ground in terms of corporate acquisitions.

Of course, direct investment is only one piece of the finance puzzle behind China’s funding activities across CEE. Chinese state-owned bank lending has featured more prominently in the region. Even so, China’s concessional lending to CEE governments is still a relatively small fraction of various countries’ overall public sector debt.

According to the European Bank for Reconstruction and Development “EBRD”, Chinese cumulative bank lending to the governments of Serbia, Macedonia and Bosnia, over the period 2006 to 2017, was €2.7 billion, €640 million and €350 million, respectively. This is an arguably minor share of these countries’ current respective public debt levels of €22.3 billion, €3.9 billion and €4.2 billion.

China’s expanding partnerships with European governments

As mentioned earlier, China’s international diplomacy with CEE is exercised at both multilateral and bilateral levels. While the “16 +1” grouping is the principal multilateral forum for China and CEE, China also conducts bilateral relations with several CEE states in the form of “partnerships”. These may include economic, political, security, environmental, social, cultural and other tie-ups.

The extent of any partnership’s importance, to China, is reflected in the description expressed in the title of the partnership. Most of China’s relations with individual CEE states tend to be in the nature of lower-ranked partnerships, such as “friendly cooperative relationships” with Bulgaria and Romania, a “friendly cooperative partnership” with Hungary, and a “comprehensive cooperative partnership” with Croatia.

China ascribes slightly higher level relations with the Czech Republic in the form of a “strategic partnership” and still higher level relations with Poland, Hungary and Serbia entitled as a “comprehensive strategic partnership”.

The partnership which outranks all those in CEE, and the rest of Europe, in terms of its importance to Beijing, is the “China-Germany All-round Strategic Partnership”. The nature of this so-called “all-round” partnership, which was inked in 2017, is unique to China and Germany.

Europe’s city gateways linking China westwards

Beyond the high value that Beijing attaches to its growing list of bilateral partnerships is China’s and CEE partner countries’ promotion of several capitol cities which have been earmarked as regional gateways. For instance, Warsaw and Belgrade have been designated as regional centres for China’s trade and investment flows into the northern and southern portions of CEE, respectively. Budapest and Prague have assumed the specific roles of China’s financial and trading gateways into CEE, and even beyond.

Several west European cities have recently taken to the idea of portraying themselves as pivotal points along China’s westernmost extension of the BRI. These include the giant industrial ports of Hamburg in Germany and Rotterdam in the Netherlands, which enable China with open access to the North Sea. This is certainly a far cry from the BRI’s early days, when Beijing’s leaders pointed rather reservedly to the initiative’s westernmost fringes along the shorelines of the Baltic Sea.

Beijing’s desire for win-win relations with Berlin

The benefits China may derive by competing for geopolitical influence in the CEE region seem remote given the region’s limited economic clout and occasional political instability. The principal constraint on China seeking influence in CEE, though, is the self-defeating rivalry this would elicit with wealthier and more institutionally-powerful western Europe.

The reality is that Beijing is engaged in a long term venture of building influence with continental Europe’s pivotal players, including, most especially Berlin. For Beijing, such strategy serves as a more realistic win-win scenario in its competition with the US for global influence. Any geopolitical ambitions China may have in CEE would be no more than securing friendly passage into the economic and political heart of a wider Europe rather than winning over lesser consequential parts of it.

*Bob Savic, Senior Research Fellow, Global Policy Institute, London, UK