Oct 2015

China’s forays into the West

China’s outbound direct investments increasingly target the countries touched by the One Belt, One Road (OBOR) initiative. This is China’s biggest diplomatic project in decades. It combines a land-based Silk Road economic belt and a sea-based 21st century maritime Silk Road, which connects China to Europe through Southeast Asia, Central Asia and the Middle East, covering 55 per cent of world GNP, 70 per cent of global population, and 75 per cent of known energy reserves.

A study by Grisons Peak, a London-based boutique investment bank, published in June shows that the majority of 67 overseas loan commitments made by China’s largest policy lenders – China Development Bank and the Export-Import Bank of China – have been in areas interested in the OBOR project since its launch in late 2013. Loans for infrastructure projects contribute to upgrading the Chinese economy at a time of domestic restructuring of various sectors – including heavy industries involved in building and maintenance of transport and energy infrastructure, but also consumer goods. Trade financing serves to maintain existing, as well as find new, markets for Chinese products.

The stated aim of this grandiose project is to boost connectivity and commerce between China and 65 countries. China’s financial commitment is likely to reach up to $300 billion in loans for infrastructure and trade financing in the coming years – not counting the leveraging effect on private investors and lenders. This sum includes a $40 billion contribution to the Chinese-led ‘Silk Road Fund’ for infrastructural developments. Sitting at the end-point of the Silk Roads project, central and eastern Europe, the Balkans and the Greek ports have been so far the main beneficiaries of these funds.

In June, Hungary became the first EU member to sign a memorandum of understanding with China on integrating the ‘belt and road’ initiative with Hungary’s ‘opening to the east’ and ‘opening to the south’ initiatives. Poland is also considered a pivotal country for the OBOR project. Plans have been made for building a railway connecting the Chinese province of Sichuan with the Polish city of Lodz as well as for developing several Polish harbours such as Gdansk – all financed by soft loans from China. Other EU members have integrated China’s OBOR project with their own investment strategies or are in the process of doing so. For instance, in June China and France signed an agreement for prioritizing cooperation in third-party markets, including joint ventures and project financing.

At the last EU-China summit on June 29, 2015, Juncker called for the creation of synergies between his European Fund for Strategic Investments and China’s ‘belt and road’ initiative. Premier Li Keqiang replied to Juncker by making a multibillion dollar investment commitment to the EFSI, though no precise amount has been unveiled so far.

Juncker and Li Keqiang  at the EU-China Summit on 29 June 2015. Source:  www.businessgreen.com

Jean-Claude Juncker and Li Keqiang at the EU-China Summit on 29 June 2015. Source: www.businessgreen.com

Totalling €315 billion, Juncker’s plan aims to relaunch growth and job creation in sectors ranging from innovation to research, education, and transport infrastructure. Policymakers in Brussels are identifying appropriate cooperation mechanisms between the belt and road initiative and Juncker’s fund. Ideas presented so far include the establishment of a China-EU joint investment fund, joint contracting and co-financing. European critics worry, however, that the initiative lacks transparency rules and the opaque financing deals may threaten the competitiveness of European companies.

Greater Sino-European connectivity will inevitably entail some economic and political costs for Europe – and the same could be said for China. Yet, the OBOR remains, ultimately, a great opportunity for a continent that is still struggling to recover from the crisis. What is urgently needed in Europe is a comprehensive response to the belt and road initiative. The focus should not be limited to economy and trade, but also include political and security issues.

An enlarged version of this article was published with the title China’s inroads into the West in The World Today