The Trajectory of China’s Geo-Economic Puzzle in Eastern Europe
China’s growing economic footprint in Central and Eastern Europe has triggered many discussions lately. A rise in Beijing’s political influence in the region almost inevitably accompanies this discourse. The European Union bureaucracy and Western European countries, which see China as an actor eroding European solidarity and spreading illiberal practices, have been the major drivers for such discussions. However, a data and trends analysis suggest that such fears concerning Eastern Europe are exaggerated.
A new chapter in China-Eastern Europe relations started in the aftermath of the 2008 European debt crises. Countries in the region looked East to attract capital and new commercial opportunities. Eastern European countries (EECs) − Bulgaria, Czech Republic (Czechia), Hungary, Poland, Romania, and Slovakia − have increasingly perceived that China could bring economic benefits to the region. This could be achieved by developing trade relations, growing inflows of Chinese FDI, and infrastructure projects financed using Chinese loans.
Countries wanted to eliminate their excessive dependence on the EU market, diversify their export destinations and investment and financial assistance sources. Some countries also wished to leverage the EU’s policies by playing the “Chinese card.” apart from promoting regular commercial interests in developing trade and economic relations with EECs.
China, on the other hand, aims to get access to the EU common market via the EECs, as well as create partners who support policies of the EU favorable for China and various Chinese stances on many issues varying from Taiwan and Tibet issues, human rights to Chinese territorial claims in the South China Sea.
China as a trading partner
During at least the past two decades, China has been expanding its economic footprint worldwide, including Europe. According to Chinese official statistics, the total trade between the 27 EU member states and China reached US$ 908 billion in 2020. For the first time, China has become the EU’s largest trading partner with a share of 16.1 percent. China and the EU trade on average over US$ 2.5 billion a day.
Since the turn of this century, trade relations between Eastern European countries and China have been smoothly progressing, rising from US$ 2.9 billion in 2000 to US$ 74.2 billion in 2019. However, against booming EU-China trade, they look comparatively limited: In 2019, trade turnover between six EEC and China occupied only 8.5 percent of the EU-China trade. Within EEC, the highest trade flows with China are those of Poland, Czechia, and Hungary. Taken together, they represent 75 percent of the region’s trade with China.
While China is the leading trading partner for more than 130 countries globally, it is not even close to being the largest trade partner for any of EEC. European countries are EEC’s top five trading partners in terms of exports and China’s share is marginal − less than 3 percent for each country. The largest partner for each of these six countries, in terms of total trade, exports, and imports, is Germany. The export dependency of each EEC on Germany is substantial. It varies from a minimum of 15 percent (for Bulgaria) to a maximum of 32 percent (for the Czech Republic) of total exports. Geographic proximity, historical ties, and the EU common market back intensive trade ties between EEC and other European countries.
Meanwhile, the Chinese position as a source of imports is much more solid. For Poland, Czechia, and Hungary, in 2020, China was the second-largest partner for imports with a share of 14.4 percent, 18 percent, and 7.7 percent correspondingly. However, rising China’s export to EEC creates a trade deficit problem. Except for Slovakia, EEC’s deficit in trade with China has been increasing, with the highest figures registered in Poland. Based on the Chinese customs data, in 2020, it reached a record high at around US$ 22 billion, with Poland’s imports from China six times higher than exports to China. Trade imbalances are seen in Europe as deriving from Chinese trade policies, including market access barriers. EEC has continuously requested the Chinese side to facilitate access to the Chinese market, emphasizing agri-food exports.
Chinese FDI
The rise in Chinese foreign direct investment (FDI) and infrastructure financing in Europe can be traced to the 2008 world financial crisis, when China increased its investment and lending activities worldwide, including in Europe. Based on Chinese official statistics, Chinese FDI stock in Europe has climbed substantially from US$ 5.13 billion in 2008 to US$ 114.38 billion in 2019. Alternative data presents a much more stunning picture. In 2018 Bloomberg estimated Chinese investment in Europe at $318 billion over 10 years from 2008.
The commencement of the Belt and Road Initiative (BRI) in 2013 resulted in the deepening of China’s diplomatic and economic engagement with European countries, which were initially seen as the primary and final destination of BRI (over the years, the BRI has become global and less Europe-focused).
According to China’s Ministry of Commerce, as of the end of 2019, China’s FDI stock in Europe reached US$ 114.38 billion, accounting for 5.2 percent of China’s total FDI stock. Chinese investment in Europe is mainly distributed in developed European countries: the Netherlands (21 percent), the United Kingdom (15 percent), Germany (12 percent), Luxembourg (12 percent), Russia (11 percent), Sweden (8 percent), France (5 percent), Switzerland (5 percent), Italy (2 percent), and Norway (1 percent). The primary reason for that is that the vast majority of Chinese investment in Europe is state-directed, aiming to serve Chinese national priorities, which dictates the focus of Chinese activities on acquisitions of European technology companies and investments into various critical infrastructure.
Although Chinese capital inflow in Eastern Europe has accelerated over the past few years, it is still very modest. China’s investment stock in EEC reached only US$1.9 billion, accounting for 1.7 percent of Chinese FDI stock in Europe. The largest recipient of Chinese investment in the region has been Poland, followed by Romania, Hungary, Czechia, and Bulgaria. Slovakia lags due to its small size (see Table 1).
So far, most of the investment inflows into Eastern Europe come from within the EU. In almost every EEC, most FDI stocks are held by the Netherlands, Germany, Luxembourg, and Austria. Only in Poland and Czechia, a relatively high percentage of investors are coming from non-EU countries: from China and South Korea.
To illustrate how limited Chinese investment is in EEC, it is reasonable to compare it with Chinese investment in other developing regions, such as Central Asia. By the end of 2019, Chinese FDI stock in all six EEC combined was of the same amount as in small and impoverished Tajikistan alone − US$ 1.9 billion. A mistaken impression of sizeable Chinese investment in EEC is shaped by highly publicized announcements of signing unbinding memorandums of understanding which eventually are not realized in real projects.
