Memorandum of Misunderstanding
By some accounts countries in Central and Eastern Europe have grown weary of grand promises of Chinese investment and trade gains that have failed to materialize. Has China really blown its chances in the region? We spoke to Hungarian expert Agnes Szunomar for her perspective.
"When the wind is at our back, lose no time in setting sail," Chinese Premier Li Keqiang (李克强) urged business leaders gathered in the city of Dubrovnik back in April. Hailing the success of cooperation between China and the countries of Central and Eastern Europe through the so-called "16+1" framework (China-CEEC Cooperation), Li said that relationships on trade, investment and connectivity had been "growing with a strong momentum."
At the meeting, hosted by Croatian Prime Minister Andrej Plenkovic, the informal bloc also expanded, welcoming the addition of Greece as a full-fledged participant.
By some accounts, however, hopes in the region that the relationship with China might bring tangible economic results are already in a dead calm. If there is wind, is this about real momentum, or about empty talk?
On April 11, the day the China-CEEC forum opened in Dubrovnik, Andreea Brinza, a Romanian scholar specializing in the study of China's Belt and Road Initiative, wrote in Foreign Policy that China's engagement efforts had failed on three counts: "China failed to make its intentions clear, failed to deliver on many of its promises, and failed to offer the assurances its partners needed," she wrote.
For more perspective on China's engagement in Central and Eastern Europe, Echowall reached out to Agnes Szunomar, head of the Research Group on Development Economics at Hungary's Institute of World Economics (Hungarian Academy of Sciences), and an assistant professor at Corvinus University of Budapest (CUB). Szunomar's research focusses on China's foreign economic relations, including its relations with Central and Eastern Europe.
Echowall: Back in March, the European Commission issued a report in which it characterized China as "a systemic rival promoting alternative models of governance." Some have argued, or feared, that China's engagement in the CEE region has been one of its success stories in terms of offering alternatives. But just as China's latest "16+1" meeting was getting underway in Dubrovnik in April, this piece in Foreign Policy, "How China Blew Its Chance in Eastern Europe," suggested the prevailing mood toward China in the region is disappointment. Where do you think we are right now with China's engagement in Central and Eastern Europe? How do you respond to the suggestion that China has "blown its chance"?
Szunomar: When China started to build relations with the CEE region, it believed this would even enhance cooperation between the European Union and China. Later on they had to realize that what is happening is totally the opposite. I don’t think China wants a divide and rule strategy toward the EU. If we consider its global aims, China is more interested in a strong and unified EU that cooperates with China – for example, in counterbalancing a protectionist US.
On many issues, the EU is divided and fragmented enough without China, and even CEE countries are not able to agree on several things, including approaches toward China. In the Visegrad region – including the Czech Republic, Poland, Hungary and Slovakia – we also see fragmentation. Right now, the Czech Republic and Poland seem to be more critical toward China, while Hungary is the most pro-China country in the region. Slovakia, meanwhile, is rather neutral, since they don’t really have economic ties with China.
As for the Foreign Policy article, I don't think the issue is that China has failed to make its intentions clear. In fact, I think China never had clear intentions, or a clear strategy, for what it wanted to achieve in this region.
Echowall: Is it possible to gauge the mood within the "17+1" framework towards engagement with China? There are rumblings, certainly of "promise fatigue," that miracle investments have not materialized. But maybe you have a clearer view on this?
Szunomar: As I mentioned before, not just in Europe but even within the CEE region there is a lot of division over China. There are countries that have indeed received large amounts of Chinese money. Greece is one example. And there are countries that have never received significant amounts at all – like the Baltic states or smaller countries in the Western Balkans. Then there are countries that waited for economic opportunities and became disappointed as these opportunities never really arrived. Poland and the Czech Republic are prime examples. Finally, there are countries, such as Hungary, that prioritize good political relations more than economic benefits. So Hungary will engage in a project like the Budapest-Belgrade railway even if this project won’t be economically profitable for the country.
Echowall: At the Dubrovnik meeting in April, the "16+1" formally became the "17+1" with the addition of Greece. As you suggested, all of the countries in this diverse grouping have very different reasons for engaging with China, and different reasons to continue showing up meetings like the one in Dubrovnik. What are some of the key factors that drive participation do you think?
Szunomar: It varies from country to country. Non-EU countries in the Western Balkans have become disappointed as a result of their worsening chances of becoming EU members. For this reason, some of them have decided to move closer to China and to do more business with the Chinese.
Some of these countries, such as Serbia, still try to inform EU bodies about projects [with China] to make sure relations with the EU do not deteriorate. Countries such as Greece and Hungary have already supported China in the international arena in many cases and will certainly be the strongest “friends,” or maybe we could call them "allies," within this group. But there are also countries that have long been cautious, like the Czech Republic, or have recently became more cautious, as with Poland, and started to block Chinese companies.
So, it's difficult to find common ground here [when it comes to China]. I think there was more opportunity for that after the global financial crisis in 2008, when these countries experienced the disadvantages of having too much dependence on their EU partners. At that time, more CEE countries decided the answer was to open up to China.
Echowall: Could you give us perhaps a more realistic picture of where the investment and economic ties and dependencies are in the CEE region. How important is China right now as a player? Can we get sort of an overall picture of what the investment and import/export picture looks like for countries like Hungary or the Czech Republic – and where China really fits in?
Szunomar: China is not a significant player at all. CEE countries are highly dependent on both trade and investment relations with developed countries, mainly-EU member states. China represents a minor, although increasing, share. Hungary, for example, is among the most popular destinations for Chinese foreign direct investment within the CEE region. Chinese statistics from the Ministry of Commerce show a rather modest stock of Chinese investment in Hungary, reported as 314 million US dollars (281 million euros). But the Hungarian National Bank (HNB), which breaks its numbers down according to ultimate investors instead gives a figure of 1.78 billion US dollars (1.6 million euros).
The Hungarian National Bank uses the so-called BMP6 (Balance of Payments and International Investment Position Manual) methodology, as does the IMF and the OECD. That means they try to track back to the ultimate owner of the company or investment. The Chinese statistics, by contrast, show the direct investments only -- the money that goes from China to the Netherlands or Luxembourg, for example. But Chinese companies usually make their investments through intermediary countries or companies, and that is why there is such a huge discrepancy between Chinese and Hungarian statistics in terms of Chinese FDI in Hungary. Indirect investment statistics are a better reflection of reality.
Nevertheless, the dominance of EU partners has to be highlighted here, too. Based on OECD and HNB statistics, more than 75 per cent of foreign investments are coming from EU countries, more than 25 per cent from Germany, while only 2.4 per cent comes from China. This 2.4 per cent share is far from being decisive, despite the fact that it is the highest to be found anywhere in Central and Eastern Europe.
China is not a significant player at all. CEE countries are highly dependent on both trade and investment relations with developed countries, mainly-EU member states.
Echowall: If we can move on just a bit to the political fears. From your position in Budapest, what do you make of the suggestion, and the fear perhaps, that China is offering alternative models of governance, and perhaps undermining European unity?
Szunomar: Although I do believe European unity is in danger, I don’t think that it is China that endangers it. The steps some CEE governments took in past years that created tensions with Brussels were made on their own, not because of or at the request of China. The illiberal models of governance in the CEE region have more to do with such factors as their own pasts, their various disappointments or the state of their democracies than they have to do with China.
Echowall: Perhaps on this issue of influence, we can focus in a bit on Hungary, because it has had a very colorful relationship with China in recent years. According to Chinese Ambassador to Hungary Duan Jielong late last year, "the relations between China and Hungary have entered the best period in history." Right after Dubrovnik, Victor Orban was in Beijing for the 2nd Belt and Road Forum. Orban has been a real champion for Beijing, some might say, and Hungary was the first in Europe to sign up for the Belt and Road. How do you see China-Hungary relations? What is Hungary's real interest in China, and visa versa?
Szunomar: From China’s perspective, Hungary is one of the most reliable friends, if not the most reliable, that it has in the whole region. Hungary has been strongly committed year after year to strengthening the relationship. China is always happy to see Hungary's commitment as it welcomes BRI projects, or votes in favor of China in the EU, or at the United Nations. Or how it regularly takes part in Chinese events such as "16+1" summits or BRI forums. Prime Minister Orbán is perhaps the most recognizable CEE leader in China, including in Chinese society, and one of the most recognizable European leaders as well.
As for Hungary’s interest, rational economic considerations seem to be less important nowadays. More important is the political relationship or friendship, which from time to time can be used as a bargaining chip.
Echowall: Of course we can't talk about Orban and China without talking about this new railway upgrade that is being built – or is it? – between Budapest and Belgrade. After endless delays and questions about public procurement and transparency, it was finally announced, also in April, that the Hungarian-Chinese consortium that won the bid for the railway upgrade included RM International Zrt., a company controlled by Orbán's friend and ally, Lőrinc Mészáros.
First, could you tell us more about this project? China has hailed it a much-needed improvement of infrastructure, making connections in the region from the Port of Piraeus.
Szunomar: I don’t have up-to-date information on this project. The latest news is about the consortium that will implement the project. And yes, the Prime Minister's friend will indeed be involved in the construction, we hear – as he has been in many projects in Hungary.
Echowall: But what is Hungary's real interest in this project? In June, Péter Szijjártó, Hungary's minister of foreign affairs and trade, said that it would benefit Hungary and Serbia logistically and financially, and that it would create jobs as well. Is any of that true?
Szunomar: I don’t see the economic benefits yet. There is no communication from the government’s side. We are informed from the media only, but there are very few facts available about the project.