China is winning battle with EU over business culture in the Balkans

China’s plan to resurrect its 2,000 year-old Silk Road trading route is bringing much-needed foreign investment to the Balkans, but Beijing’s growing soft power is  undermining European Union influence in the region and threatens to set standards of business conduct that fall below the West’s expectations.

President Xi Jinping launched the $900 billion Belt and Road Initiative in 2013. It aims to link China, Central Asia and Europe through a network of roads, railways, ports and pipelines and in the process to smooth trade flows between East and West.

The Balkan states are a key link in the chain, with Serbia in particular benefiting from Chinese investment in projects ranging from an almost €3 billion high-speed rail link between Belgrade and Budapest, a $260 million bridge over the River Danube and a bailout of the failing Smederevo steel plant.

China is taking advantage of these states’ lack of, or limited access to, international capital markets by providing soft loans at below-market rates. Typically, China’s state-owned Exim Bank will cover up to 85 per cent of the value of a project at an interest rate of 2-2.5 per cent.

This includes financing projects such as a €800 million stretch of highway in Montenegro linking the Port of Bar with Serbia, which the International Monetary Fund had warned threatened the government’s fiscal stability.

But there is a catch. Beijing expects its state-owned companies to be awarded contracts for key infrastructure projects, raising serious questions about transparent tendering and procurement processes.

Investments in the region nearly all include China state-owned players. Dong Fang Electric was involved in developing a €350 million thermoelectric plant in Bosnia Herzegovina, funded by the China Development Bank, while China Ocean Shipping Company (Cosco) is investing in port facilities in Albania and Montenegro, to name but two.

This lack of open tenders shuts out European Union companies that need to abide by more stringent EU trade rules. It also increases the potential for corruption, which is already seen as a problem in the region. Officials from Macedonia’s former ruling party for example have been accused of accepting bribes to award a highway construction project to Sinohydro, despite a competing lower bid.

At a Belt and Road forum in May, several EU states made their concerns known by refusing to sign a proposed trade statement drafted by Beijing because it did not include commitments to social and environmental sustainability and transparency.

“China may not aim to export its ideology, but its economic expansion is accompanied (and fostered) by its domestic model of business relations, based on a balance between state and market forces which is in stark contrast with the governance reforms promoted by the EU,” associate analyst Michal Makocki and senior fellow Zoran Nechev wrote in an article for the European Union Institute for Security Studies.

Beijing’s efforts go beyond infrastructure and trade. The Belt and Road Initiative has spawned another geopolitical grouping known as the 16+ one. It’s made up of China, 11 central and Eastern European countries, many of which are also EU members, and five Balkan states. China is seeking common ground with these countries on economic and political policies.

The EU could speed up the accession process to membership which has already seen Slovenia, Croatia, Romania and Bulgaria accede to the bloc. But although Serbia and Montenegro have been granted permission to start negotiations, progress has been painfully slow. Then there is Macedonia, which was deemed eligible to start entry talks nine years ago but hasn’t done so yet because of objections from Greece that its name clashes with that of a Greek region.

When one adds rising populism across European member states to the mix, there isn’t much political impetus to push hard for further expansion. But European businesses are losing out on opportunities in the expanding Balkans and the economies in the region are becoming very comfortable with China and its more laissez faire approach to trade.