The Belt and Road at the Gates: Interpreting Chinese Investments in Europe

Opinion, Belt and Road

MERICS Exposure to Chinese Tech Catchup
Under Pressure: countries feeling the heat of China’s technological catch-up (Source: The Mercator Institute for China Studies, 2016)

Against the background of this week’s 16+1 meeting between China and the Central and East European Countries (CEEC), it is instructive to take a step back and interpret China’s investments in Europe through its domestic economic situation.

From the Greek port of Piraeus to Belgium’s port of Antwerp, the Italian tyre manufacturer Pirelli to the Swedish carmaker Volvo, there are many examples of Chinese investment presence in Europe.

However, the 2016 talks between the Chinese company State Grid and the Belgian distribution system operator Eandis offer a wholly different perspective. After a leaked memo from an intelligence agency, a heated debate ensued about the possible security implications of such deals. 

Although talks eventually cooled down, the Eandis saga does offer insight into the perception of Chinese investment in Europe, especially towards deals that touch upon a country’s critical infrastructure. At the same time, European businesses in China enjoy a more restricted market access.

MERICS Belt Road map
An outline of the Belt and Road Initiative (Source: The Mercator Institute for China Studies, 2017)

Where are the silk roads leading to?

As illustrated elsewhere on The China Road, China’s Belt and Road Initiative (BRI) – the new silk roads – was initially announced by Chinese president Xi Jinping in 2013 during state visits to both Kazakhstan and Indonesia.

The most striking aspect to the BRI is that there is little more concrete information since its creation, except for the Chinese government’s Vision and Action Plan from 2015. Nevertheless, we can assume that the BRI is a broad state-led policy to support Chinese investments in Asia and Europe. The obscure breadth of the project, together with its questionable profitability and local opposition to projects adds to the possible overstretch of the BRI, as other sources has warned about before.

At its core, the BRI is comprised of investments in roads and railways, energy pipelines, telecommunication networks, manufacturing supply chains, and more. In concert with this initiative, several investment vehicles were also set up to fill the gap in infrastructure investment across the Eurasian continent. These multilateral institutions, together with Chinese policy banks and investment funds provide the credit for China’s new and global program.

The Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund (SRF) combined with, for example the China Development Bank, the Export-Import Bank and the Agricultural Bank of China offer the funds.

In an interesting turn of events, Great Britain joined the AIIB as a founding member in 2015. The Obama administration at the time warned for “a trend toward constant accommodation of China.” What adds fuel to the fire is the absence of a clear European understanding of these investments. The push aimed at Chinese companies to go abroad can lead to suspicion by audiences in the West.

Here, the Chinese businessman is quickly equated with an agent fulfilling Chinese geopolitical aspirations. The answer to China’s going abroad however, lies in part with the Chinese domestic economy and its slowdown.

The Chinese economy during the ‘new normal’

Since 2012, Chinese economic growth has been slowing down. GDP growth sank below the double-digit numbers which have characterized the Chinese economic boom since the Reform and Opening-up era started in 1978.

Putting the BRI in this light, we can learn more about whether or not the Chinese investments are the Trojan horse that they are at times perceived to be.

The Chinese president Xi Jinping has repeatedly emphasised the need for a new economic structure, under the ‘new normal’ (新常态of slower economic growth. The domestic situation of the Chinese economy does indeed reveal several interesting aspects.

A consequence of the Chinese economy’s slowing down, is the accumulation of overcapacity in the industrial sectors. One explanation for the establishment of the BRI would be the use of these assets to build a vast infrastructure network spanning the entire Eurasian continent and thus solve the overcapacity problem.

A study by the European Union Chamber of Commerce in China (EuCham) however, states the BRI and the AIIB are limited in their ability to absorb this overcapacity. This leads to the conclusion that Chinese investments abroad are part of a bigger story.

China’s innovation challenge

In recent years, the Chinese leadership has been emphasising the need for China to become an innovation economy. This state-led endeavour has crystallised in an initial policy called ‘Made in China 2025’ (中国制造2025) which aims at restructuring the Chinese industrial base as to make it more competitive in high-value added sectors.

Belt and Road Forum
Leaders and special envoys from across the globe gather in Beijing in May 2017 for the Belt and Road Forum for International Cooperation (Source: People’s Daily, 2017)

While China is well-established in natural resources investment in Asia, Latin-America and Africa, research shows that the focus has recently shifted towards strategic assets in European countries. While Chinese investment at first focused on the East and South European countries, the focus has gradually broadened to also include Western Europe.

In another report, the EuCham also makes note of the repeated emphasis on concepts such as ‘indigenous innovation’ (自主创新) and ‘self-sufficiency’ (自主保障). Based on the assimilation of imported technologies, it can be argued that China will use its acquisition of strategic assets abroad to leapfrog the technological development and that China will eventually strive to move from imitation to innovation. This innovation challenge is also the theme of an excellent book.

Europe: come together

China’s commitment to this initiative was once again very prominent in May 2017, when leaders and envoys from across the globe gathered in Beijing for the Belt and Road Forum for International Cooperation. It is clear that with the BRI, China is trying to establish a network spanning the whole of Eurasia and beyond.

For European member states there is an urgent need for bilateral investment talks between the EU and China to level out the asymmetries in market access and establish a list with sectors restricted to foreign investment.

In this context, the President of the European Commission Jean-Claude Juncker in early September 2017 already talked about establishing a new EU framework to better screen foreign investments.

To conclude, let me end with the words written in reports for the Mercator Institute for China Studies. Here, the researchers conclude that European complacency and subsequent inaction about China’s catch-up process are severe.

As a long term strategy, China wants to acquire control over the global supply chains and production networks. At the same time, China’s technological rise should be taken as an opportunity to address the asymmetries between European and Chinese companies. What the BRI certainly has in store is ample room for deeper negotiations between both sides.

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