Chinese investment acts as a powerful growth stimulus for Southeast European economies
The period after the global financial and economic crisis in 2008 has been characterized by an aggravation of geoeconomic confrontation, mainly as the response of the United States to China's transformation into a global economic power. The dimensions of this transformation include the increase of China's GDP, dominance in international trade flows, and the expansion of Chinese investment abroad. With the US response, the liberal model of the international economy has gradually been replaced by increasing restrictions on both international trade and cross-border investment. Chinese overseas investment is already subject to a permission regime in a number of developed countries, which is a step backward in the liberal economic paradigm that has guided the international economy for more than six decades.
Critics accuse the China-proposed Belt and Road Initiative of all kinds of sins. In Southeast Europe, however, it bears fruit in a very unstable economic environment caused by the COVID-19 pandemic, the conflict in Ukraine and others. Any analysis of the scope and specifics of the Chinese investments in this constantly geopolitically unstable region should convince even the most prejudiced critics of their vital role.
China's overseas investments are not conventional cross-border investments, which are mostly profit-driven activities. What makes Chinese investments different is the long-term economic benefits of well-planned activities, supported in most cases by the Chinese government. At the same time, this is exactly what makes them desired, sought after and encouraged in Southeast Europe.
Unlike the US and some large economies in the European Union, in Southeast Europe, there is still no departure from the principle of free movement of capital, with no mandatory monitoring or permission regime introduced for the investments from abroad, including China.
The economic growth of the relatively small and open economies in Southeast Europe (with the exception of Turkey) is highly dependent on the inflow of foreign direct investment. These countries are not particularly rich in raw materials. Suffering from chronic political instability, the countries have smaller markets and populations. Thus, the region appears unattractive to most foreign investors while local investment is weak. This makes them dependent on public investment and external financing by the World Bank, the European Bank for Reconstruction and Development and other institutions. The foreign direct investment decrease since the global financial crisis has led to slower growth and increased social problems, which the pandemic has compounded by further slowing growth and hitting the standard of living. In 2020, the FDI in Southeast Europe decreased significantly－by 32 percent－much worse than the global average and that in other regions.
In this environment, Chinese investment is a powerful stimulus for Southeast European economies. The Belt and Road Initiative has enabled the implementation of large-scale projects with high economic potential.
China is a significant investor in the Serbian economy with the financial sector at the forefront. In 2017, the Bank of China opened a branch in Serbia, becoming the first Chinese bank to operate in the country. In 2019, Serbia received the highest amount of Chinese foreign investment of any Southeast European country. Projects include the construction of the Mihajlo Pupin Bridge, a thermal power plant in Kostolac, the Corridor 11 highway and railway modernization. There are also projects with the participation of local and European companies, mergers and takeovers in the raw materials sector such as iron and copper. An advantage of the Chinese investments in the region is their integration with European investments in the recent years, which has significantly increased their synergy and effect.
In Montenegro, the construction project of the Bar-Boljare highway with $890 million loan from China is emblematic. In Romania, significant investments have been made by large Chinese companies－a $30 million project has been implemented in the automotive industry, for instance.
Chinese investments are close to 20 percent of the investments in Albania, in sectors such as the mining industry and airports management.
An increasing number of Chinese companies are operating in Turkey. For example, the Turkish subsidiary of Industrial and Commercial Bank of China invests in financial services. And in the communication sector, Chinese manufacturers have begun producing smartphones. Turkey acts as a bridge to the markets of Central Asian and Arab countries. In Greece, strategic investments have already been made in infrastructure. The port of Piraeus invested by China's COSCO has the ambition to become the largest European port.
The green transition－a commitment of the region－opens up a huge space for expansion of trade and investment from China. It would hardly be an exaggeration to say that the green transition in the region depends to a large extent on trade and investment relations with China. Chinese investments play more and more significant role in the construction of photovoltaic parks, and in refineries and petrochemicals in the Black Sea region. Hydropower is also of interest to Chinese State-owned companies investing in the region.
The positive performance of the Chinese investments further motivates the governments in the region to boost foreign investments, with legislation over the last two years to encourage and give greater convenience to foreign investments. For example, a new Law on Strategic Investment has been adopted in North Macedonia. Romania has expanded its state aid program to encourage investments in underdeveloped regions and the employment there. In Serbia, a special handbook has even been developed for Chinese investors to ease their entry into the country.
Yes, Southeast European countries welcome Chinese investments.
The author is professor in the Economic Research Institute at the Bulgarian Academy of Sciences and former deputy prime minister of Bulgaria.
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