How to Live with China on our Doorstep

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The Balkans have recently seen a spike in Chinese investment activity similar to that being witnessed across Central Asia and Central and South America.

The Balkans have recently seen a spike in Chinese investment activity similar to that being witnessed across Central Asia and Central and South America. While concerns about the geopolitical implications of this new trend are legitimate, all strategic calculations need to take into account the kind of influence an investment portfolio can buy, as well as the behavioral pattern of the investor and the investment recipient that is known from the past.

Chinese investment activity in the Balkans is a recent phenomenon. Its origins can be traced back to the 2007 financial crisis and the need of governments in the region to offset a sudden region-wide drop in Western financial activity with alternative sources of funding. The Chinese investments of what has so far been close to €6 billion have exclusively been taking the form of infrastructure loans and acquisitions. Their concentration is on a north-south axis, connecting the ports in Greece and Montenegro through highway and railway developments in Macedonia, Serbia and Hungary to Europe. Their impact is complementary to European and Turkish infrastructure investment on the west-east axis, which is connecting Albania, Bosnia, and Kosovo to the very same highway and railway system. All are aligned with China’s Belt and Road Initiative and regional development strategies that leverage competitive labor costs and proximity to the European market to benefit from the shift to agile manufacturing.

It would be unrealistic to expect any region in need of infrastructure development to disregard the opportunity of securing affordable loans from China.

The fact that Chinese investment activity is almost exclusively focused on infrastructure makes it less problematic than it might be otherwise. Infrastructure investment is primarily used for gaining access to the markets, rather than obtaining geopolitical leverage. Such investment in the Balkans will give Chinese manufacturing another route to Europe, with Chinese construction gaining an impressive portfolio of European standard projects with which to compete afterwards. As far as Chinese loans are concerned, these do buy influence for their duration, but in the European theatre, they can be restructured with the help of the European Investment Bank, if circumstances ever make such a move geopolitically expedient. Where the situation does get more complicated is in foreign direct investment into the real economy. This is where investors do get more of an influence on national politics with the alignment of their interests with those of their workforce and their ability to impact tax receipts through shifts in volumes of output. Fortunately, such type of Chinese investment in the Balkans is very low and limited to the Piraeus Port in Greece of €100 million for 35 years and the Smederevo Steel Mill in Serbia of €46 million, which is minuscule in comparison to foreign direct investment from Europe, which only in Serbia accounts for three quarters of all such investment to date or €15.5 billion.

The final points to consider when looking at geopolitical implications of a new actor in a region are behavioral patterns. The Balkans have a long history of effectively balancing between great powers to advance national interests. The entire region won its independence from the Ottoman and Habsburg empires by playing different alliances off each other throughout the 19th and early 20th century. The Cold War saw Albania and Yugoslavia maintain their independence from the Soviet Union through the former’s close relationship with China and the latter’s co-founding of the Non-Aligned Movement, while Bulgaria, Hungary, and Romania secured a high degree of autonomy within the Soviet Block out of Soviet fear of losing the three to Yugoslavia’s pull. At the same time, Greece benefited heavily from Western assistance, as the only country in the region that remained firmly in the Western camp. In the post-Cold-War period, the entire region profited from Western concerns about Russia’s resurgence and secured faster integration into NATO and the European Union. It is very likely that the same will now be true for the remaining few countries negotiating to join the Union, if not NATO as concerns about Russia and now China keep the process on track despite the growing fatigue on both sides.* An alternative course for any of these countries is highly unlikely given how dependent they are on exports to Europe for growth.

Concerning China, little is known yet about how this global actor may eventually behave in its new role as a foreign investor. What is known is that Chinese investment is conditional on support for the One-China Policy and could potentially carry some conditionality with regards to the East and South China Sea, but it does not do so at the moment. Chinese loans are most affordable if they employ Chinese companies in loan-related activities, and the workers in these companies tend to stay after the projects are complete. The most worrisome is that the loans do not come with any good governance conditionality, but in the case of the Balkans, this does not diminish the European Union’s ability to insist on such standards being met through the accession process. Beyond that, everything else is still an unknown, including whether China would ever use its leverage to resolve other regions’ issues or shape the world in its own mold. The fact that there is little proof of either justifies contingency planning and vigilance, but not much more.

The German Marshall Fund of the United States, with its Europe Program, the Future of Geopolitics, and Asia Program, will continue to monitor developments on the ground and convene Western and Chinese leaders to make sure that synchronicity of development efforts continues into the future. Our Balkan Trust for Democracy will maintain its support for civil society in the region to stay watchful for all risks to good governance including those that may come with Chinese investments. That said, it would be unrealistic to expect any region in need of infrastructure development to disregard the opportunity of securing affordable loans from China, especially when alternatives are scarce and everyone else is borrowing from the very same source for their deficit spending. The Balkans are no exception, but they are also entirely dependent on access to the European market for their economic growth. The West should therefore not worry about ever losing its influence in the region, but should rather double down on finishing the process of integration, so that those parts outside the Union can finally benefit from greater European investment.

*Serbia is interested in the European Union membership only at the moment, because of its complicated history with NATO. Military collaboration is strong, though.