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China’s Railway Diplomacy in the Balkans

Publication: China Brief Volume: 14 Issue: 20
October 23, 2014 04:42 PM Age: 2 yrs
Category: China Brief, Home Page, Economics, Foreign Policy, Transit, China and the Asia-Pacific, China, Hungary, Western Europe

Hungarian, Serbian and Chinese leaders shake hands at the ceremony announcing their agreement for the new Hungaro-Serbian High-Speed Railway (HSR) project.

In November 2013, China, Serbia and Hungary signed a Memorandum of Understanding (MoU) for the construction of the Hungaro-Serbian High-Speed Railway (HSR), connecting Belgrade and Budapest by rail to facilitate transporting Chinese exports from Greek ports to European markets. First proposed by Beijing in February 2013, the contract is expected to be finalized during the China-Central and Eastern European (CEE) Summit in Belgrade this December, with construction set to begin in 2015 and finish by 2017 (Dnevnik, February 22, 2013; Government of Republic of Serbia, September 11). The two billion euro ($2.5 billion) project, financed by soft loans from China’s Export-Import Bank and built by state-owned China Railway and Construction Corporation (CRCC), represents the changing face of China’s relations with CEE countries and will serve as a staging ground for greater Chinese access to Western Europe, for both commerce and infrastructure projects (Tanjug, September 9; Politika, September 11).

Ticket to Ride

The Hungaro-Serbian HSR project is an important part of China’s strategy to extend its Maritime Silk Road (MSR) into Europe via land routes (see China Brief, October 10). The maritime terminus of the MSR is the Greek port of Piraeus, which is partially owned by China’s state-owned shipping giant COSCO and is now the main entry point for Chinese goods to Europe, though Beijing has also shown interest in developing and utilizing other Greek ports in Thessaloniki and Igoumentsia, as well as several Adriatic ports, including Bar in Montenegro (People’s Daily, December 21, 2012). Furthermore, railway infrastructure and technology projects financed with Chinese export loans enable Chinese state-owned enterprises (SOEs) to gain a foothold in overseas markets and test their technology and know-how in less-developed European countries on the way to lucrative markets in Western Europe.

Keeping Chinese imports competitive in the European market requires reduced shipping times to offset the rising costs of production in China, and the HSR project will accomplish this by dramatically reducing the time required to transport exports between the Suez Canal and Western Europe. According to Chinese Premier Li Keqiang, directing exports bound for Europe to the Greek port of Piraeus, “the pearl port” of the Mediterranean Sea, already shortens the total shipping time from China to Europe by at least one week compared to traditional routes (China Daily, June 20). Previously, Chinese exports were shipped through the Suez Canal, then sailed around Europe to ports on the northwestern coast, including Rotterdam, Antwerp and Hamburg, and finally taken by rail to inland cities. Now that Chinese exports can sail through the Suez directly to Greece and be taken by train through CEE countries to Western Europe, the total transit time is estimated to decrease from roughly 30 to 20 days. The Hungaro-Serbian HSR, along with other regional transportation infrastructure projects, will further reduce shipping times within the European continent, as HSR trains will average at least between 100 and 125 miles-per-hour (mph), instead of the current 45 mph (Ekathimerini, June 20; Železnice Srbije, November 26, 2013; B92, May 12). This will reduce the time by rail between Belgrade and Budapest alone from the current eight hours down to a mere three hours.

China’s Railway Diplomacy: Present and Future

The HSR project adds to a number of recent Chinese-led projects in the Balkans that have either upgraded or built new regional transportation networks, particularly railway infrastructure and technology, which are financed by Chinese banks and fulfilled by Chinese construction SOEs. These projects are part of a coherent Chinese strategy to create a distribution infrastructure that will facilitate the movement of Chinese goods from several ports in southern Europe—Piraeus, Thessaloniki and Bar—via the Balkans to northern Europe.

In Serbia, Beijing features prominently in the country’s development agenda through China’s involvement in myriad capital projects. In December 2012, China’s Chinese Communications Construction Company (CCCC) and the Serbian Ministry of Transport signed an MoU for the improvement of several neglected sections of the country’s north-south railway axis. The north-south railway, including the Serbian part of the Hungaro-Serbian HSR route, transits from Serbia’s borders with Croatia and Hungary in the north to Bulgaria and Macedonia in the south. CCCC will also repair 300 miles of railway connecting Serbia and Montenegro from Belgrade to Bar (Xinhua, December 18, 2012). In July 2013, Serbian Railways reached a 78 million euro ($100 million) agreement with Huawei, backed by favorable bank loans ensured by Huawei, to modernize Serbia’s railway telecommunication infrastructure along 275 miles of the same north-south railway line (Železnice Srbije, July 17, 2013). Serbian Railways is also negotiating a Chinese loan of approximately 400 million euros ($510 million) for the reconstruction of rail lines to Serbian ports on the Danube River. China is interested in harnessing the potential of these ports along the Danube to serve as free-trade zones and transit points for Chinese goods on their way up the river toward European markets, an idea recently embraced warmly by the Serbian government (Government of Republic of Serbia, September 11). The loan could also be used to fund the construction of a new terminal on the north-south railway route, and would be paid back through exports of unspecified Serbian commodities to China (InSerbia, April 14). These projects altogether reflect a further deepening in Serbia’s strategic partnership with China, and Serbia’s role anchoring as a key transport hub for Chinese exports.

In Hungary, which borders the Balkans to the north, the government reached an agreement in February with CRCC, financed through the China Development Bank, to build a 70-mile railway ring around Budapest (Budapest Business Journal, March 31). The estimated 1.2 billion euro ($1.5 billion) project will enable railway traffic to cross Hungary in one day, down from the current five days, by reaching speeds of 125 mph and avoiding the railway bottleneck in Budapest that significantly slows transit. Of note, Hungary originally sought funding from the European Union (EU), but was turned down.

China is pursuing other rail infrastructure projects in the CEE region. They include a high-speed railway from Romania to Moldova using Chinese financing and technology, and a comprehensive effort to upgrade Greece’s railway system. China’s focus in Greece is the northern route to Macedonia through Thessaloniki and the Macedonian railway line that would connect Greek lines to the upgraded north-south route in Serbia and the Hungaro-Serbian HSR route, effectively extending the high-speed rail connection all the way from Piraeus to Budapest when the projects are all completed. Furthermore, there are Chinese plans to upgrade both railway and road infrastructure from Bar through Montenegro to the border of Serbia (Agerpress, September 2; Government of Montenegro, April 11; BalkanInsight, September 19). Once completed, these projects will significantly improve the transportation infrastructure in CEE countries, while at the same time allowing for a more cost-efficient transfer of Chinese goods from several cargo nodes northward to the European market.

Building Europe’s Railroad Dream for Brussels

China’s willingness to finance and deliver these projects provides opportunities for CEE countries, especially Serbia and Hungary, to keep their economies afloat and complete strategic development projects that the EU has so far neglected. CEE countries, whose economies largely depend on cash inflows from the EU that have dried up since the onset of the Global Financial Crisis, view these projects as a valuable opportunity to close the infrastructure gap with Western Europe, and thus become more competitive with Europe and the rest of the world. For example, the last upgrade of the Serbian section of the HSR line was completed in 1980, and has been at the top of the priority list since 2010 for Serbia’s railway planning strategy (Železnice Srbije, February 20). While the EU did offer limited funding to Serbia for this rail line, the EU’s plan called for a moderate modernization, not the dramatic technological leap forward to the HSR that China has decided to support.

Beyond the local economic benefits for CEE countries, China’s determination to finance and build these railways also facilitates the EU’s own development strategy for the CEE region, most notably the Pan-European Corridor 10 plan. The route of the Hungaro-Serbian HSR, as well as most of the other aforementioned railway and road projects, support Corridor 10, a part of the network of ten planned pan-European transport corridors. The EU envisions these corridors as key projects for European integration, as they aim to facilitate the efficient flow of goods, people and capital across Europe. Therefore, the Hungaro-Serbian HSR is not only crucial for the integration of Hungary and Serbia into Europe’s transportation, and thus commercial, networks, but also of strategic importance to Brussels for drawing the Balkans region closer to the EU politically. This is one substantial example of the mutually beneficial “win-win” emerging out of European economic cooperation with China that both medias tout. Indeed, China also benefits from more efficient transport routes and better access to Europe’s interior markets.

Yet, Chinese projects do not receive universal support in CEE countries. For example, the Serbian business community has a less favorable view of Chinese investment and projects, as business elites feel threatened by Chinese competition. This is in contrast to the general public’s belief that the projects create employment and economic growth in their countries, both in the short and long term. Although the agreements stipulate that Serbian enterprises should receive up to 50 percent of the project’s value, the non-transparent process of the selection of contractors breeds the perception amongst business elites that domestic enterprises are excluded from the projects. Although Serbian enterprises do not have the technology and experience required for building and maintaining the HSR, Serbian companies and workers readily posses the necessary technology and skills for normal transportation infrastructure, such as the construction and maintenance of bridges, regular railways and roads, as well as the production of railway equipment and machinery for the HSR. Also, the “importing” of Chinese laborers—when Serbia boasts a high number of unemployed yet skilled laborers—frustrates workers who otherwise see China as a job creator. There are also widespread concerns that Chinese construction falls short of expected quality and technological standards (Author’s Interviews, Serbia, March–July).

Beijing Displacing Brussels in the Balkans

Despite these concerns, China’s infrastructure projects in CEE countries are diminishing Brussels’ traditional ability to dominate regional proceedings and reconfiguring regional power relations that have existed since the end of the Cold War. As of the early 1990s, Brussels has been able to guide the development of Balkan countries because they were integrated into the EU’s economic and political structures. However, China’s emergence as an important partner during the financial crisis quickly positioned Beijing to challenge Brussels’ role in the region.

In recent years, a number of CEE countries have adopted pro-China measures and policies. Some CEE countries have been vocal supporters of abolishing the EU’s weapons embargo against China, and some have followed China’s lead on international issues. For example, Serbia effectively boycotted the 2010 Nobel Peace Prize award ceremony to Chinese dissident Liu Xiaobo, and voted against EU-supported United Nations resolutions criticizing Iran, Myanmar, Sudan, Zimbabwe and North Korea (European Council for Foreign Relations, July 2011; China Policy Institute, April 2011).

Brussels has sought to counter Beijing’s rising influence in the Balkans, but to little effect. According to local reporting, the EU attempted to persuade Hungary, Serbia and Romania to each reconsider moving forward with their respective HSR deals with China through both official and informal channels, under the guise of ensuring that the projects “adhere to the EU’s policies” (Budapest Business Journal, March 31; Politika, June 3; Business Review, September 2). The Balkans may well be the front lines of Beijing’s competition for influence in Europe, as China seeks to muscle its way into a larger role in its biggest export market at a time when the EU is at its weakest in living memory.

Concluding Thoughts

Beijing appears to be following a strategic plan to establish a transportation infrastructure network in the Balkans in order to bolster Chinese exports to Europe and support its “going out” policy for Chinese SOEs. This infrastructure strategy is welcomed by CEE countries, as it provides much-needed development opportunities and a competitive edge for their economies. It is therefore likely that some other European countries will be pressed into considering HSR and other infrastructure development projects themselves in order to remain competitive and to secure developmental opportunities, opening the way for further projects delivered by Chinese SOEs and financed by Chinese banks—a one-two punch that the EU is evidently unable to match at home or abroad in its current economic fragility.

As briefly discussed above, China’s emergence as a financial backer and operator of development projects not only carries significant benefits for recipient countries and the EU, but also presents some possible challenges. On one hand, the host countries must ensure that these projects benefit local business communities and meet the necessary quality standards. On the other hand, although China’s loans to developing countries are famously touted as coming without conditions, it remains to be seen whether they are used in the future as leverage to sway the policies of recipient countries in China’s favor, potentially disturbing the current status-quo in the region. With similar deals expected to follow elsewhere, the world should pay attention to how China performs its railway diplomacy in the Balkans, as it may be a telling sign of things to come on a global scale.