China in the Balkans

The Western Balkan economies are all small and underdeveloped, which should make them too small for far-away China’s attention. Not so.

Due to their geographical position, these countries — Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia — are an important piece of the Silk Road puzzle.

Beijing is building up assets in the region (at cheap prices). It has no qualms to take on Western actors in the region in order to increase its own political influence.

At present, the EU is the main trade partner for the Western Balkans, accounting for 73% of its trade. China’s share of trade with the region is much lower, accounting for 5.7% of the overall trade in the region.

The EU is also the main investor in the region, with more than 60% of the total FDI. By comparison, Chinese FDI in the region remains low for now, accounting for only 3% of the total stock to date. Serbia is the only Western Balkan country to date that has attracted sizable FDI from China.

Big loans, small investments

But looking at FDI numbers does not provide the proper analytical frame. In a way, China flies “under the radar” with its approach, which relies heavily on loans, not actual investments.

The Chinese view the Western Balkans as a ripe target for more than one reason. The region suffers from a huge infrastructure gap and is cash-strapped (and already debt-burdened, which does not concern the Chinese much, if at all).

In addition, the Chinese are attracted by the loose regulation practices, lax public procurement rules and labor regulations which prevail in the Western Balkans.

The main form of Chinese economic cooperation in the Western Balkans is lending for infrastructure projects, mainly in transportation and energy. Beijing has announced the building of two highways in North Macedonia and one in Montenegro.

Overall, Chinese projects focus on Serbia, which has the region’s largest economy and accounts for 44% of regional GDP. The country has been pinpointed for projects worth more than 2.5 billion euros. The most significant project is the upgrade of the Belgrade-Budapest railway.

By modernizing the railroad, Beijing would establish a transportation corridor between Piraeus in Greece and Western Europe via North Macedonia, Serbia, and Hungary.

According to the original plans, the first train should have rolled through Hungary by 2017, but construction on the Hungarian side has not started yet. The main obstacle appears to be concerns of the EU Commission about the lack of transparency in the financial agreements between Hungary and China.

The strings attached

In contrast to projects involving Hungary, Belt and Road Initiative infrastructure projects related to the Western Balkans are, of course, not bound by EU standards and regulations, which also look at the financial sustainability of projects.

Absent such an evaluation, China’s much looser approach risks to create fiscal instability for the governments in the region, especially in view of entering large debt obligations. Many of the projects lack transparency and public debate on the open procurement procedures.

Some of countries in the Western Balkans already have sovereign debt levels as high as 70% of their GDP (Montenegro has reached 80%). By taking on yet more loans, they could get trapped in debt servitude.

As of 2018, Montenegro owes almost 40% of its debt to China, followed by North Macedonia with 20%, Bosnia and Herzegovina with 14%, and Serbia with 12%, according to the MERICS.

EU vs. China: Good lender vs. bad lender

Contrary to the general narrative of Chinese “checkbook diplomacy,” the EU’s combined funds for infrastructure and economic development are larger and cheaper for recipient countries. The EU actually provides grants, while China’s financial involvement is limited to loans.

Unfortunately, the EU’s offer is less appealing than the Chinese one because of cumbersome bureaucratic rules attached to EU funding.

Of course, these rules have been developed over time to reduce the risk of financial opaqueness and save countries from reckless governments often serving their own corrupt interests.

In that sense, Chinese loans and – still prevailing – practices in at least some of the Western Balkan countries fit like hand in glove.

Infrastructure loans with no-strings attached?

The reality is even worse. The famous Chinese “no-strings” mantra is anything but.

While Western loans come attached with strings of conditionality in good governance and transparency, the Chinese funding is conditioned on the implementation of projects by Chinese companies (mostly State Owned Enterprises), as well as the employment of Chinese workers.

None of that helps develop the local economies. But that, of course, is never the interest of the Chinese side. It just seeks to export economic demand any which way it can, whether by goods exports, or “projects exports.”

Beyond economic ties

But the Chinese are keen to cover their tracks. Throughout the Western Balkans, they have established cooperation in non-economic areas, such as in culture, education and science.

The clear purpose is to increase bonds between Beijing and each individual government, to balance for the lack of FDI.

Everybody for themselves

Unfortunately, there is no public debate in the Western Balkans about the opportunities and challenges related to increased Chinese presence in the region.

The public does not have any real perspective of the governance model in China, and the geographical distance plays into China’s favor. With an increased investment of Beijing in soft power tools such as media, think-tanks, Confucius institutes, popular perceptions are shifting towards being more favorable to China.

Some more far-sighted observers, especially in Serbia, describe China’s influence in the region as a new form of “neo-colonization.”

The Chinese, for their part, are not much concerned about such criticism, as long as the majority of the Serbian population, for example, considers China the second-most important player and “credible investor,” right after Germany.

China muscling its way in

In 2017, the EU warned that “the Balkans can easily become one of the chessboards where the big power game can be played.” That is now a reality.

China is intent on using the Balkans as an entry point into the European market and, to solidify its gains to date, even tries to promote its own political model in the countries of the region, exploiting their weak governance.

The EU’s own fault?

Without clear prospects of EU membership, the Western Balkan countries could very well shy away from the costly normative alignment with the EU and the pain of good governance reforms.

The latter require a long view, in a region that is very much consumed with meeting its own needs over the short term. Little wonder people look towards the Chinese with favor. After all, getting a loan now always sounds good, as the pain only materializes later.

Conclusion

China’s increased engagement in the Western Balkans is driven by a geo-economic and political logic. Beijing’s main aim is to use the region as a gateway and a commercial platform to Western Europe, where the real Chinese interests lie, in its insatiable search for markets, technology and knowledge.

The Chinese foothold in the Balkans does not have to be necessarily at odds with the European interests, as Chinese investment in the region increases connectivity and market integration.

But due to a combination of factors, including the region’s political economy, prevailing public debt levels and spending restraints, economic competitiveness and deepening divergences on other security issues, China could become a challenging factor for the European future of the Western Balkans.