Cover of 2016 annual report of Exim Bank of China (Exim Bank of China, Public domain)
The proposed model based on credits and favoring of Chinese enterprises is not adapted to the local conditions; consequently, planned infrastructural cooperation was not launched. The Chinese offer of infrastructure financing, presented to 16 countries of Central and Southeast Europe (CSE) in 2012, was tailor-made for developing countries without broad access to capital. In practice, the credit facility for “16+1” worth USD10bn does not significantly deviate from the instruments offered by Beijing to the rest of the world, among others, to South-Eastern Asia, Africa or Latin America.
Similar to other regions, financial resources are provided by Chinese state banks (implementing the government’s goals through preferential loans), such as Exim Bank and China Development Bank (CDB), which finance approximately 85 per cent of project value. Granting financing involves subcontracting of the whole project, or a substantial part thereof to Chinese enterprises and inclusion of Chinese sub-suppliers for purchasing the majority of components.
By means of capital exports, Beijing creates foreign demand for an extremely oversized Chinese construction sector struggling with an infrastructural downturn inside China.
Transferring its experience and cooperation models with developing countries to CSE, China proposed a based-on-debt model of infrastructure expansion within “16+1”. In the case of smaller economies, the Chinese model of financing is, however, associated with the risk of a surge in indebtedness. In the case of Montenegro, signing a single agreement for the construction of a motorway increased Montenegro’s debt to GDP ratio by 23 percentage points.
The terms and conditions of credit granting are not transparent, which hampers the evaluation of the long-term profitability of projects. Importantly, contracting of the majority of components and materials (sometimes even labor force) in China results in fast cross-border outflows of capital allocated for projects, which does not stimulate local economies. This may significantly hinder debt repayment in the future as well as trigger problems in the balance of payments (in case of difficulties with raising foreign currency for the repayment of the loans).
Transfer of overall business risk to local governments also does not guarantee engagement of the Chinese party in seeking the long-term profitability of a project.
After five years of operation of the “16+1” format, the cooperation on the expansion of the infrastructure thereunder clearly divided along the line of the European Union membership. In five non-EU countries of the “16” (Serbia, Montenegro, Macedonia, Bosnia and Herzegovina), a dozen projects with the total value of approximately EUR6bn were launched with the application of the Chinese financing model. The infrastructure under construction includes, among others, coal-fired power plants in the Serbian town of Kostolac and Bosnian Tuzla, motorways in Serbia, Bosnia and Herzegovina, Montenegro, Macedonia and Albania, as well as a part of the railway route Belgrade–Subotica (it is a part of the route connecting Belgrade with Budapest) (read more).
Using loans from the Chinese Exim Bank and CDB in Western Balkans results from the lack of attractive alternatives for financing of huge infrastructural needs of the subregion. The Chinese offer often wins with the fragile financing from Russia (credit facility for Serbia), the European Bank for Reconstruction and Development (EBRD) and the World Bank, which is setting conditions concerning reforms and financial discipline, as well as with limited EU pre-accession funds.
At the same time, in the eleven countries of the “16” which belong to the EU (hereinafter EU-11), despite intensive political contacts with China, the dynamics of infrastructural cooperation remains close to zero. The analysis of commitments made and declared at “16+1” summits shows that in the case of the EU member states, none of the infrastructural projects went beyond the stage of media speculations and political declarations or memoranda.
Authors are experts of the Center for Eastern Studies (OSW). Jakub Jakóbowski is a specialist in the OSW analytical division, and Marcin Kaczmarski is a coordinator of the China – EU project at the OSW.
The full analysis can be found here. Reprinted with the OSW permission.
