| By Dr. Justyna Szczudlik

China’s approach to Central and Eastern Europe (CEE) has changed dramatically in recent years. For the last three decades, the region was not high on China’s Europe agenda, which focused mainly on Western Europe. But in 2012, the 16+1 format was unveiled during Prime Minister Wen Jiabao’s visit to Poland, signaling a new approach to the region. Since the announcement of China’s Belt and Road Initiative (BRI) in 2013, infrastructure has become a primary focus for the 16+1. China has both economic and political aims for this unusual grouping of countries, and its investments are raising concerns about transparency and accountability. For now, however, the risks are relatively manageable given the modest scope of investment.

China has at least three goals in its engagement with CEE countries. The first goal is to secure its existing European markets and find new ones. The economic problems in the western part of the EU have paved the way for China to pay more attention to CEE countries (including those beyond the EU). The second goal is to export China’s excessive manufacturing and investment capacities. By doing so, China hopes to ensure stability at home, which means that the 16+1 is, to some extent, a new tool to prevent social problems in China.

The third goal is to counterbalance Western values and promote Chinese rules. This goal is linked with Chinese policy towards developing countries and Chinese president Xi Jinping’s own ambitions. The memory of the “century of humiliation” (bainian guochi) – a result of Western hegemonic policy – is still alive in China. At the Nineteenth Chinese Communist Party Congress, Xi announced a “new era of socialism with Chinese characteristics,” which assumes a more nationalistic and authoritarian political system without any democratic, ergo Western, values. China will more aggressively promote its own principles via “great power diplomacy” to achieve a “great rejuvenation of the Chinese nation” by 2049. Xi argues that China should no longer be a norm-follower but, instead, a rule-setter.

China views the CEE countries, especially those which are not EU members, as likely adopters of those rules and potential partners for balancing against the West. Chinese proponents of the 16+1 format recall that the CEE countries are former fellow socialist states that have had diplomatic ties with China since 1949. Some of these countries are also less developed. Offering infrastructure investment on preferential terms and without conditions or complicated procedures is a means to “tie” those countries with China. Moreover, China’s focus on inland infrastructure linking them with European ports and maritime trade routes aims to bypass the most economically vibrant and strategically significant southern trade sea-lanes via the Indian Ocean, the Malacca Strait, and the South China Sea, which are controlled by the United States and its allies.

In fact, the 16+1 format is an artificial grouping based on Chinese thinking. There are many differences between the countries included, from their political ambitions and level of economic development to their legal frameworks. For example, 11 of the 16 are EU members, while 5 are outside the EU and unlikely to join it anytime soon. Despite these differences, China has unilaterally prepared a single mechanism to direct its offers for the 16 countries. For example, in 2012 China set up a $10 billion credit line for cooperation projects with 16+1 countries and at the latest 16+1 Summit in Budapest, China announced an additional $2.4 billion in development-oriented financial cooperation loans from the China Development Bank.

China’s approach to infrastructure investments under 16+1 is similar to its approach in Africa. China’s offers are based on granting credits or loans, provided by state-owned institutions such as China Export-Import Bank, which often requires sovereign guarantees. This is different from public tenders, which assume competition and favor contractors with comparative advantages. According to one report by the European Bank for Reconstruction and Development (EBRD), China usually provides 20-year loans that cover 85 percent of capital for the project with a 2 percent interest rate (the rest should be secured by the host country). Moreover, China also requires borrowers to use Chinese labor.

Only the 5 non-EU members of the “16” are interested in this assistance mode. According to the EBRD, infrastructure projects, mainly in the transport and energy sectors, with financing from Chinese state-owned banks are being carried out in: Montenegro (e.g. European motorway corridor to Serbia); Bosnia and Herzegovina (e.g. Stanari thermal power plant); Serbia (e.g. Kostolac thermal power plant, bridge over Danube); Macedonia (e.g. highways) and Albania (e.g. motorways). The offer is appealing for those countries because, contrary to the EU members, they lack easy access to capital but need financing to solve infrastructure bottlenecks.

China has been less successful within the EU where its infrastructure investments are relatively modest. Poland is a good example; it has expressed interest in both 16+1 and BRI initiatives and has very good political ties with China, but does not have a Chinese-led infrastructure project. Brussels, instead of non-transparent loans from other countries, favors fair and competitive public tenders. Chinese offers are also less attractive because EU funds are relatively “cheap” and easily available. Generally, EU countries do not need Chinese money and labor for infrastructure projects.

Still, Chinese lending to non-EU members poses a few risks. First, Chinese loans are not transparent, which raises concerns about strings being attached such as political concessions or better treatment for Chinese entrepreneurs. Furthermore, the requirement of sovereign guarantees means the investment risk is shifted to the state where the project is being implemented. This “debt-diplomacy” creates an unfavorable situation for the host countries. In Montenegro and Bosnia and Herzegovina, there are infrastructure projects co-financed by Chinese loans that are worth 27 percent and 16 percent of their GDP, respectively. Requirements to use Chinese contractors, labor, and machinery may limit the contribution of these projects to local economies. It also limits the ability of local companies to gain technical experience, build capacity, and move up the value chain.

The Belgrade-Budapest railway, eagerly promoted by China as a success under the 16+1 format, illustrates some of these concerns. Work is proceeding on the Serbian side, but progress on the Hungarian side was temporarily halted in 2016. The European Commission initiated an investigation because the project assumed implementation by a consortium from Hungary and China (15 percent and 85 percent, respectively) based on an intergovernmental agreement without issuing a public tender. Following the recent 16+1 summit in Budapest, Hungarian foreign minister Péter Szijjártó announced the opening of public tenders. This means that the consortium itself will not be a project contractor. This case underscores the need for greater vigilance in the future.

Despite these concerns, Chinese infrastructure investments do not pose a serious risk to CEE countries because the scope is limited at present. But that could change in the future. Xi’s agenda presented at the Nineteenth Party Congress reflects growing ambitions. With an unstable situation in the EU, and a lack of engagement from the United States, Chinese offers might become more attractive than Western offers. China is serious about exporting not simply its overcapacity, but also its values and its political and economic model.

Dr. Justyna Szczudlik is head of the Asia-Pacific Program at the Polish Institute of International Affairs, specializing on Chinese foreign policy, China-CEE and China-Poland relations.

This article is part of our Big Questions Series.