Is Investment Screening from China Feasible in the Western Balkans?

By Jens Bastian1

At the beginning of 2019, China’s signature Belt and Road Initiative (BRI) involved over 100 countries that have signed BRI-related cooperation agreements. Moreover, at least 29 international financial organizations participate in the BRI, including the IMF, EBRD, EIB, World Bank, etc. Governments across Europe have expressed their interest in and cooperation with the BRI. At present, 17 EU member states are also members of the China-led Asian Infrastructure Investment Bank (AIIB). The 16+1 framework established by China in Central, Eastern and Southeast Europe (CESEE) in 2013 includes eleven EU member states and five countries from the Western Balkans.

Beijing’s economic footprint, lending activities through state-owned policy banks and equity investments are expanding and diversifying across the Western Balkans. In parallel, the objectives and locations of infrastructure projects in the region are evolving. Let us consider a number of country examples across the region during 2018, starting with Serbia.

The Chinese company Shandong Linglong plans to invest $994.4 million (870.4 million euro) in the construction of a tire factory in Serbia's Zrenjanin Free Trade Zone. The construction of the factory is planned to officially start in April 2019.
Zijin Mining Group, China's largest gold miner and one of the country’s top copper producers, acquired the Serbian copper mining and smelting complex RTB Bor for $1.26 billion (a 63 percent equity stake). Located in eastern Serbia, RTB Bor is the second company a Chinese firm is buying in the country. In 2016, China’s Hesteel acquired Serbia’s steel plant in the town of Smederevo.

In Croatia, Chinese companies broke new ground in an EU member states. For the first time, an infrastructure project, which is 85 percent co-financed by funding from the EU, was awarded in a public tender to a winning bid from China.

The Croatian state-owned highway operator Hrvatske Ceste (HC) awarded the contract to the Chinese consortium led by China Road and Bridge Corporation (CRBC). It will build the first phase of the Peljesac Bridge and its surrounding access roads. The bridge crosses the Mali Ston Bay over the Adriatic Sea, thereby giving Croatia a direct land link instead of having to reroute traffic through a small stretch of Bosnia-Herzegovina.2

Building a bridge in European countries (EU and non-EU states) with Chinese companies in the construction-lead has its precedents. In December 2014 the “Friendship Bridge” was inaugurated over the Danube in Belgrade, also having been built by the CRBC.
But another element of innovation is also emerging in (bridge) infrastructure projects with Chinese participation. Based on experience gained on the ground Chinese companies are now starting to form joint ventures with firms from Southeast Europe to advance projects outside the region.

In December 2018, the Chinese Sichuan Road & Bridge Group (SRBG) in cooperation with VNGfrom Novi Sad in Serbiacelebrated the official opening of the Hålogaland Bridge in the Arctic town of Narvick, Norway.3 This is Norway's second largest bridge with a total length of 1,533 meters. It is the longest suspension bridge within the Arctic Circle. It is also the first successful Sino-Serbian bridge construction consortium in Europe!

What is also striking in this arrangement with Chinese companies is that neither Serbia nor Norway are EU member states. The former is a candidate country currently negotiating membership with the Commission. The latter has an Association Agreement with the Union since 1994 in the European Economic Area (EEA). Put otherwise, China is making inroads in a variety of institutional arrangements in Europe. Membership of the EU, while important, is not a condition sine qua non for China to become involved.
The expanding presence and diversification of Chinese activities in CESEE during 2018 has triggered a variety of reactions and initiatives inside the Commission in Brussels. Namely, the Croatian bridge case raised a troubling aspect of the EU public procurement process: when participating in such tenders, state-sponsored and subsidized Chinese companies will regularly underbid European competitors at the price level. The Commission in Brussels and local funding authorities in EU member states are thus faced with the challenge how to apply procurement rules when Chinese competitors participate in the process.
But the European Commission is also reacting to the Chinese challenge on other fronts. The Brussels executive recently agreed with its member states two encompassing initiatives. Both initiatives underline the determination of the Commission to regain the strategic initiative vis-à-vis Asian countries in general and China in particular.

In September 2018 the Commission published its Connectivity Platform.4 It sets out the Commission’s objectives and conditions for increasing connectivity between Europe and Asia, i.e. beyond the focus of China and the BRI. The Commission’s blueprint emphasizes the harmonization of regulatory standards, e.g. in the fields of tender procedures, governance standards and digital parameters.
Two months later the Commission released a political agreement with member states on the EU framework for foreign investment screening.5 While China is not explicitly mentioned, the proverbial elephant in the room is visible between every line. The framework seeks to create a cooperation mechanism between Brussels and the member states, giving the Commission the capacity to issue opinions on individual cases while reaffirming that member states have the last word on investment screening. The Commission’s proposal still requires final confirmation by the European Parliament who is a co-legislator in the process.

The specifics of investment screening at the national and EU levels are particularly relevant. All the more because currently only 12 out of 28 member states have screening mechanisms in place.6 For countries in the Western Balkans the debate over the need for investment screening procedures, in particular with regard to China, is practically non-existent.
In the case of EU candidate and accession countries, neither Serbia, Albania, Montenegro, Macedonia, Kosovo nor Bosnia-Hercegovina have adopted such regulatory foreign investment screening procedures. It will be telling to observe to what degree the Commission in Brussels will insist on such screening mechanisms in the accession negotiations with the two countries – Serbia and Montenegro – that are most advanced in the process. Serbia has the most diverse range of BRI related cooperation with China in the region while Montenegro has the highest lending exposure (in percent of annual GDP) to China in 2018. The political authorities in both Belgrade and Podgorica can be expected to try and push back against any such mechanisms advocated by the Commission negotiators.
The list of countries outside the EU is growing that are prepared to engage in bilateralism when dealing with China instead of participating in the maintenance of a joint European approach. For its part China illustrates through the 16+1 network that it can become less reliant on a Brussels-defined institutional infrastructure.
Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Balkan Studies Centre (BSC).

BIBLIOGRPAHY

1Jens Bastian is an independent economic consultant based in Athens, Greece and Stuttgart, Germany. In 2017 he authored a report for the EBRD in London on the Balkan Silk Road: https://www.ebrd.com/news/2017/what-chinas-belt-and-road-initiative-means-for-the-western-balkans.html.
2 The four-lane bridge will be 2.4-km long and 55-meter high. The Chinese are not the first to try and build the bridge. A Croatian contractor attempted to construct the bridge over a decade ago but had to give up the project due to a lack of funding, leaving several unfinished piers in the water. See: http://www.xinhuanet.com/english/2018-07/31/c_137358039.htm.
3 The SRBG-VNG cooperation delivered the steel constructions and was responsible for the mounting of the bridge. Halogaland Bridge contributes to a significant shortcut on the European Transport Corridor route E6 — the main north-south road through Norway and the west coast of Sweden. See: http://www.globalconstructionreview.com/news/chinese-built-arctic-mega-bridge-bridge-opens-norw/.
4 See: http://europa.eu/rapid/press-release_IP-18-5803_en.htm.
5 See: http://europa.eu/rapid/press-release_IP-18-6467_en.htm.
6 See: https://rasmussenglobal.com/media/foreign-investment-screening-china-factor-memo.