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China gaining ground in eastern Europe

China's influence on Europe's economies is growing. Countries in eastern Europe need capital, and China is willing to give it to them at unbeatable interest rates in order to achieve its geopolitical goals.

China Development Bank

China Development Bank is one of many state institutions investing in eastern Europe

The number of large-scale Chinese projects in eastern European countries is growing, according to the Committee on Eastern European Economic Relations, Ost-Ausschuss der Deutschen Wirtschaft (OA). This influential lobbying group for German industries involved in the region said such deals particularly focused on infrastructure.

According to an OA survey published earlier this month, Chinese funding has enabled a slew of new ventures. In Serbia, the Export-Import Bank of China (EXIM) has helped finance a 170-million euro ($235 million) bridge project in Belgrade. China and Croatia have agreed to build a new airport in Zagreb, and a Chinese industrial zone is to be constructed in Bulgaria, near the capital Sofia.

The China Development Bank has said it will help support the expansion of wind energy in Romania, in addition to China's plans to invest a total of some one billion euros in the Romanian energy, agricultural and mining sectors. In Moldova, the China Overseas Engineering Group (Covec) is to conduct infrastructure projects with a total value of one billion euros - amounting to some 10 percent of Moldova's entire GDP.

Eberhard Sandschneider, a China expert from the German Council on Foreign Relations DGAP, said Beijing is keen on securing resources and gaining access to markets in all of these countries. But most importantly, China wants to gradually position itself strategically in the region, he said.

"Such poor nations, which are easier to impress than other countries by the mass of Chinese investment sums, are often grateful objects to enter into such policies," Sandschneider said.

Distorting competition

One project in particular has caused quite a stir. Last year, Covec - the subsidiary of the state-owned Chinese railway - won two public contracts in Poland for the construction of two sections of the A2 motorway between Warsaw and Lodz.

Chinese Yuan notes

Chinese companies are also cashing in in EU countries

The project is funded by a 500-million euro loan from the European Investment Bank. It is the first time that such a major EU construction project has been awarded to a Chinese contractor.

The European Construction Industry Federation (FIEC) in Brussels said Covec underbid the construction costs by 30 percent from the next bidder. For FIEC, it's a clear case of distorting competition. It suspects the Chinese state is providing direct and thus unfair help for Covec and will probably bear any losses which may result.

"If our companies were also supported with 500 million dollars in state aid, we could also offer cheaper prices," said Ulrich Paetzold, FIEC's director general. "But our companies can simply not compete fairly with the People's Republic of China."

OA said in its survey it suspected that the project is also to serve as a reference for similar invitations to tender in Bulgaria, Romania and Hungary.

Dubious financing

The OA survey found that China was taking advantage of the current economic climate, using aggressive financing methods.

"China of course has used the economic crisis in western Europe in order to win market shares," said OA chairman Klaus Mangold. "There's nothing to say against affordable financing, when they are in some way economically comprehensible. But this is not the case."

The EXIM deal with Serbia, for example, involved a loan of 145 million euros at three percent interest for a period of 15 years. The normal market interest rate for such a project, however, is a minimum of six percent over a period of five years, OA said.

"This can not be justified at all as an interest rate orientated to international markets," Mangold said.

OA said in its survey that the Chinese credit institutions' risk assessment appeared to correlate directly with the strategic interests of the political leadership in Beijing.

"The greater the political interest, the lower the guarantees required," the Committee said.

Regulatory measures

Many eastern European countries have no qualms taking advantage of China's financing methods. Even crisis-plagued Greece is happy to have a strong investor in times when western backers are showing reservations in pumping money to Athens.

Piraeus container port

China controls part of Piraeus, Greece's largest seaport

Greece already in 2007 entered into a "strategic partnership" with China. The Chinese maritime freight group Cosco took over control of part of the container port in Piraeus in 2008. The Thessaloniki port is next on the agenda.

Greece is the ideal bridgehead for Chinese trade to Europe, said Christos Alexakis, head of Invest in Greece, the agency that promotes and facilitates private investment there. Not only does his country profit from Chinese capital, he said.

"There's also a significant psychological aspect which benefits us," Alexakis said. "It is very encouraging to underline China's decisiveness in its course of action in Greece. Where other fear turbulence and back down, Chinese companies such as Cosco decide to set out and profit from a strategically important transport project in Europe."

But not everyone is as happy as Alexakis about China's involvement in Europe. Last month, German chancellor Angela Merkel recommended limiting Chinese access to EU government contracts. Calling for more transparency, she said it had to be clear how much Chinese companies were being supported by state institutions and banks when competing for contracts with European firms.

FIEC's Paetzold said regulations needed to be sharpened so that such dumping offers could be ruled out. But DGAP's Sandschneider said critics should be careful talking about the distortion of competition considering the amount of official backing available for various sectors in the EU.

"As long as this level of subsidies exists in the EU, it's difficult to truly attack the fact that the Chinese government is trying to position its companies globally and come to their aid to a degree that it could have an effect," Sandschneider said.

Meanwhile, the Chinese government has now undertaken its latest investment at the doorway to Europe with a 28-billion dollar railway project in Turkey.

Author: Alexandra Scherle / sac
Editor: Rob Mudge

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