China’s Belt & Road In The Mediterranean: From Giant Container Ships To Cruise Liners
An overview of Belt & Road activities in the Balkans and Southern EU
By Bob Savic, Senior Consultant, Dezan Shira & Associates
The rollout of China’s Belt & Road Initiative (BRI) across the northern half of the Mediterranean Sea is typically portrayed in strikingly polar opposite terms depending on the political source. Western think-tanks and Washington/Brussels-centric media regularly depict the BRI as a plot by the Chinese Communist Party to ‘undermine European unity’, ‘divide the transatlantic alliance’, ‘create unsustainable debt burdens’, among other hyperbole.
In contrast, Chinese state media paint a picture of China and various south European countries as having ‘a bright and enduring future’, ‘each other’s most important strategic partners’, ‘ancient civilisations coming together’ among many other superlative constructs.
This article looks past the political messaging to explore some of the substantive economic features of the BRI for European countries in the northern half of the Mediterranean region. A subsequent article will analyse the BRI’s impact on the southern portion of the Mediterranean in North Africa and the Middle East.
Western-led multilateral agencies endorse the BRI
As a first port of call in dispassionately ascertaining how the BRI is faring across southern Europe, it may be instructive to review the commentary of the Asian Development Bank (ADB). The ADB was founded in the 1960s with its largest shareholders being Japan and the United States providing funding for projects across the Asia-Pacific. Currently, there are 68 members including China.
According to its affiliated Asian Development Bank Institute’s August 2020 working paper, “The People’s Republic of China Connecting Europe”, the importance of the BRI for Europe is on the rise. It states that “the BRI is about to change physical and digital connectivity within Europe, while the EU has yet to become an active player engaging in the initiative, in order to enable improved connectivity in Europe to drive economic convergence and not political divergence”.
The paper goes on further to say that in relative terms, the Western Balkans are expected to benefit the most from the BRI, as they show particularly high deficiencies in infrastructure and to date have limited access to EU grants. The economic effects of infrastructure projects in central and southeast Europe would, however, trickle through European production and supply chains, with an impact on economies not directly subject to BRI-related construction plans.
Another non-politicised view may be obtained from the European Bank for Reconstruction and Development (EBRD). The EBRD is a multilateral lending agency established in 1990 to provide finance for projects in Eastern Europe’s former Socialist economies. Its funding mainly comes from the US and west European governments, although China recently became a small shareholder.
The EBRD’s report on the potential for Chinese investments along the “Balkan Silk Road”, published in July 2017, states that “With the availability of capital, technology and a master plan under the heading of the BRI, Chinese investments in EU and non-EU member states create leverage for acquisitions and infrastructure innovation on an unprecedented scale. Embarking on a concerted effort, state-owned Chinese banks are providing loans at low interest rates to companies and political authorities in southeast Europe. Equally, through the acquisition of ports, opening of bank branches in the region or official lending for bridge building, highway construction and power plant renovation, an infrastructure of transport and logistics networks is being created”.
The report goes on to say that China’s ambitious BRI project can contribute to help transforming the western Balkans. Seen from the Chinese perspective, their penetration of markets and sectors brings this periphery into a more centrally positioned part of an integrated Eurasian economic zone that Beijing envisions.
BRI’s growing trade ties with southern Europe’s larger economies
The key benchmark in assessing the merits of China’s expanding BRI across southern Europe must surely be the level of bilateral trade and especially the growth rate of a country’s exports to China. Following the hiatus in trade, last year, caused by the global pandemic, two-way trade between south European economies and China, in 2021, has not only been revived to pre-pandemic levels, but is accelerating to new record highs, including the former region’s export performance.
By far the largest southern European economy, Italy, which officially joined the BRI in 2019, has seen exports rise strongly since that year. Over the first eight months of 2021 alone, goods exports have grown by around 60% to reach US$20.6 billion, exceeding even the full years of 2019 at US$14.5 billion and 2018 at US$15.5 billion. About one-third of those exports were capital machinery, while pharmaceuticals were Italy’s second-best performing export sector, both serving as positive indicators of strong future demand in China for Italian manufactured goods.
The country’s current Prime Minister, Mario Draghi, in contrast to his predecessor Giuseppe Conte who originally signed up to the BRI, has expressed reservations over Italy’s ongoing involvement in the initiative. Draghi, who served as president of the Eurozone’s European Central Bank prior to his Italian premiership in 2021, backed US President Biden’s Build Back Better (B3) program as the West’s alternative to the BRI, at the June G7 summit in the UK.
Whether Draghi will formally withdraw Italy from the BRI remains to be seen given its evidently booming trade relations with, despite the standstill in cross-border investment since end-2019. If Draghi did take Italy out, it would be the first country to have exited the BRI. The Italian premier would need to carefully consider the potential disadvantages such move may pose for Italy’s critical low-tech export manufacturing sector and how it would likely only empower its neighbouring European competitors.
Portugal, as the only south European nation with an Atlantic coast to have joined the BRI, has maintained longstanding bilateral relations with China, especially in their cooperative administration of Macao, a former Portuguese colony. These ties were boosted from 2010 onwards as China invested in a broad range of Iberian country’s industries – including over the period its economy was rocked by the Eurozone crisis – resulting in Portugal becoming one of the largest recipients of Chinese investment in Europe. The investment deals included high-profile acquisitions of the state-owned utility operator, the largest insurance provider, amid several banks and private healthcare facilities.
In some years, China was Portugal’s largest inward direct investor, such as in 2018, when it invested over €10 billion. Lisbon has also consistently resisted pressure from Washington to drop Huawei from supplying critical infrastructure in the country, even though the three main private mobile operators have decided not to use Huawei 5G equipment in their core systems.
Over the first eight months of 2021, Portugal’s trade with China has attested to these close relations. Its goods exports were up by over 48% on the same period last year reaching US$2.8 billion; far exceeding total goods exports of US$674 million in 2019, and US$845 million in 2018.
As the largest southern European economy located in the Balkans and official BRI member, Romania has a GDP of US$250 billion. Its bilateral trade with China hit record highs in 2021. From January to August, according to China Customs Statistics, the country’s exports rose by 61% over the previous year, to reach US$2.4 billion and far exceed those of prior years, including US$850 million in 2019, and US$884 million in 2018.
Most of the exports were made up of mechanical and electrical machinery, as European companies out of Germany, France and Switzerland have set up new export-oriented production bases there. Increasingly, Chinese companies are also considering Romania as a key production platform for household appliances, including China’s Haier which has recently opened up a US$85 million refrigerator manufacturing plant there.
While Romania’s trade with China has taken off this year; China’s overall investment in the country has been modest to underperforming relative to the size of its economy and that of much smaller neighbouring Balkan economies. According to a report issued by the Central and Eastern European Centre for Asian Studies in April 2021, Chinese financing has totalled only €2.8 billion, although even that figure is questioned as being inflated by around €1 billion.
The muted levels of investment may in part be attributable to growing frictions between Bucharest and Beijing. These have included the Romanian government’s reneging on large-scale infrastructure deals with Chinese contractors in the power and telecoms sectors.
Among the most controversial was China General Nuclear Power Corporation’s bid to build two reactors at Romania’s Cernavoda nuclear plant. The planned construction of both reactors was ditched last year as recent Romanian government have looked to focus on building closer defence and security relations with the US. Romania has also rejected Huawei in the development of its 5G networks, even though the Chinese telecoms company has maintained a major presence in Romania over several years.
China’s supply chain and infrastructure expansion in the Balkans
The bulk of southern Europe nations which signed up to China’s BRI are the smaller economies of the Balkans, although Greece, located at the southern end of this region, has the largest GDP of US$185 billion. All the Balkans countries are also members of the sub-regional China-Central and
Eastern European economic grouping known colloquially as the “17+1”; Athens having joined in 2019.
In trade terms, all the region’s economies have experienced surging exports to China. These ranged from Greece, Slovenia and Bulgaria’s 40%-plus annual growth rates over January to August this year, to Croatia’s 211% export expansion. Serbia and Bosnia saw goods exports rise by 99% and 97%, respectively, while North Macedonia recorded 150% expansion. Only Montenegro suffered an export decline of -74% over this period, due mainly to its limited export base.
The majority of the region’s export growth has come from raw materials including non-metallic minerals, wood, marble, and other mined resources, but also fabricated metals including steel. More encouragingly for these economies, manufactured intermediate goods including automotive parts and other transportation equipment have seen considerable growth in line with China’s huge demand for automobiles, this year, as the world’s largest car market. Diversification of the region’s exports to China affirm the Balkans as emerging to become a part of China’s expanding international supply chain.
Some of this growth in exports can be credited to China-financed modern infrastructure in the Balkans in facilitating their shipment eastwards. In this regard, according to the EBRD, countries in the region have been making concessions to Chinese investors and lenders precisely because they want China to be embedded in their economies.
As a result, China’s infrastructure investment comes not only as an alternative for these countries in relation to EU finance or other regional investors such as Turkey or Gulf States, but in their seeking additional economic partnerships with Chinese state construction companies and financial institutions. From this perspective, policy makers in Beijing and the Balkans have framed the narrative as a win-win strategy: As China opens up to southeast Europe with investments, lending and trade, Balkan countries have downgraded their perceptions of risks and dependency.
To assess the potential effect of BRI-led infrastructure projects in southeast Europe, the ADBI examined data on construction projects for the period October 2013 to June 2019. A direct comparison with GDP per capita levels at purchasing power parities across the EU presented the biggest positive growth effects as a proportion of GDP to have occurred in the non-EU states of the Western Balkans. Substantial GDP uplift was therefore found for Montenegro (13.6%), Serbia (6.3%), Bosnia and Herzegovina (4.4%), and North Macedonia (2.3%).
The highest GDP gains among EU member states within the “17+1” group were identified for Slovenia (1.4%), Croatia (1.0%), and Hungary (0.6%). For remaining EU members, the GDP increase was negligible given these wealthier countries did not directly benefit from any large-scale Chinese-financed construction projects. In light of these findings, it seems clear that China’s BRI-related infrastructure finance and associated trade benefits have provided a significant fillip for the smaller economies of southeast Europe.
Turning Piraeus port into a new Mount Olympus
For Greece, despite being a relative latecomer to some of China’s economic partnerships in the region, it has nonetheless come to play a pivotal role for the BRI. This is manifested in its provision of a vital BRI entry point into mainland Europe through its deep-water port of Piraeus. According to the EBRD, the initial Piraeus investment served the purpose of an anchor investment that subsequently started to attract follow-up investment in sectors beyond maritime ports and container shipping. This ‘anchoring’ process is at the initial stages of realization. In the context of the BRI strategy for Greece, the priority sectors will continue to be (port) transport infrastructure, logistics and energy.
Beyond these sectors, the Greek economy is beginning to attract new Chinese investment groups which are targeting the financing of services, such as commercial real estate, insurance, banking, and tourism. In the latter regard, the port of Piraeus is perhaps a significant measure in the evolution of China’s BRI investments in the Mediterranean.
Since China’s COSCO Shipping acquired part ownership of the port in 2016, it has been turned into Europe’s fourth busiest container terminal and the Mediterranean’s largest, handling nearly 5.5 million twenty-foot equivalent units (TEUs) in 2020 (up from 3.6 TEUs million in 2017). The forthcoming development of Piraeus will involve an expansion of the port’s cruise terminal to accommodate “new generation” cruise ships and to host over a million tourists of the 26 million who currently cruise the Med every year.
In turn, the next phase of the BRI will not therefore be solely as an international supply chain centre for goods and raw materials, but as a hub for Eurasian tourism and travel enabling global visitors to explore the fusion of the modern and original Silk Roads with the cradles of European civilisation, both past and present.
Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at firstname.lastname@example.org or visit www.dezshira.com