The New Silk Road – China’s Answer for Europe’s Needs

By Adam Minter

[contextly_sidebar id=”KIihh4yy1V7oj6PXYwgli17hUfZhXbfY”](Bloomberg View) — Although Budapest and Beijing are separated by 6,000 miles, they’ve just agreed to become much closer. In a quiet ceremony held last weekend, Hungary became the first European country to sign onto China’s New Silk Road initiative, a multi-billion dollar program to build up infrastructure and trade along the land and maritime routes of the ancient Silk Road that stretched across Asia and Europe.

Right now, Hungary’s participation probably won’t have an impact beyond its own borders. But as others countries follow its lead, China’s economic and political relationship with Europe will likely undergo a dramatic shift — one that may not be to the European Union’s liking.

The Chinese government’s interest in Europe isn’t new. In recent years, it has made substantial investments in Greek port facilities, and agreed to help finance the development of high- speed rail service between Belgrade and Budapest. In both cases, China wanted to simplify the logistics of exporting to European markets. In return, it offered something to the countries in question: help building infrastructure, and easier access to Chinese markets (assuming they could figure out something to export back).

The novelty of the New Silk Road initiative is that China is now pursuing far deeper partnerships as part of a comprehensive political strategy. Previously, policy makers in Beijing tended to treat, say, an investment in Tajikistan as a discrete exchange — you get a pipeline, we get gas. Under the New Silk Road framework, it’s part of an explicit effort to expand Chinese influence across Eurasia — one step toward earning primacy for China on the global stage.

Beijing hasn’t denied having vast ambitions for a program it expects to spur $2.5 trillion in annual trade by the end of the decade. In March, Xinhua, China’s official state news wire, announced the purpose of the program is nothing less than to “change the world political and economic landscape.”

According to an analysis by Barclays, China’s economy will benefit enormously from opening up new markets for its excess capacity. For example, China’s massive state-owned sector currently earns an average return on investment of just over 4 percent. In contrast, Barclays estimates the average return for Chinese firms on New Silk Road infrastructure projects to be between 10 and 15 percent.

What’s in it for Hungary? In 2013 Prime Minister Viktor Orban noted that central Europe is in desperate need of infrastructure that “the euro zone is unable to finance in its current situation.” Two years later, that assessment still holds. Meanwhile, China’s need to diversify its investments beyond its own slowing economy has only grown. For Hungary, turning toward China might appear to be an easy decision.

Nonetheless, the program comes with risks to China’s potential partners, from Pakistan to Hungary. The New Silk Road initiative foresees lowering trade barriers to encourage trade. But, given its over-capacity production, China would almost certainly be the dominant exporter in any resulting trade relationship, to the detriment of local industries in partner countries. China has not hesitated to leave local manufacturers out in the cold when building roads and rail in partner countries; Chinese companies have tended to be designated the projects’ official suppliers and contractors.

Then there are the political risks. The New Silk Road initiative’s founding document declares the initiative will uphold the “five principles” of China’s foreign policy, including “mutual non-aggression” and “mutual non-interference in each other’s internal affairs.” In recent years, Chinese officials have placed a special emphasis on that latter point, especially when responding to criticism of its human rights record in regions with ethnic minorities, including Tibet. Development assistance always comes with strings attached, of course, no matter the donor country. But China’s investments are best understood as a cumulative means to a geo-political end — one at odds with some of the West’s own principles.

That Hungary has signed up for this project may not come as a shock, given that its government has shown an authoritarian streak of its own. And with so much potential investment at stake, it wouldn’t be surprising if other European countries are tempted to forge their own partnerships with China. But they should understand that China is unlikely to back down on its national interests when it comes to investing in Europe. It’s up to Europe’s potential New Silk Road countries to remember to hold onto their own.

©2015 Bloomberg View