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CEE and CIS / Serbia

China’s investment strategy in emerging Europe is all wrong

Chinese investors in the western Balkans have slowed its green transition and EU entry. Everyone would be better off if they did the very opposite.

EU-China-Balkans
Chinese engineers working on the Peljesac Bridge in Croatia. The bridge was mostly funded by the EU but built by a Chinese company, and has been hailed a success from both a logistical and environmental standpoint. (Photo by Elvis Barukcic/AFP via Getty Images)

The western Balkans is in the midst of a public health crisis. Composed of Serbia, Bosnia-Herzegovina, Kosovo, Montenegro, North Macedonia, Albania and Croatia, this unique part of Europe has shocking levels of air pollution.

In 2020, for example, Serbia was named as the country with the highest rate of pollution-related deaths in Europe (and the ninth-worst globally), according to the Global Alliance on Health and Pollution.

While China is not to blame for this malaise, it has made major contributions through its poorly managed investments in coal, steel and other ‘dirty’ industries across the region. National governments, especially in Serbia and Bosnia-Herzegovina, have turned a blind eye to the deadly environmental consequences. This state of affairs, however, is far from inevitable.

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China can build to high standards

Largely non-existent a decade ago, Chinese investment in the western Balkans has poured in over the past eight years, mainly in the form of state-to-state infrastructure contracts.

Most of these projects – such as the Kostolac B power plant and the Boljare to Bar highway – have violated EU environmental standards and/or emissions goals, thereby taking several countries in the region further away from integration with the EU, and evermore locked into a high-carbon future.

The Pelješac Bridge is a huge bragging right for China. It is proof that they can work to EU standards. Senada Šabić, IRMO

“[Tying] into the Belt and Road Initiative [BRI], the Chinese recognised one of the biggest ongoing problems in the Balkans: the lack of infrastructure,” says Agnes Szunomár, assistant professor at Corvinus University of Budapest. “They saw a niche opportunity in Europe to build coal plants, roads and hand out loans, and they took it.”

In the western Balkans, Chinese companies have imported the construction and environmental standards they were used to in China, Africa and other locations with less regulation, explains Miljan Radunović, a Chinese FDI consultant and member of Serbia’s National Convention on the EU. But not in all cases, he adds.

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Indeed, while the list of grievances is long, some Chinese endeavours have been built to a high standard, the most obvious example being the Pelješac Bridge near the medieval city of Dubrovnik. Constructed by state-owned China Road and Bridge Corporation, it is the first major Chinese infrastructure project to be paid for (in greatest part) by the EU.

“The bridge is a huge bragging right for China,” says Senada Šabić, a senior research associate at Zagreb’s Institute for Development and International Relations (IRMO). “It is proof that they can work to EU standard.”

Meanwhile in Serbia, China’s construction of the Mihailo Pupin bridge (over the Danube in Belgrade) and the Pancevo gas-fired power plant have also been success stories, environmentally speaking.

“Then there is the power plant in Stanari, Bosnia,” says Radunović, who has worked on several engineering contracts between China and Serbia. “The Chinese did it to EU regulation, but [this is] because they were intensely supervised, as this was a private investment. So they can do it, but only if you ask them at the beginning of the project cycle, and then monitor them all the way to the end – [two things] that most western Balkan governments have not done,” he contends.

A profitable opportunity for China in the Balkans

Although Chinese investment ran amok over the past decade, reaping environmental havoc across the western Balkans, room for such manoeuvring has decreased significantly.

In recent years, non-EU nations in the western Balkans have come under growing pressure from the IMF to stop taking risky, ‘non-green’ Chinese loans or investment, according to Radunović. Working closely with the national budgets of numerous Balkan countries, the IMF does indeed have leverage.

A change in China’s strategy is inevitable, but moving slowly. There is a huge commercial opportunity for them to help develop EU-grade infrastructure in the western Balkans. Miljan Radunović, Serbia’s National Convention on the EU

Moreover, with some countries in the region looking to append up EU accession, Chinese investment that lacks green credentials is less appealing. In short, the business niche that China carved out for itself in the western Balkans is shrinking.

“A change in China’s strategy is inevitable, but moving slowly,” says Radunović. “There is a huge commercial opportunity for them to help develop EU-grade infrastructure in the western Balkans. There is almost nothing they can’t build.” The region certainly needs the help since it is very much playing ‘economic catch-up’ with most EU nations, especially in terms of high-quality, environmentally friendly energy and connectivity, an important stepping stone to EU accession. Brussels’ available funding for such infrastructure, even for non-EU European countries, has been raised by the Green New Deal.

“There are hundreds of Chinese companies that could help with these upgrades,” adds Radunović, who is based in Serbia. “We see them operating higher, stricter standards next door in [EU members] Slovenia, the Czech Republic and Slovakia. I don’t think they are as aware of the investment potential here.”

Awareness and appetite might grow faster if Beijing stepped up its global green transition policy. Already, there has been much talk that the transcontinental BRI is becoming more climate conscious, a trend that might be accelerated to match US president Joe Biden’s green credentials on the world stage. Moreover, with Covid-19 damaging trust between an evermore pro-China versus pro-US world, Beijing could help improve relations by increasing its green investment worldwide, but especially in ‘the West’.

The BRI provides other motives for Chinese investors to bring the western Balkans closer to the EU. “Trade and investment links would be so much improved. Ultimately, [the] BRI wants to connect China to western Europe, and the Balkans are a key gateway,” says Simon IIse, director of the Heinrich Böll Foundation, an agency for green visions and projects.

It almost goes without saying how much the western Balkans would benefit, commercially speaking, by letting China speed up its road to the EU. The EU is, by far, the western Balkans’ largest economic partner. A concerted move to build green infrastructure would speed up accession, create thousands of future-facing jobs, and actively fight the air pollution crisis, says IIse.

What is the hold up?

It may seem strange, therefore, that over the past decade many western Balkans nations have allowed Chinese investments to take them further away from EU integration.

Part of the problem is that climate activism remains low in this part of Europe, not least since coal remains king, especially in resource-rich Serbia and Bosnia-Herzegovina. Moreover, Chinese investments in ‘dirty’ industries have been perceived as time-efficient and cost-effective, but in reality many have had limited spillover effects and a high risk of corruption.

The region has also engaged with China for its symbolic power. “China’s economic relationship with the western Balkans, especially Serbia, is just as much about political partnerships, and vice versa,” says Szunomár. “China needs friends in Europe, and Serbia needs a counterweight to Brussels.”

Serbia is one of China’s key BRI hubs in eastern Europe, and arguably Beijing’s most vocal supporter on the entire continent. One reason for this has been growing disillusion in Serbia towards the EU, comprised of the partially justified view that Brussels is reluctant to enlarge and provide the region with economic support. On the other hand, dealing with China and its investors is more hassle-free, given it is a less strict and moralising partner.

“There is also the fact that the Serbian government greatly appreciates China’s international objection to Kosovo’s independence – unlike the EU,” says Radunović. Meanwhile, Serbia remains the only country in Europe that has not criticised China’s persecution of its Muslim Uighurs population. For these reasons, the current Serbian government seems all too content to remain in the EU waiting room where it can juggle China and Brussels.

China’s BRI could also be interpreted in terms of hard, cold realpolitik. “China is trying to buy geopolitical influence and loyalty in the western Balkans [and elsewhere] through bilateral investments and agreements,” says IIse.

However, such calculations lose their vitality the more China gauges the economic and political price of alienating the western Balkans from the EU. With the region’s support, however, Chinese investors could do the very opposite, a win-win situation that would mark an exemplary chapter in Sino-European relations.

Sebastian Shehadi

Sebastian Shehadi

Political editor

Sebastian Shehadi is political editor and senior editor at Investment Monitor and a contributing writer for the New Statesman.