Belgrade-Budapest via Beijing: A case study of Chinese investment in Europe

The most tangible outcome from the latest “16+1” Summit between China and its Central and Eastern European partners was the significant progress achieved on the Belgrade-Budapest rail line, with Belgrade finally signing a commercial contract for the first (Serbian) section of the line, with works expected to start in 2017.

This iconic yet long-awaited project is almost as old as the 16+1 forum itself – having been first proposed by China in early 2013 – and speaks volumes about the political economy of China’s engagement with Central and Eastern Europe.

The project is characteristic of the unease that Chinese investment in and around the EU provokes, and, indeed, it could easily be depicted as chiefly serving China’s interests. It sits nicely within China’s One Belt One Road (OBOR) initiative, assisting China’s objective to increase trade with Europe, promote Chinese infrastructure investment abroad, and use up some of China’s excess capacity. It is also something of a flagship project for Beijing –  proof that China is now an exporter of high-tech, high value-added products even to advanced economies.

From a host country perspective, the value of establishing a high-speed rail line between Hungary and Serbia is less obvious. China’s ‘financing’ of the project is no more than a loan which must be repaid by the two host countries using the profits earned from operating the line.

Yet as presented today, the project falls below most profitability thresholds for high-speed rail. BBVA, for example, estimates that at least 6 million passengers per year are needed for a high-speed line to break even, while the Belgrade-Budapest project would link two cities with a combined population of only 3.1 million, and fewer than 100,000 yearly bilateral rail commuters.

Serbia has long wanted to upgrade its woeful transport infrastructure to assist its EU accession bid. It currently ranks 119th out of 144 countries worldwide in this regard – behind even Zimbabwe.

In this context, it is easy to see the project as an example of aggressive Chinese economic diplomacy asserting itself on passive recipient countries. But this narrative ignores the fact that, despite its dubious profitability, the project serves a number of Serbian goals, and has been successfully shaped by Belgrade to meet them.

Serbia has long wanted to upgrade its woeful transport infrastructure to assist its EU accession bid. It currently ranks 119th out of 144 countries worldwide in this regard – behind even Zimbabwe. Of course, improving this does not necessarily require high-speed lines, which is why Belgrade has successfully negotiated for the project to be downgraded to a less expensive, medium-speed one (despite the rhetorical “high-speed” label still attached). Given China’s desire to export high-speed rail as a proof of its technological proficiency, this was a significant concession secured by Serbian negotiators.  

Second, for a country such as Serbia – cash-strapped, largely deindustrialized, and which experienced recessions in 2012 and 2014 – foreign investment is vital. The Belgrade-Budapest project will provide a much-needed short-term economic stimulus, and a boost to growth and employment – as will conditions obtained on procurement, which dictate that at least 46% of goods and services involved be sourced domestically. In the longer term, transit fees collected on the transport of Chinese goods from the Greek port of Piraeus to Central and Western Europe could make a significant contribution to Serbia’s distressed state budget.

Overall, the Belgrade-Budapest project is a good example of the nuances of high-level Chinese investment projects. Yes, they serve clear Chinese interests, but these are not one-way affairs. Given China’s eagerness to promote its OBOR initiative, and to build a successful 16+1 platform, host countries such as Serbia might find themselves having much more negotiating power than their mere political or economic weight might suggest.

For the EU, finally, the Belgrade-Budapest project provides an important case study of China’s economic activism in Europe. It has become clear that both Serbia and Hungary increasingly look to China to strengthen their economies and diversify their foreign policy options. Other Central and Eastern European countries are also engaging China, through the 16+1 format or bilaterally, with similar motives.

This should send a strong message to Brussels at a time of tense relations within the EU and doubts about the immediate future of the Union. Indeed, such projects shouldn’t just draw attention to China’s growing economic presence on the continent; they should trigger significant reflection about the apparent decline of the EU’s ability to act as a political-economic centre of gravity, even for countries on its immediate periphery.

Dr. Dragan Pavlićević is Lecturer at the Department of China Studies of Xi'an Jiaotong – Liverpool University in Suzhou, People’s Republic of China.