Monday, November 30, 2020
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Chinese energy investments in CEE are becoming problematic

In 2019, Chinese foreign direct investment (FDI) in the European Union fell to 11.7 billion euros, the lowest investment level since 2013 and a drop of 69 per cent from the peak of 37.3 billion euros in 2016, as shown by a report published by Rhodium Group and the Mercator Institute for China Studies (MERICS).

After the initial success of the One Belt One Road initiative and the so-called 17+1, we haven’t seen much of Chinese energy investments in Central and Eastern Europe either. Additionally, when it comes to China, reactions are always mixed. Some fear its political influence, while it is not a secret that China is one of the biggest polluters of the world, therefore not in line anymore with the European climate targets.

“Chinese investments in the European energy sector increased especially in the years after 2008, taking advantage of the weakened economic situation in Europe,” recalls Richard Q. Turcsányi, Deputy Director of the Institute of Asian Studies and Director of the Stregic Policy Institute, both located in Bratislava. “The energy sector, however, has always been seen as a strategic one and there have been political and security considerations. With the time going and as the EU-China relations have been worsening in recent years, the overall sentiment is turning against Chinese investments in strategic sectors.”

“In the current international sentiment, Chinese investments in European energy sectors are becoming more problematic and I think bigger projects are quite unlikely in future,” he tells CEENERGYNEWS.

Source: report CHINESE FDI IN EUROPE: 2019 UPDATE by the Rhodium Group and the Mercator Institute for China Studies. The graph shows the main sectors in which China has invested in the past decade, with investments in the energy industry clearly decreasing over time.

Risks and benefits of Chinese investments

According to a research conducted by the Dahrendorf Forum, an initiative which promotes interdisciplinary European debate about key issues in society, the immediate economic benefits of an inflow of Chinese capital are obvious. Attracting Chinese investors can offer Europe a real long-term chance and can help to restart investment and economic growth. Chinese investments have saved a number of companies from bankruptcy and thus also saved European jobs.

Also, political benefits should not be overlooked. In his paper entitled Central European attitudes towards Chinese energy investments: The cases of Poland, Slovakia, and the Czech Republic, Mr Turcsányi highlighted that attracting Chinese investment can help countries to diversify the risks of foreign ownership. For instance, Poland saw a strong benefit in having Chinese investments in its energy sector because they helped to lower the country’s dependence on Germany and Russia.

But concerns are many. The Dahrendorf Forum reminded that Chinese outbound investments are often a manifestation of China’s state-led economic system as a large proportion of Chinese investments in Europe comes from state-owned enterprises. Their motives may not always be guided purely by commercial objectives but are plausibly shaped by China’s national interests. Therefore Chinese investments in Europe, in particular in the energy sector, raise concerns over possible infringements of national security.

“Energy is a strategic sector and China is now seen by the EU as a rival and competitor, besides also being a partner,” highlights Mr Turcsányi.

Chinese investments in CEE: the main trends

Actually, a policy paper released by China Observers in Central and Eastern Europe, a multinational consortium of experts providing informed analysis on the rising influence of China within the countries of CEE, shows that the trade flow was relatively low.

“As far as I can see, there are not too many projects in Europe,” says Ágnes Szunomár, Senior Research Fellow and Head of the Research Group at the Development Economics Centre for Economic and Regional Studies Institute of World Economics.

“EU countries consider the involvement of Chinese companies into their energy sector relatively risky, only the non-EU member Western Balkan countries seems to be more open towards Chinese energy project.”

Indeed, in all the V4 countries (Poland, Hungary, the Czech Republic and Slovakia), the main import products from China were machinery and electronics, while many energy investments happened in the Balkans and especially in Serbia. Also, Greece enjoyed a privileged position since COSCO, China’s shipping giant operates the Piraeus port. Chinese companies showed an interest in a wide area of sectors and in one of the latest high-level meetings at the ministerial level, the two countries discussed the possibility of future investments in waste disposal technologies.

COSCO, China’s shipping giant operating the Piraeus port.
Source: COSCO.

What does CEE think of China?

Mr Turcsányi explains that most EU countries, perhaps with the exception of Hungary and Greece, are turning out to be rather negative towards the idea of Chinese investments in strategic sectors. Also, the EU rules have long made it much more difficult for Chinese investors to acquire strategic assets.

“In non-EU countries, local elites, who are often critical of the EU, are more interested in cooperation with China in all sectors of the economy, including the energy,” he says.

For Mrs Szunomár, it is difficult to evaluate the perceptions.

“Typically, these are not foreign direct investment projects, but loan-based agreements, where loans are not preferential at all, therefore people may consider these projects risky,” she tells CEENERGYNEWS. “However, a lot depends on how the respective governments communicate about these projects. In the Balkans, these projects seem to have been perceived rather positively. Serbia, Hungary and Greece are among those that are not really criticising but welcoming Chinese presence while Poland and Czechia became more cautious recently.”

The US vs China

However, as Mr Turcsányi points out, China offers not only an alternative economic partner but also a political one, allowing the regimes to get more leverage in its relations with Brussels, Berlin or Washington. Very recently, the US Secretary of State Mike Pompeo visited once again countries in CEE, underlining how important it is to decrease the energy dependence and both the political and economic influence from Russia and China.

“The US pressure in recent years has been an important factor in the CEE countries’ considerations when it comes to cooperation with China,” he says. “To many CEE countries, Washington is a more trusted partner than Brussels, which is often blamed and misused for populist purposes as an easy target. Besides, there is a tradition of the transatlantic partnership, especially strong in Poland, the Baltic countries and Romania, but also in other Visegrád countries. Most visibly this was seen in the case of 5G and Huawei, but it applies also to the issue of Chinese investments in the energy sector.”

Mrs Szunomár reminds that the situation varies from country to country. In Poland or the Czech Republic, for instance, the US position is usually supported, while Hungary seems to be more committed to non-EU players, such as Russia and China.

Interest in nuclear

Nevertheless, both the US and China have shown some interest in the same energy field: nuclear. Earlier in October, Romania signed a draft intergovernmental agreement with the United States for the financing the refurbishing of the first reactor at Romania’s Cernavoda nuclear power plant and the construction of units 3 and 4.

“Abdicating American leadership in the international competition for nuclear influence through neglect of this industry has empowered Russia and China to establish long-term relationships with nations, inimical to US national interests,” read a report prepared by US Secretary of Energy, Dan Brouillette.

Although also China has shown interest in the Cernavoda plant in Romania, local investors are concerned about China’s non-compliance with international regulatory standards and quality control.

“Personally, I think the option of Chinese investments in the nuclear field in the CEE region has never been too serious or close to materialisation,” explains Mr Turcsányi. “I think many countries in the region want to present a public face of being open to Chinese bid to preserve good relations with China, while also to improve their leverage and push other competitors to come us with a better offer. I think Cernavoda in Romania, but also the situation with Temelín in the Czech Republic or Slovenské elektrárne in Slovakia can be examples of this type of behaviour.”

Climate change-related issues

China is surely the second largest economy in the world but it is also the top energy consumer and the biggest emitter of greenhouse gases. Taking into consideration that Chinese involvement in the western Balkans has mostly concerned coal-fired power plants and that, at the same time, Europe aims to become the first carbon-neutral continent, the possibility of new energy investments in the region is very little.

“We haven’t seen much of Chinese investment in the CEE region so far, even though years after 2012 might have been considered from today’s perspective as the golden era,” agrees Mr Turcsányi. “If those investments didn’t come at that time, I see an even smaller chance they would arrive now, with additional political and security considerations. At the same time, it should be said that the new American President, as well as the COVID-19, might bring some new dynamics into the picture.”

“As a result of the COVID pandemic, the US-China trade war, China is stigmatised by many, their investments, involvement is therefore not as welcomed as it was 5-10 years,” concludes Mrs Szunomár. “Even so, China will probably play an increasing role in Europe, also in CEE. Infrastructure projects will be more important, including energy projects. They may try different strategies in EU countries (compared to non-EU), where engaging with, for example, renewables would definitely make them more popular in EU countries.”

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