China's New Silk Road into Europe:

Combining commerce with politics

By Keith Johnson

China is actively building out the European portion of its ambitious new "Silk Road" plan, with port deals from Greece to the Netherlands, railroad investments in Greece, Serbia and Hungary, and a handful of historic, high-profile state visits this spring by President Xi Jinping.

Chinese President Xi Jinping (ncmp)

Beijing's multibillion-dollar plans to build overland and maritime links across Central and South Asia - whether that means huge investments in Pakistan or gas pipeline deals in places like Kazakhstan and Uzbekistan - grab the lion's share of attention. But the ultimate prize in the Silk Road plan - also known in China as the "One Belt, One Road" initiative - is someplace else: Europe.

That's true both because Europe represents a bigger and richer market than the relatively poor countries that dot the steppe, and because Beijing's ambitions aren't purely commercial.

Geo-political project

"It is not an economic project, it is a geopolitical project - and it is very strategic," said Nadège Rolland, an analyst at the National Bureau for Asian Research. As it has across Asia, Africa and Latin America, China is trying to parlay its economic heft into bigger diplomatic influence in Europe.

That task is made easier, thanks to the increasing weight and reach of Chinese state-owned companies. Beijing began encouraging consolidation among competing firms last year as a way of trying to deal with overcapacity in Chinese industry, where having several giant firms in the same sector was leading to inefficiencies.

The resulting mergers created giants like such as CRRC Corporation, formerly a pair of railroad equipment makers and now the world's second-biggest industrial company, and COSCO, cobbled together from a pair of state-owned shipping firms and now the world's fourth-largest shipping company. Both of those mega-firms are active in China's recent European investments.

COSCO is snapping up stakes in ports, while CRRC is working to build new rail lines in Eastern Europe. Another state-owned giant, ChemChina, has been on a European buying spree in the last year, gobbling up agricultural firms, tire makers and machine tool manufacturers. And their state-backed involvement makes clear that more is at stake than the financial bottom line.

"Most Chinese foreign direct investments are not normal foreign direct investments," said Philippe Le Corre of the Brookings Institution, co-author of the recently published book, China's Offensive in Europe. "With a few exceptions, they just happen to have the whole Chinese state behind them."

In Europe, China's investment push has indeed led to a few diplomatic victories. Fuelled by big investments in the energy sector, Xi received red-carpet treatment from British leaders on a state visit last year.

Several of Europe's biggest countries, including the UK, France, Germany and Italy, supported China's creation of a new international development bank, the Asian Infrastructure Investment Bank.

China is perhaps making its biggest inroads on Europe's periphery. It has created a new grouping, known as the "16+1," of the 16 Central and Eastern European countries including some inside and some outside the European Union. The informal club has responded to Chinese infrastructure investment with closer ties and a more compliant approach to issues that are prickly for Beijing, especially human rights.

The Czech Republic, once outspoken on the subject of Tibetan independence, now hews closer to Beijing's line regarding its continued control of the Himalayan nation. Beijing hailed Slovenia as one of a group of 40 countries.

In Europe, China's geopolitical ambitions have run into growing opposition, both in the street and among some governments.

Earlier this month, the European Parliament recommended against granting China "market economy status," a label Beijing craves and which it believes it is entitled to 15 years after joining the World Trade Organization. The EU reticence is driven, in part, by concerns of continued unfair Chinese competition, including "dumping" the detritus of its industrial overcapacity in Europe, which makes life more difficult for struggling European firms.

Growing footprint

Europe has also begun to push back against China's territorial ambitions in the South China Sea. Slovenia made clear, in contrast to Beijing's public pronouncements, that it does not take sides on the dispute.

In April, France signed a US$40 billion deal to build advanced new submarines for Australia, prompted by French concerns about Chinese military expansion in the Western Pacific. More recently, Britain urged all countries including China to respect an upcoming ruling by an international arbitration panel on the South China Seas imbroglio. Beijing has attacked the tribunal's legitimacy and vowed to ignore whatever ruling it hands down.

"The European part of One Belt, One Road will not be a walk in the park," said Le Corre. "It's not that simple to say, 'China is going to come and rescue Europe.' I don't think there's appetite for this."

- Foreign Policy