China’s Billions Help Xi Make Useful Friends in Eastern Europe

(Bloomberg) -- It’s 10 a.m. and the high-speed train leaves Belgrade’s new, glass-and-steel station right on time. Thirty-six minutes later it pulls into Serbia’s northern city of Novi Sad, the first completed section of a 350 kilometer-long (217 mile) upgrade going up to Budapest in Hungary.

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The route is the kind of European modernity that Serbia has coveted for years. Yet the line — being built by China — also represents something more political: how Beijing is helping transform a corner of Europe when much of the continent now views it as a strategic rival.

The Belgrade-Budapest rail link will unite the capitals of two countries that have tightened their embrace of China and provided it with a backdoor to a continent that’s torn over its dealings with the world’s second-largest economy.

From car battery plants in Hungary to copper mining in Serbia, direct Chinese investment in the two countries exceeds $15 billion with more coming. The new high-speed railway will be highlighted by President Xi Jinping during a trip to Europe this week, where he will stop in Belgrade and Budapest after Paris.

The relationship is based on money — loans, investment, trade — politics, and even health. Serbian President Aleksandar Vucic says he wants to take his nation into the European Union, though has maintained his country’s east-west balancing act with China and Russia. Both countries back Belgrade’s stance to not recognize Kosovo’s independence. Dropping opposition to Kosovo’s statehood is a condition of EU membership for Serbia.

In Hungary, an EU member for two decades now, Prime Minister Viktor Orban has forged his own nationalist path, clashing with the bloc over rule of law and funding and threatening to veto aid for Ukraine.

For Xi and his government, there’s the political dividend of having closer ties with two European states willing to listen to Beijing as well as Brussels and Berlin. Vucic and Orban, for example, both met Vladimir Putin at an international forum hosted by China last October.

The message to other countries in Eastern Europe is look “what opportunity you missed,” according to Daniel Hegedus, a senior fellow focused on central Europe at the German Marshall Fund.

“What we see is actually the Chinese demonstrating that we are rewarding our friends, those who stay with us, those who work with us ultimately benefit,” he said. “The Chinese are building a wonder child of Chinese investment to demonstrate the benefits of cooperation with China.”

The broadening economic footprint is filling a void left by the EU, which is still the region’s biggest investor. The bloc is increasingly seen as a distant dream in Serbia and getting a negative report card in Hungary, where Orban talks of the decline of western civilization.

“Xi’s visit is definitely a gesture, a sign of gratitude to Hungary and Serbia,” said Gergely Salat, a researcher at the Hungarian Institute of International Affairs, a government think tank. “With the string of new investments, especially coupled with the prospect of cheap Chinese loans, the government in Budapest can claim this as a resounding success.”

In Novi Sad, that’s definitely how Veselin Simovic sees it. The railway manager proudly showed off the soon-to-be unveiled refurbished main train station hall in the city. Workers were welding stair railings and laying tiles.

The train link costs $2.9 billion, and rising. For Simovic, it’s a demonstration of how Chinese loans and know-how bring a taste of 21st century technology, precision and efficiency to the volatile Balkans. He hit back at critics who say Vucic has deepened ties with China and jeopardized EU membership one day.

“Those who say that, why didn’t they give us such help?” said Simovic, 63, who saw infrastructure in the city destroyed during NATO’s air strikes against the country in 1999 because of the war in Kosovo. “This is a quantum leap. I didn’t expect to see anything like this in my professional lifetime.”

Xi’s trip to Europe is his first since 2019, except for visiting Russia, and the itinerary encapsulates China’s view. He will be in Belgrade on the 25th anniversary of the deadly US bombing of the Chinese embassy in the city. The site has since been turned into a giant cultural center, and workers were fixing the roads around it in preparations for the Xi’s arrival.

The president’s schedule caused a wrinkle in Paris, which would have preferred him to visit only France because Belgrade and Budapest have a different agenda, said a person familiar with preparations for the trip who declined to be identified.

Indeed, that agenda is on full display in Hungary, where Chinese companies are investing more than $10 billion.

Contemporary Amperex Technology Co. Ltd. is building a giant €7.3 billion ($7.8 billion) battery plant near the eastern city of Debrecen to supply German auto makers. Electric car producer BYD chose the southern city of Szeged near the border with Serbia for its first factory in Europe.

Orban has consistently vetoed the EU’s statements critical of Beijing. For him, the links with China are part of his “Eastern opening” strategy of boosting ties, often by leveraging Hungary’s membership in the EU, which grants the nation a veto over some of the most important decisions. Hungary also gives Chinese investors access to the world’s largest trading bloc.

“Many talk about decoupling and de-risking these days, which means isolating Europe’s economy from China’s,” Orban told the Belt and Road Forum in Beijing in October, where he was the only EU leader in attendance. “Those who support connectivity, like Hungary, reject that policy.”

The country wants to add projects to the Belt and Road cooperation in the areas of logistics, infrastructure development and the expansion of electric vehicle charging stations, Economy Minister Marton Nagy said last week.

The danger is that China will have too much leverage over the Hungarian government, which is already “absolutely subservient,” according to Hegedus at the German Marshall Fund.

Links with China also stretch beyond money. Hungary has been home to the region’s biggest Chinese minority of about 20,000. The Jegenye street area in Budapest’s 10th district is full of discrete Chinese-owned shops, stores and restaurants in former industrial buildings, an improvement from the old Chinese market that closed just over a decade ago.

The first and biggest wave of Chinese arrived following the Tiananmen Square crackdown just as Hungary was transitioning from communism to democracy. Thousands more arrived via a Golden Visa program Hungary opened in 2013 and which the government is looking to restart this year.

Other moves have been more controversial. Three years ago, thousands of Hungarians rallied against a plan to finance the private campus of Fudan University in Budapest with taxpayer funds. Hungary has also allowed Chinese police officers to patrol its streets, ostensibly to help Hungarian counterparts liaise with the community.

In Serbia, the relationship also runs deeper than money. China won public praise for support during the coronavirus pandemic after it shipped Sinopharm vaccines, as it did to Hungary. China has invested $5.5 billion, mainly into copper mining and a steel processing plant, and the impact is very visible.

A case in point is Bor, Serbia’s main mining hub, which was a desolate place in a pariah state under international sanctions following the Balkan wars of the 1990s. Even after then-Yugoslavia’s isolation ended in 2000, the government-owned RTB Bor mining and smelting complex was struggling with debt and unable to fix its decrepit, polluting facilities that caused acid rain.

The plant’s fate changed in 2018, when China’s Zijin Mining bought a majority of RTB Bor with a pledge to inject at least $1.5 billion. Six years later, the city’s grimy facades are scrubbed and repainted. The mining complex rebounded to employ more than 6,000, offering average net pay of $1,300 a month, more than 50% above the national average.

Local real estate prices have almost tripled since the takeover, while dust and sulfur-oxide pollution are under legal limits for the first time in decades. Banners around the facility tell workers their safety paramount. Zijin plans to make the Serbian facility into the biggest copper producer in Europe by 2030, Chen Jinghe, the company’s chairman, said in late April.

“Every part of our production has been upgraded, modernized,” said Nemanja Anicic, a 42-year-old manager of the open-pit Krivelj mine, the biggest in Serbia, as he watched screens in the control room that monitor every truck and bulldozer roaming the vast pit. “It’s a rebirth for the industry.”

Serbia’s turn toward China reflects the need for investment with EU membership looking further out. China is Serbia’s biggest trading partner after Germany, with exports and imports totaling $6.2 billion last year.

Bilateral trade deals will end once the country joins the EU, Vucic pledged last year, but in the meantime “we have to live before EU accession.”

The rail link north from Belgrade shows how the country is doing it: On the way to Novi Sad, the high-speed train goes over a bridge rebuilt with EU funds to replace the one destroyed by NATO in 1999.

“You can cooperate” with China, said Bojan Stanic, assistant director for strategic analysis and data at the Serbian Chamber of Commerce, “and still have your independence, your European values.”

--With assistance from Zoltan Simon, Ania Nussbaum and Tom Fevrier.

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