Czech Republic, China’s Gateway to Europe? (2/3): Broken promises

Years after Prague and Beijing decided to move closer to each other and increase their bilateral ties, the over-arching feeling among Czech decision-makers is that of disappointment: the economic involvement of China in the country falls short of initial expectations.

Bilateral trade between Czech Republic and China remains below expectations

Sure, in 2017 China was the third most important trading partner of the Czech Republic (6.6% of market shares), only surpassed by neighboring Germany and Poland, its second supplier (12.5% of imports) and 17^th exports market (1.3%).

And according to preliminary estimates of the Czech statistical office, China might have surpassed Poland and become the Czech Republic’s second largest trading partner last year. Bilateral trade has reached 20.2 billion euros in 2017 after a significant, yet uneven increase, and remains largely in favor of China’s trade balance (record Czech trade deficit of 16 billion euros with China alone).

Moreover, China’s market shares and relative importance in overall Czech foreign trade have barely improved, and even stagnated in the last several years: in 2010, China was already the Czech Republic’s third largest trading partner (6.5% of market shares), its second supplier (12.3% of imports) and 17^th foreign market (0.9% of exports). In close to a decade, the situation has barely changed.

From greenfield investments to trophy purchases

A similar observation can be made regarding China’s investments in the Czech Republic. From 2000 to 2010, most of Chinese investments were greenfield and mergers and acquisitions remained marginal. But 2010 marks a turning point: while investments do increase, especially thanks to CEFC’s purchases, Chinese FDI increasingly focus solely on “trophy acquisitions”, with no link whatsoever to the alleged goals of the Belt and Road Initiative nor any real contribution to the Czech growth and economy.

During his visit to Prague, Xi promised nearly 10 billion euros worth of investments. But a few years later, only a marginal part of them have really been executed while major investment deals mainly benefit a few well-connected oligarchs. At the end of 2017, Chinese FDI positions accounted for less than 1% of total FDI stock in the Czech Republic, far behind the main European investors and Korean or Japanese competitors – all this, despite the activities and purchases of CEFC, spearhead of China’s growing presence in the Czech Republic and striking symbol of its setbacks.

In 2015, CEFC established its European headquarters in Prague, at the same time its president Ye Jianming was appointed special advisor to Czech President Milos Zeman.

The Chinese conglomerate then went on an unprecedented shopping spree, buying, among other things: the Czech football club and stadium of Slavia Prague, shares in media groups (Medea Group and Empresa Media) and in Travel Service (main shareholder of Czech Airlines); real estate (including the Florentinum business centre and luxury hotels Palais Art Hotel Prague and Mandarin Oriental Prague); minority shares in J&T Financial Group and purchase of one of the country’s largest breweries, Pivovary Lobkowicz; owner of engineering company ZDAS and majority share in Invia.cz, the biggest Czech online travel agency.

According to rumors, CEFC would also be interested in investing in O2 CR, the country’s main telephone operator owned by Petr Kellner’s PPF, as well as in TSS Cargo, the Czech Republic’s main rail carrier.

Of course, CEFC is not the only Chinese entity to invest in the Czech Republic. We should also mention China’s interests in the railway sector (including through CRRC, whose shares in Skoda Transportation provide it with a stepping stone to develop in the EU market), in the banking and financial sector (the Czech National Bank signed a MoU for cooperation with the Chinese regulator) or in high-tech (PPF is contemplating cooperation with Huawei in the field of 5G technology); let’s also not disregard their interest for the nuclear industry, health, medicine or agriculture.

But along with many of its neighbors, the Czech Republic has been disappointed by China’s unkept promises: as Jan Weidenfeld from the Mercator Institute for China Studies pointed out, Czech decision-makers have also “been insulted” by the fact that China’s loans come with the same conditions as they do to African countries.

Czech and Central European decision-makers increasingly realize that all of this may not be worth it and that they can find funding for their infrastructure projects directly with European institutions, like the European Bank for Reconstruction and Development.

A short-lived convergence of interests

This feeling of insult is not merely anecdotal but bears a crucial significance when we consider the underlying reasons for Prague’s rapprochement with Beijing: by seeking for reinforce its relations with the world’s second biggest economy, the Czech Republic was ultimately attempting to show their autonomy, gain in credibility and reduce the country’s dependency toward the EU and the West in general, both on the political and economic levels.

Roughly a decade after the EU accession, many Czech decision-makers wanted to promote an independent foreign policy regardless of its Western orientation – a yearning directly linked to a widespread disappointment and disillusionment regarding the country’s “return to the West” – and diversify its trade relations in order to weaken its reliance on European markets.

The Czech Republic wasn’t trying to severe ties with the West, far from it. But was simply betting that it shouldn’t put all its eggs in the same basket, a thoroughly reasonable and common strategy for small and medium-sized states. Moreover, the promise of Chinese investment flows appeared all the more attractive as the country was expecting a drop in EU structural and cohesion funds over the next few years and decades.

But Czech Republic’s European partners were unable or unwilling to address this new challenge appropriately: their answer was completely off the mark, as they lectured the Czech Republic over its new pro-China stance, arguing that Prague was selling its soul to the devil and dividing the EU in exchange of juicy deals. But this paternal, half-condescending and moralizing rhetoric is precisely what lies at the heart of Czechs’ initial disappointment towards the West and what motivated them to look East.

And as some pointed out, the West is in no position to lecture or give any advice to the Czech Republic on the matter: Western Europe’s reliance on Chinese FDI is much more significant than in Central and Eastern European countries. But the harm was done, and Chinese leaders subtly took advantage of the situation by praising the dynamism and independence of Central European states at a time when Visegrad Group countries were starting to cross swords regularly with their Western European allies.

In the meantime, China, including through the BRI and 16+1 initiative, was seeking to unload its overproduction abroad and turn the Czech Republic – along with all the rest of Central and Eastern Europe – into its backdoor entrance to Western European markets, Germany first and foremost. In that regard, the factors behind China’s interest for the Czech Republic are similar to those of any investors: low labour costs, workforce quality, industrial know-how, dynamic growth, etc.

The Czech-Chinese growing partnership over the last several years can only be understood by taking into account those underlying trends. In that regard, the Belt and Road Initiative only appears as a catchy slogan which, several years late, annexed itself to a convergence of interests that was already long in the making and doesn’t have much to do with the reality – and frailty – of China’s economic presence in the Czech Republic.

Feel free to check out the other episodes of our series dedicated to Czech-Chinese relations:

Czech Republic, China’s Gateway to Europe? (1/3): The honeymoon