China’s ‘One Belt One Road’ hits road bump in Hungary

The rise in protectionism and strategic concerns has heightened scrutiny of major Chinese investments in Europe. As a result, European businesses exposed to Chinese interests and deals should expect the E.U. to employ its regulatory leverage more frequently in the future, which could lead to counter-actions by Beijing.

Events

On 20 February, Britain’s Financial Times newspaper reported that the European Commission (E.C.) had opened an investigation into a Chinese-backed railway project in Hungary. The probe concerns China’s alleged violation of E.U. internal procurement laws stipulating that large transport projects must be open to public tender.

This prompted the European studies director at the China Institute of International Studies, a state-backed research agency, to criticise the E.U. for ‘bureaucratic instincts’ and a desire to ‘assert its power’ and suggested it was concerned with expanding Chinese influence in the region.

The agreement to build the estimated USD2.9 billion high-speed rail line was signed in 2013 and would link Budapest and Belgrade, respectively the capitals of Hungary and Serbia, the latter a non-E.U. member state. The 350km link is the first stage of a project that will eventually connect the two capitals with the Chinese-operated Greek port of Piraeus and the wider European rail network. It would be China’s first railway project in Europe, intended to showcase Beijing’s capabilities and technology, based on its past 15 years of experience of laying 19,000km of rail tracks across the Middle Kingdom.

China’s grand strategy

These infrastructure projects form key components of China’s ambitious if often vaguely conceived Silk Road Economic Belt and 21st Century Maritime Silk Road strategy, more commonly known as One Belt One Road (Obor). Announced in 2013, Obor represents Beijing’s ambitious strategy of connecting China to Eurasia and beyond through a network of overland and maritime routes and rail lines.

The purposes of Obor are to resolve a decade-long problem of overcapacity within China’s construction and infrastructure sectors and to utilise its huge foreign reserves for strategic and diplomatic ends. This also aligns with the principal motive of Chinese companies’ overseas investment strategy – opening up new markets for Chinese-made products, services and technology.

Beijing’s focus in Europe over the near term has been to develop transport corridors in the Central and Eastern European (CEE) region using the port of Piraeus as the main logistics hub for Chinese exports into the continent. State-owned China Ocean Shipping Group currently operates two of Piraeus’s three container terminals. After acquiring majority stakes in the port in 2016, it announced that it would further invest EUR230 million into expanding the facility.

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