On a recent brisk morning in Belgrade, a black luxury sedan sporting the Chinese flag stood idling close to the red carpeted steps leading into the Serbian presidency building.
“Yes, the Chinese, I meet them everyday,” Aleksandar Vucic, Serbia’s president, told the Financial Times.
Serbia has swiftly become one of Europe’s biggest recipients of Chinese direct investment, especially in manufacturing and technology. But the burgeoning relationship has raised concerns about transparency, governance and geopolitics.
Last year, Chinese companies announced 16 greenfield projects in Serbia involving investments of $625m, making China the country’s biggest source of such investment, according to fDi Markets, an FT data service.
China’s headline foreign direct investment into Serbia — which includes mergers and acquisitions and other transfers, in addition to job and facility-generating greenfield FDI — has also risen strongly. In 2018, it accounted for 20 per cent of all FDI into the country, with investments of $650bn, second only to the $711bn from France, according to Serbia’s central bank.
In greenfield terms, landlocked Serbia, with its 7m inhabitants, ranks fourth behind Russia, Spain and Germany among the top recipients of Chinese FDI in Europe, according to fDi Markets. Measured as a percentage of GDP, Serbia became the world’s number one recipient of greenfield FDI last year.
“The country has opened up its economy and diversified its investors base since 2014, so as not to depend on the EU, Russia, China or the US,” said Siniša Mali, finance minister. He said Belgrade’s close ties with Beijing were the result of “very, very smart foreign policy”.
Serbia is one of a string of countries along Europe’s eastern and south-eastern flank to have shown an interest in projects at the western end of China’s transcontinental Belt and Road Initiative. Its involvement in the so-called “17+1” group has grown since 2008. Within the group, no other country has received as much Chinese FDI in a single year as Serbia did in 2019, according to fDi Markets.
Among recent Chinese investments, the HBIS Group expanded its investment in Serbia’s largest steel mill in Smederevo, which in 2016 became the first European steel plant to be bought by a Chinese steelmaker. China Road and Bridge Corporation announced late last year that it would invest $272m in Serbia’s first industrial park.
China has in effect “made Serbia the hub of the BRI (Belt and Road Initiative) in central and eastern Europe”, said Tena Prelec, a research fellow at the University of Oxford’s Department of Politics and International Relations.
Ms Prelec said that Belgrade, emerging from a decade of war and sanctions in the 1990s, was not an early destination for Chinese investment, and did not “learn from . . . the unpleasant experiences” other countries in the region had with Beijing in the 2000s.
She argued that, in being less picky in its choice of investors, Serbia had attracted business ventures of low quality and low transparency. Beijing, she said, works on the principle of “my money, my rules”.
For example, when the Serbian government was seeking funding to extend its Kostolac thermal power station, it borrowed $608m from the ExIm Bank of China and hired as the main contractor the China Machinery Engineering Corporation, whose sister company China Machinery Industry Construction Group is blacklisted by the World Bank.
“Direct negotiating of this kind by default eliminates transparency and significantly jeopardises a project’s environmental quality and sustainability,” said Miljan Radunović, a consultant and project manager and a member of Serbia’s National Convention on the EU.
“Chinese BRI investments to central and eastern Europe, in 99 per cent of cases, specifically target projects where the state is the end user,” he said.
Mr Mali defended his government’s choice for Kostolac.
“Was I able to get money elsewhere? . . . All money has a price,” he said. “The European Investment Bank’s rates were not as favourable as the Chinese . . . Time is money, as well. Who’s going to wait two years [for the EIB]? The Chinese are much quicker.”
Mr Mali also said he was not privy to the World Bank’s blacklist.
“Am I breaking any international laws? The World Bank is not ruling Serbia, right?”
Last year, the EU’s former enlargement commissioner voiced concern about the long-term risks of borrowing heavily from China for infrastructure projects, saying the EU had underestimated China’s reach in the Balkans.
Environmental groups have criticised Zijin Mining Group’s announcement last year of a $200m investment in Serbia’s Majdanpek copper mine. Coalition 27, a group of civil society organisations, raised concerns about increased sulphur dioxide concentrations in the nearby city of Bor.
Serbia has the highest rate of pollution-related premature deaths in Europe, according to the Global Alliance on Health and Pollution.
Ms Prelec said the lack of accountability on many projects was “worse than shortsighted and contributing to a pollution emergency in south-eastern Europe”.
Some Chinese companies have dismissed such concerns. HBIS claims that its expansion and investment in Smederevo will create one of Europe’s most environmentally friendly and energy efficient sinter plants.
While European officials warn aspiring member states not to rely heavily on China, Ms Prelec said it would be hypocritical not to acknowledge that “China invests exponentially more in EU countries than in eastern Europe”.
“If the EU doesn’t want its neighbourhood entangled in debt traps and non-transparent deals, EU countries should lead by example,” she said.
Dragan Pavlicevic, a lecturer at Xi’an Jiaotong-Liverpool University and a specialist in Chinese relations with central and eastern Europe, said Serbia had not necessarily sought out Chinese investment, but it had sought to keep its companies alive.
“For Bor and Smederevo, the government had been looking for strategic investors for a long time, speaking to companies from the EU and Russia, but nobody came forward,” he said. “The Chinese came in and filled that void.”
Indeed, big investments by HBIS and Zijin Mining Group have provided vital support to the Serbian economy, preserving thousands of jobs.
“You want to have huge unemployment?” asked Mr Mali. “Give me billions to employ people, and then we can think about environmental concerns in parallel . . .[Remember] it was a public competitive process, like everywhere in Europe, and then you have a winning bidder.”
Although Serbia’s main trade partner and source of foreign investment remains by far the EU, greenfield FDI from the bloc has fallen from 73 per cent of Serbia’s total between 2005 and 2014, to roughly 55 per cent in the years since, according to fDi Markets.
This follows a reduction in EU investment to Serbia since 2011, while investment from China, Turkey and other emerging markets has grown strongly.
This fits into a broader trend. While China’s headline FDI to Europe has fallen, the number of its greenfield projects into the region has been growing for almost a decade, while European investment to China has decreased.
Much of China’s greenfield investment across Europe has been in heavy industry and manufacturing. In Serbia, the majority of Chinese investors have targeted the country’s extractive, automotive, textile, chemical and electrical component sectors. The remaining investments were in technology.
China’s investment in Serbian tech began in 2008, when Huawei took over Ericsson’s role in the production of equipment for wireless internet. Last year, the company opened its Innovation Center for Digital Transformation in Belgrade to serve as a regional hub. It followed an agreement to make Huawei a strategic partner in Serbia’s Smart City project.
In October, Belgrade hosted the fourth annual conference on tech innovation between China and central Europe. Huawei showcased its 5G and smart city systems. A month later, China’s Quectel Wireless Solutions — a leader in 5G technology and global supplier of cellular modules — said it would open a new R&D lab in Belgrade in 2020, its first in Europe.
Huawei technology will support 2,000 surveillance cameras being installed across Belgrade, equipped with facial and licence plate recognition software. The project has caused alarm, especially among supporters of Serbia’s bid to join the EU, who contend that it fails to meet the conditions of Serbia’s law on personal data protection. Concerns have also been raised about a lack of regulation in Serbia, and the possible use of 5G by Chinese companies for spying.
Last year, the EU initiated an FDI screening mechanism to protect critical industries from foreign ownership, partly due to fear of IP-theft by Chinese companies.
Mr Mali dismissed such concerns as anti-Huawei lobbying and said no deal on 5G had yet been agreed.
Critics say Serbia, outside EU restrictions but centrally located, presents Beijing with fertile ground from which to test or roll out 5G in a European country.
There is also concern that, with China’s growing foothold in Serbia’s economy, Belgrade will have a harder time conforming to EU transparency and environmental standards as it approaches membership, says Ms Prelec. But as the EU accession process has stalled, others worry that Serbia will be less focused on adhering to the bloc’s standards at all.
Last summer, Mr Vucic hailed China as “the most honest and trustworthy friends of Serbia” at a concert in Belgrade marking the 70th anniversary of the founding of the People’s Republic of China. In a video posted at the end of December on Instagram, he addressed President Xi Jinping in halting Chinese.
“China is one of our biggest partners and we will do everything to make sure that you feel at home here,” he said.
Sebastian Shehadi is global markets editor at fDi Magazine. Valerie Hopkins is the FT’s south-east Europe correspondent.
