The trade and economic cooperation between China and CEE countries enters into a new era. The latest 20 years showed different development path for CEE and China. CEE countries returned to Europe, and with the accession to the European Union their economies deeply integrated into the European internal market. China steady follows the Reform and Openness policy, and with joining to the WTO, China's economy successfully integrated into the global market and benefited from the globalization. The Financial Crisis brought shocks to the CEE countries, and they started the process to adjust their development path, try to attract more investment and explore markets beyond EU. China is facing the challenges of sustainable development, and along with the "Go-Out Strategy" China is searching the destination for its investment. The traditional relationship and new common interests could bring China and CEE countries together to further enhance the trade and economic cooperation.

China-CEE trade and economic relations

China and CEE had a long traditional trade and economic relations. CEE countries are the first ones who recognized the PRC. During the socialist period, CEE countries had provided a lot of assistance to the China's economic construction and development, including equipments, technology, expertise etc. China also learned a lot from CEE countries on their reform theories and practices in 1980s. 

Since the end of 1980s, CEE countries and China had chose different economic and social development paths. CEE countries turned to face to West and China turned to face the World. CEE countries declared back to Europe, and took joining EU as the priority. After 20 years, CEE countries had become the EU member states and their economy had deeply integrate into Europe. Some of the CEE countries have more 70-80% trade volume with EU markets, which shows the high dependency with the EU internal market. At the same time, China continue to carry out the Reform and Openness policy, especially after joining the WTO, along with massive FDI rushing into China, China had developed an export driven economic growth path. China became the world biggest export country.

China-CEE trade experienced a low pace in 1990s. When CEE negotiated with EU on accession treaty, China worried about the negative impact on trade relations with CEE countries, and even asked for the compensations. After CEE joined EU, as the EU's internal market is getting larger, it provided good opportunities for China to enter into EU via CEE. Since then, the bilateral trade between China and CEE back to a growth shape.

In 2011, China's trade with 12 EU's new member states (NMS: 10 CEE country + Malta and Cyprus) reached 54.3 billion USD, which takes close to 10% of China-EU trade and 1.5% of the China's external trade. China's export to 12 NMS is 41.2 billion USD, and import is 13.1 billion USD.

Table 1     China's trade with EU and 12 NMS in 2011

In 10 thousand USD. Resource: China Customs.

Before CEE countries joined EU, Hungary was China's biggest trading partner in the region. Several years later it was replaced by Poland. And since 2010 Hungary is down to the third place. By 2011, we have Poland leading the first place with 13 billion USD trade volume, follow with Czech Republic and Hungary whereas the trade volume close to 10 billion USD, and Slovakia and Romania are at the next group, more or less 5 billion USD. (Graphic 7)

Graphic 7    China's trade with CEE

In Million USD. Resource: China Customs.

On the export, Poland is the biggest export market for China in the region, with 11 billion USD in 2011. Czech Republic and Hungary are the second and third one, with 8 and 7 billion USD respectively. Romania is the fourth export market, 3 billion USD.(Graphic 8)

Graphic 8     China export to CEE

In Million USD. Resource: China Customs.

On the import, Slovakia takes the lead in 2011 with 3.5 billion USD, surpassed Hungary in 2010. The import from Hungary, Czech Republic and Poland is more than 2 billion USD each. Romania close to 1 billion USD. (Graphic 9) The reason of the sudden import jump from Slovakia is that German VW's plan in Slovakia started to export SUV and parts to China in 2011. Actually big European companies and multi-national companies play an very important role in the CEE's export to China, especially in the transportation sector. Not only VW's SUV from Slovakia and Skoda parts from Czech Republic, but also Audi motors and GM gear box from Hungary. The export of national products from these countries is very limited.

Graphic 9     China's import from CEE

In Million USD. Resource: China Customs.

Chinese investment to CEE region increased dramatically after these countries joined EU. As Table 2 shows, Chinese capital flow to CEE region in 2005 was only 5 million USD, took 2.8% of Chinese FDI in EU. Soon it increased to 18.7 million USD in 2006, and the share increased to 14.5% of the capital flow of the year. The Financial Crisis brought a drop in the Chinese investment in CEE, along with the general drop in Europe from China. From 2009, Chinese investment in CEE started to a rebirth, and only for one year in 2010, Chinese capital flow to CEE reached 416.5 million USD, 7% of the Chinese investment of the year to Europe.

Table 2     China's investment in EU and CEE (Capital Flow)

Note: Data for 2005, 2006 include only non-financial outward FDI stock.

Million USD. Resource: 2010 Statistical Bulletin of China's Outward Foreign Direct Investment.

On the capital stock, Chinese investment had a similar trend in CEE as capital flow (Table 3). In 2005, there was only 66 million USD Chinese investment in CEE. In 2010 it turned to 828.7 million USD, took a share of 6.6% of Chinese investment in EU.

Table 3     China's investment in EU and CEE (Capital Stock)

Note: Data for 2005, 2006 include only non-financial outward FDI stock.

Million USD. Resource: 2010 Statistical Bulletin of China's Outward Foreign Direct Investment.

Table 4 shows the country data on Chinese FDI flows to CEE. Hungary, Poland, Czech Republic, Romania and Bulgaria are the destination for Chinese investment. In 2010, these 5 countries almost absorbed the whole Chinese capital flow to the region, and Hungary itself took 89%.

Table 4    China's outward FDI flows into CEE countries 2005-2010, millions of USD

Note: Data for 2005, 2006 include only non-financial outward FDI stock.

Million USD. Resource: 2010 Statistical Bulletin of China's Outward Foreign Direct Investment.

On capital stock, Hungary, Poland and Romania are the big three destination for Chinese investment (Graphic 10).

Graphic 10    China's outward FDI stock into CEE countries 2005-2010, millions of USD

Note: Data for 2005, 2006 include only non-financial outward FDI stock.

Million USD. Resource: 2010 Statistical Bulletin of China's Outward Foreign Direct Investment.

China's approach in investment

Why to invest

When a Chinese company makes a decision on investment abroad, usually they have the following rationales. The first one is for the access to resources. Along with the rapid development of Chinese external trade, China becomes the World factory. Huge manufacturing capacity requires the substantial consumption on energy and raw material. The second one is the access to technology and distribution networks. More than 50% of Chinese export is based on the processing trade, which is part of the world production chain. China is in the lower end of the technology ladder and has started the climbing-up process. Access to technology and distribution network plays a significant role for Chinese companies in this regard. The last but not least one is close to the end market. Making investment is the best way for have a close sensor to the end market.

How to invest

The methods for Chinese investment are the Merge and Acquisition, Green Field investment, and for some extent leasing is also a widely used one. M & A takes an important share in Chinese investment, as M & A is the appropriate way for Chinese companies to access to the technology and distribution network, and also provides a short path to close to the end market. Leasing is also another useful tool for Chinese companies, especially for home electronics producers. They rent a workshop and imports parts and accessories from China, assemble them, and then sale the final product in the region. It is the exact way the processing trade has. Chinese companies are familiar with it. The advantage is that when crisis comes or the sales of the product is not satisfied, Chinese companies can easily close the workshop and keep the loss in the minimum level. In 2008-2009, we can see several Chinese cases in CEE region, like Hisense, Changhong and Lenovo.

What activities the Chinese investment in favour

Trade is the popular sector Chinese investment is in favour. They not only set up local sales companies, but also establish regional distribution centres. We can see the examples in Hungary, Poland and Romania.

Manufacturing is another widely applicable activities, especially in the field of producing electronics, IT and vehicle.

Mining is one of the major investment activities, but it is mainly in Latin America and Africa. It is not applicable for CEE.

Service is an emerging activity for Chinese investment, especially the financial service. Chinese banks register as the local banks and provide financial services to the local Chinese companies and partners. Bank of China had opened their first branch in CEE at Budapest for 10 years, and will soon open branches in other CEE countries. ICBC also has an expansionary business plan in the region.  

Opportunities and obstacles for China to invest in CEE

When the Chinese companies make decision to invest in CEE region, they use to take the following advantages into their consideration, such as the established infrastructure, trained labor force with low cost, experience in manufacturing, EU membership. And last but not least the local need toward FDI for economic growth, which means the welcome to the FDI.

The CEE region is also an New Land for Chinese investment. The business possibilities are under estimated by the Chinese companies. With the investment in CEE region, Chinese companies can have a better access to EU internal market. They can upgrade their technology by investment, and also contribute to Chinese domestic demand. China's traditional relationship with CEE can make Chinese investors more comfortable when decisions are taken. And Chinese investment to CEE is also a useful way for China to diversify its currency reserve. Last but not least, China's investment in CEE can provide contributions to improve the trade imbalance between China and EU, as well as China and CEE.

Although there are advantages and opportunities for China to invest in CEE, there are still some risks need to be mentioned.

The first one would be the language barrier. There are different languages in the region, which are not familiar for the Chinese investors. To overcome this obstacle means more cost to hire staffs with local language skills. The second one is connected with the first one, the lack of knowledge on the local market and investment environment. The third one is the consequences of the first twos, lack of professional service. And last but not least, the consistency of policy is also a key factor for investors to make a decision.

Some recommendations

For governments

For governments, their task is not only to absorb more and more investment, but also to working out a coordinated strategy in CEE region. Obviously China cannot have repeated investment in the region for same sector and same business, so the coordination among the countries is very important. The situation in the region is complicated. There are EU member states and Non EU member states, there are Eurozone countries and Non Eurozone countries. Even the population is differ. The coordination is difficult but very important.

Consistent policy is another key issue, as these countries have democratic system, which means the government may change based on the results of election. Despite of government changes, consistent policy would enhance the investors confidence.

Investment promotion agencies play key role. Their tasks are not only related to provide attractive investment environment, but also to support business training program, establish SME platform and improve country image in China.

Visa facilitation is also an important issue for Chinese investor. Now days a Chinese Taiwan farmer can entry into EU with visa free, but an potential Chinese investor from mainland need to face the complicated visa application procedure. Such kind of administrative obstacle may have an impact for Chinese investors to loose interest.

For investors

Maybe two advices are very important for Chinese investors. One is to get better prepared, and the other is that professional service is needed.

For social actors

In order to overcome the obstacles, language training should be promoted, not only by government but also social actors. And at the other hand, positive reporting on China's investment by mess media would encourage Chinese investors' decision.