Ciprian Stanescu: Romania - crux of the New Silk Road

  • 2017-08-07
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Romania - crux of the New Silk Road

Edited by: Ciprian Stanescu

Authors: Gabriela Radu, Raluca Ghenghea

 

Abstract

 

This paper sets out to analyse the current trade and investment trends between Romania and China, through a comparative analysis with EU-China and CEE-China trade and investment relations. The analysis focuses on export and import trends and whether or not they fit into regional trends but also looks at current bilateral FDI flows and stocks in determining the opportunities and challenges and providing policy recommendations for attracting future investments.

 

Keywords: China-EU, China-CEE, China Romania, trade, bilateral FDI, FDI stock

 

 

 

 

 

Contents

 

 

  1. Introduction

  2. Perspective on China – CEE relations

  3. Chinese-Romanian trade links

  4. Policy recommendations

  5. Bibliography

 

 

 

 

 

 

 

  1. Introduction

 

A decade ago China was set to surpass Japan in economic terms. Five years ago it became the largest exporter in the world, surpassing Germany, and today it is poised to surpass the US in terms of GDP by 2021.

In order to analyze possible effects of Chinese investments in Eastern and Central Europe, including Romania, the current situation of its involvement at a global level has to be thoroughly analyzed. China is projected to surpass the US in economic terms to become the largest economy in the world within a decade, its military budget has been expanding by 15.6% year-on-year since 2001 and its soft power is on the rise at an international level more than ever. European markets on the other hand have seen multiple ups and downs (due to the 2007-2008 crisis and its aftermath in global economics). Central and Eastern European countries have, for the most part, turned towards full financial liberalization and free market mechanisms using all the tools that modern capitalism has to offer but also becoming more vulnerable to external shocks, such as the 2007-2008 economic crisis or exposure in terms of fluctuating currencies (such as the euro or the dollar).

Moreover while CEE countries have different economic speeds all are heading towards a similar direction – EU integration. A significant part of them are on a clear path towards the EMU - Economic Monetary Union (despite recent tension, despite the global financial crisis and despite euro-skepticism). As for their economic outlook given their relative small size, the fact that their export is thoroughly linked to that of other EU states and the positive outlook for Europe in general they stand to maintain their current position. One cannot expect to see GDP growth reach that of Asian developing nations (given that they are edging closer to developed countries than to developed ones) but one can expect them to be consistent in their growth rate.  

The financial status of these countries is also influenced by their current commercial and geopolitical standing. Their monetary policies and monetary transmission mechanisms vary depending on both internal (political environment, macroeconomic status, reform process) and external factors like the influence of other countries’ macroeconomic fluctuations, willingness of investors to enter the market, geopolitical skirmishes which spillover the entire region.

China’s interest in Central and Eastern Europe is thoroughly linked to its Silk Road Economic Belt. The ultimate goal is to increase connectivity to Western Europe and benefit from the areas’ natural resources as well as developing economic competitiveness.

 

Routes along the Silk Road Economic Belt according to the One Belt, One Road initiatives announced by Chinese President Xi Jinping in 2013. The black route represents the current railway route between the EU and China while the Red and Blue routes are part of the One Belt, One Road, the land and the maritime routes.

Infographic produced by the 3Seas Institute and the Aspen Institute Romania using data from official sources

 

The Silk Road Economic Belt or „One Belt, One Road” is the Chinese vision for a land and maritime based New Silk Road (NSR). According to the plan put forth by the Chinese government and publicized by Xinhua the land based NSR would start from Central China and go towards the North Western provinces, Central Asia, Northern Iran, Iraq, Syria, Turkey, the Bosphorus Strait, Bulgaria, Romania, the Czech Republic, Germany and finally reach the Netherlands. The Maritime Silk Road will start from Quanzhou (Fujian province), go through the South Eastern provinces then the Malacca Strait, Kuala Lumpur, India, Kenya, the Horn of Africa, the Red Sea, the Mediterranean, Greece and finally Italy (Venice). 

 

Trade between the European Union and China has flourished in the past decade, doubling between 2003 and 2013. Currently the EU is China’s most important commercial partner but the reverse is that for the EU, China still ranks second in terms of trade. China ranked first in terms of trade in 2014 but second in terms of exports in bilateral trade with the EU. Nonetheless with a share of 13.8% in total EU trade (8% in imports and 11.2% in exports) it is still a major influence on European markets, industrial players and consumers alike. China on the other hand counts on European trade to a similar degree as the EU ranks first in terms of imports but only third in terms of exports, preceded by Hong Kong, with 295 128 million euros in exports, and the United States with 282 959 million euros in exports. Total bilateral trade reached 428 648 million euros in 2014 (13.4% of China's total trade).

 

 

Total EU Trade                                Total EU Imports                  Total EU Exports

 

For Bilateral Foreign Direct Investment there is however a high gap. Until 2013 global Chinese outward FDI levels were not comparable to the country’s exports and imports and while FDI outflows from China have increased by a factor of almost 30 in the past decade the overall figure was still low in 2012 as total FDI outflows were $ 87 804 million. Moreover only $6 million out of the $120 million was directed towards EU countries accounting for 6.9%. At the same time EU FDI flows towards China accounted for 20% out of the overall figure while Chinese FDI stocks only amounted to 0.7% to total FDI towards the EU. The perspective is currently on a positive trend as some researchers have projected that Chinese outbound FDI will reach 750 billion euros to 1.5 billion euros by 2020.

             

                             Total FDI flows to the EU                    Total FDI flows to China

 

Overall, fundamental issues that need to be addressed to enhance perspectives for an increase in trade and investment for both Romania, and all the other 27 EU member states, as well as China, depend on the internal debate process for a draft of the Bilateral Investment Treaty. Key issues in this respect are: the process for Investor State Dispute Settlement (ISDS), market access and the Chinese State Owned Enterprises. The ISDS issue is a particularly difficult matter for both the EU-China negotiations as well as TTIP negotiations between the EU and the US. Commissioner Juncker himself has mentioned his uncertainty in regards to the matter. Market access on the other hand, for both Chinese and European companies, is at the heart of the treaty. The recent free trade zones throughout China, a continuation of the Shenzen experiment, carry high hopes in terms of the Chinese market, particularly as authorities are updating the „negative list” for European investors. Chinese state owned enterprises have always been and will always be a problematic issue in the bilateral relationship particularly due to European concerns that they have access to preferential state funding and technology acquisition.

 

  1. Perspective on China – CEE relations

 

China is one of the major beneficiaries of globalization. For decades, the country has succeeded in attracting foreign capital and value in support of growth, development, acceleration of economic restructuring and modernization, and assimilation of Western technology know-how and management.

Starting with the „Going global strategy” and continuing with the ‚12 Measures Strategy’ China has made significant efforts to engage CEE countries from an economic standpoint. The 12 measures strategy announced by Prime Minister Wen Jiabao in April 2012 in Warsaw included several measures for Chinese engagement in the CEE region which include:

  • Creating a Secretariat that facilitates cooperation with Central and East European countries, coordinated by China’s Ministry of Foreign Affairs;

  • Setting up a $10 billion special credit line with a focus on cooperation projects in infrastructure, high and new technologies, and green economy. Projects by CEE countries in these areas can be financed within this framework by the following financial institutions: the National Development Bank of China, Export and Import Bank of China, Industrial and Commercial Bank of China, Construction Bank of China, Bank of China or China Citic Bank;

  • Creating an investment cooperation fund between China and Central and East European countries;

  • Setting up trade and investment promotion missions in Central and East European countries (a clear objective in the strategy is increasing total two-way trade to US$100 billion by the end of 2015);

  • Encouraging Chinese enterprises to cooperate with relevant countries to establish one economic and technological zone in each country in the next five years;

  • Furthering financial cooperation through currency swaps, local currency settlements for cross-border trade and establishing bank branches in each other's countries;

  • Setting up an expert advisory committee on the construction of transportation network between China and Central and East European countries, coordinated by China's Ministry of Commerce;

  • Holding a forum on cultural cooperation between China and Central and East European countries in 2013 in China and regular high-level and expert meetings on culture, cultural festivals and theme activities;

  • Providing 5,000 scholarships to students in Central and East European countries, supporting the Confucius Institutes and Confucius Classrooms program in the 16 countries, inviting 1,000 students from relevant countries to study the Chinese language in China in the next five years, enhancing inter-university exchanges and joint academic research, and sending 1,000 students and scholars to the 16 countries;

  • Setting up a research fund on relations between China and central and eastern European countries supported by a 2 million yuan grant per year grant meant to support academic exchanges between research institutes and scholars;

    Thus, we see several economic measures meant to engage the countries in the area. Of particular note are the special credit line, worth $10 billion, the investment cooperation fund (with a goal of $500 million), introducing currency swaps and setting as a specific goal the increase of two-way trade to $100 billion by the end of 2015. The measures are all the more important given the fact that since 2003 Chinese capital flows have primarily chosen other destinations than Europe, and of those investments made in Europe. Western countries (EU15) were targeted rather than the Central and Eastern European countries, despite the initial governmental strategy in 2004 that privileged the EEC 5 group - Romania, Poland, Czech Republic, Hungary and Bulgaria.

    Moreover, despite the introduction of the special credit line, few of the projects that were discussed both at bilateral meetings and the China-CEE forums have actually started the implementation phase. The only noteworthy project that was signed so far is the Belgrade-Budapest high speed railway route which has not started implementation.

     

     

     

    Chinese FDI flows (left) and stock (right) in EU countries in 2012

     

    However for all European countries, Western as well as Central and Eastern ones, there are several issues that need to be dealt with to smooth trade relations and to ensure continuous economic growth, such as:  questions over intellectual property rights, transparency, human resources, discrimination.

                                                                    

     

     

  1. China – Romania trade links

 

Diplomatic relations between China and Romania were established in 1949 and for a significant number of years the two countries maintained a high level of cooperation. From an economic perspective Romania received interest free loans (commodities, plant equipment) in the 1970s and trade volume surpassed $1billion in 1979 but decreased in the next years, stabilizing at a level of $0.2 – 0.3 billion. After Romania’s accession to the EU the main framework for Romanian-Chinese collaboration became the EU-China strategic partnership. According to René A. Pfromm „The EU Trade Policy towards China [was] considered the single most important challenge for the EU trade policy” at that time and while today there are far bigger challenges it remains an important part of the dialogue on the EU’s Trade Policy.

In 2014, over 5000 Chinese companies were registered in Romania, bringing total investments of $41 million. The Romanian National Trade Registers’ Data on 31 December 2014 and on May 2015 show that for 2014 Chinese companies ranked 19th in terms of investment value while only halfway into the year in 2015 they ranked 7th.

Romania has been a favorite destination for Chinese investment in Europe beginning with 2000. Moreover, according to a study done by the Institute of World Economy in Bucharest, China is the main Asian investor in Romania. In the hierarchy of countries investing, it ranks 5th in terms of number of companies and only 17th in terms of investment.

In Europe, Romania concentrates the largest number of Chinese companies, occupying first place, ahead of Germany, Serbia, Czech Republic and Hungary, the five countries that accumulate 80% of total number of Chinese firms on continent. At the city level, the highest number of Chinese firms are in Bucharest (1st), Belgrade (2nd), Prague (3rd), Budapest (4th) ;Hamburg, Moscow, Düsseldorf and Frankfurt. While the comparison only refers to the number of companies and not the nominal value of their respective investments it is of note that a very high number of small companies have chosen Romania as an entry point for the European market.

 

 

The biggest Chinese Companies currently present in Romania are:

  • China Tobacco International Europe Company

This is the only production base that China Tobacco has in Europe and is also the largest state owned Chinese company that has invested in Romania. The project was set up in 2007, and reached $40 million in 2012 in terms of investment value.

  • Golden WayDevelopment BV

The only greenfield Chinese investment in Romania is a brick factory in Constanta with a value of 12-15 million EUR.

  • Eurosport DHS

The DHS brand was officially registered in 1999 in Petrosani. The company, which manufactures bicycles, has invested more than 20 million € in Romania. Following a 2 year collaboration with the german group Prophete GMBH 40% of the stocks were purchased by the German conglomerate.

  • F&J Europe

F&J Europe is part of the F&J Group which focuses its businesses on timber, electronic products and household appliances, energy investments, construction and tobacco products. It started operating in the mid 90’s. The following companies are also part of F&J Europe: Lemnking Manufactory, Vortex International, China Energy Investment, F&J Industrial Park and China Tobacco International Europe Company.

  • Huawei Romania

Huawei has been operating on the Romanian market for almost 12 years. From 2007 to 2013, the company invested over EUR 90 million in Romania. Huawei’s global revenues last year surpassed USD 35.4 billion, and in the first semester global revenues surpassed USD 20 billion.

  • ZTE Corporation

Was set up in 1985 in Shenzhen and at the moment operates in more than 140 countries. ZTE is listed on both the Hong Kong and Shenzhen Stock Exchanges and is China’s largest listed telecoms equipment company.

  • China Huadian Corporation

    The company was founded in 2002 and is based in Beijing, China and is one of the five (Huaneng, Huadian, Datang, Guodian, CPI) largest state-owned power generation enterprises in China, administrated by SASAC for the State Council of the People's Republic of China. It  engages in the generation and supply of electricity and heat in China. It generates electricity through water, thermal, and wind sources. The company also develops power-related primary energy, such as coal, as well as provides related technological services. In addition, it engages in the investment, construction, operation, and maintenance of power plants; and provision of power generation technology services to power plants. Further, the company manufactures and supplies electric power automation, as well as related products and services comprising concept of digital substations, thermal power plant solutions, substation automation and protection, hydropower plant solutions, distribution automation, energy conservation and emission reduction, water conservancy automation solutions, and geotechnical engineering. China Huadian Corporation has a strategic partnership with Electricite de France S.A. and in 2013 registered a global profit of $800.7 million (an increase of 66.3% compared to 2012)

  • Ming Yang

The Ming Yang Wind Power Group Limited is the largest private wind turbine manufacturer in China and the fifth largest in the country. According to the Corporate Profile on Ming Yang’s official page its focus is designing, manufacturing, selling and servicing megawatt-class wind turbines. Ming Yang produces advanced, highly adaptable wind turbines with high energy output and provides customers with comprehensive post-sales services. Ming Yang cooperates with aerodyne Energiesysteme, one of the world's leading wind turbine design firms based in Germany, to co-develop wind turbines. In Romania the group signed a joint investment agreement with the Paunescu Corporation Group in 2013 totalling 403 million euros.

 

 

 

 

 

 

In 2014, over 5000 Chinese companies were registered in Romania, bringing total investments of $41 million. Infographic produced by the 3 Seas Institute and the Aspen Institute Romania using data from official sources representing the highest investments by Chinese companies in Romania.

 

Since the founding of the Secretariat for Cooperation between China and Central and Eastern European Countries several high level meetings between Chinese and Romanian officials’ statements have mentioned prospective investment projects, either with private investors from China or with state owned institutions. Unfortunately despite a high number of bilateral meetings few projects have been implemented. Out of all CEE countries Romania had the highest number of bilateral visits with high level Chinese officials (under-secretary or above) between 2010 and 2013, totaling 27 meeting between prime ministers, Foreign Affairs ministers and assistant foreign affairs ministers on both sides, compared to the next Central Eastern European country, Poland, where the total number of high level visits amounted to 18.

The majority of the projects discussed and mentioned in official statements following Romanian-Chinese high level bilateral meetings were either infrastructure development projects (second line belt Bucharest and various other sectors of highway in the rest of the country; the Bucharest - Danube Canal; The Siret – Baragan project; the bridge over the Danube at Galati) or energy projects, especially modernization, expansions or completion of thermoelectric power stations Rovinari, Doiceşti, Halanga, hydropower stations like Tarniţa-Lăpuşeşti or nuclear power plants (reactors 3 and 4 at the Cernavodă power plant). The majority of these projects however are still in early stages of discussion and only the Cernavoda power plant one is nearing completion of early stages.

 

Infographic produced by the 3 Seas Institute and the Aspen Institute Romania using data from official sources

 

 

 

 

 

 

  1. Policy recommendations for Romanian-Chinese relations

 

Chinese investment levels are rising all across the EU and the Eurasian continent as a whole and this boom is driven by commercial interests. At the same time Chinese investments offer a huge welfare potential, given the upward trends experienced in the past decade and particularly following the global financial crisis of 2007 – 2008. If extrapolated to the next decade the benefits of rising investment would lead to innovation spillovers, jobs, taxes and fresh capital in Romania and other EU countries. On the other hand given the risks that are attributed to such investments like global asset prices affected by the sheer size of the Chinese economy, unfair competition concerns in the case of state owned enterprises, a common European policy is crucial. Such a policy needs to be open (barriers to capital flows would not be recommended in this case), it needs to address market access directly and ensure a competition policy framework that standardizes the approach on an internal level. It would also need to develop a hedging mechanism against national and regional security risks in terms of investment without falling into the trap of protectionist abuse.

 

Infrastructure policy

Romania, situated on the west coast of the Black Sea, is connected to several types of transport corridors and has a fortunate geostrategic position but also a slow track record in terms of developing its infrastructure. The Constanta port, for example, has the potential of becoming a regional hub, connecting the Black Sea to the North Sea through the Danube-Main-Rhine Canal and could also provide a maritime passage to Eastern Europe by way of the Volga-Don canal. The first step towards turning Constanta into such a hub is investing in building highways, railways, ferry lines which connect Constanta to the eastern ports at the Black Sea (particularly Georgian and Turkish ones), bridges over major rivers and expanding the Danube - Bucharest Canal. Improving infrastructure would also boost trade and investment in the region and reduce cost and current delays in merchandise transport.

 

Financial policy

The Silk Road Economic Belt comes equipped with financial measures meant to tackle the obstacles of economic growth among the less developed countries. One of these, the Asian Infrastructure Investment Bank (AIIB) has attracted several members of the EU as founders, as well as several Central Asian and Middle Eastern Nations, all five BRICS members, the ASEAN nations as well as Australia and New Zeeland. Of the EU members Austria, Finland, France, Germany, Iceland, Italy, Luxembourg, Malta, Netherlands, Poland, Portugal, Spain, Sweden, United Kingdom joined the bank. Furthermore, several EU partners can be found on the list - Norway, Georgia, Switzerland and Turkey. Romania however, despite being a central part of the East-West corridor, expressed no intent to join the AIIB. An important step in turning the country into a regional hub is to take part in initiatives that have both a global and a local impact on the East-West corridor, such as the AIIB. Thus should Romania decide to apply for membership it would become part of a mechanism that promises to directly influence the building of such a trade corridor by supporting key infrastructure in the countries along the New Silk Road. Should it remain uninvolved in the AIIB it stands to lose important partnerships, cooperation and development opportunities, as well as regional policy initiatives that would directly influence not just the development of the New Silk Road but also the routes that would be developed, thus risking being left out altogether.

 

Investment and trade policy

While trade and investment relations with China and other partners have increased in the past decade, Romania still lags behind its CEE neighbors. Increasing trade and investment ties is an important part of increasing its regional clout together with infrastructure investment. The Romanian government has made significant efforts in encouraging growth in sectors such as: agriculture & Fast Moving Consumer Good (FMCG), automotive, minerals, IT&C products, electronics, oil and gas, medicine. These sectors represent the main target, as shown in the Initiative presented by the National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People's Republic of China, with State Council authorization. Romania’s strategy for bringing in more Foreign Direct Investment would need to focus on attracting high value companies and investments as FDI levels are still low compared to those in other CEE countries. The main areas towards which Romania needs to focus and direct FDI are IT and Business Process Outsourcing, energy and, as mentioned above, infrastructure.

In regards to attracting Chinese FDI in particular another important measure is lobbying at EU level and at EU member state level for renewed efforts to complete negotiations for the Bilateral Investment Treaty between the EU and China. The Treaty itself would need to combine both investment protection and market access and both sides have an interest in having a binding FDI framework to provide against protectionist tendencies and security concerns.

Overall EU-Chinese and the Romanian-Chinese trade relations have only recently started to develop beyond the regular global framework and given time, a unified, detailed and open European policy towards China, bilateral investment will bring a much needed restart to EU growth and development and thus benefit both sides of the East-West corridor, including Romania.

 

Conclusions

 

The current regional economic perspective, for both Romania, the EU and China is not necessarily at a high point but does show promise for development. Bilateral investment has been on the rise for the past 3 years and despite the multiple challenges (Eurozone crisis, stock market downturn in Shanghai, geopolitical risks throughout Eurasia) the EU-Chinese trade relations are growing stronger. For Romania this translated into opportunities regarding fresh capital, innovation spillovers and jobs provided the right policy measures to benefit are put in place, both at EU and at Romanian level. Romania’s role is thus both local and regional and ties in with EU-China trade negotiations, regional networks (such as the AIIB) as well as local investment attracting measures.

The recently developing EU-Chinese and the Romanian-Chinese trade relations have just started to gain momentum. As a unified and European policy towards China is making progress, so will trade relations between the two partners. Thus both sides of the East-West corridor will benefit from growing trade links along the New Silk Road.

For Romania, progress and dynamic growth is tied in with further using its assets in IT and Business Process Outsourcing. Furthermore Romania has to take a biggest step towards using the mechanism at its disposal as an EU member state. Attracting more FDI, particularly from big EU partners such as the US and China, are pending on trade and investment agreements which have long been overdue.

Last but not least Romania missed the chance to become a founding member of the AIIB, unlike its close neighbor, Poland, and thus risks being left on the side lines once the New Silk Road infrastructure projects will come to fruition. Not only that but it also risks missing out on important investment opportunities in countries from the Eurasian region. Thus, one of the important decisions Romania has to take is whether it will become a member of the AIIB.

 

 

 

 

 

 

 

 

 

 

Bibliography