Opportunities abound where east meets east

Central and East European countries have tended to favor one of two trade paths; Now there is a third way

For the past century Central and Eastern Europe (CEE) have been torn between the fortunes of the great powers that share their borders and influence their trade, with Russia on one side and Western Europe on the other.

In the past two decades most countries have turned away from Russia toward Western Europe. With Western Europe under increasing strain, some are now reaching further east back along the ancient Silk Road to China to reinvigorate trade and investment.

The interest is two-way, with CEE reaching out for new markets in China, and China scaling up its activities in the region as it provides easier access to the European market and infrastructure investment opportunities. This can be tracked in the increasingly higher profile meetings with Chinese leaders and the region, such as Premier Wen Jiabao's trip to Hungary for bilateral talks for the first time last June, and the Ukrainian prime minister being welcomed to Beijing in April.

In common with most other European countries, the key point to note about trade between China and CEE is the large surplus that China has with the region, with trade in machinery and mechanical exports particularly strong to all countries.

As China's products are far more competitively priced than those of most European products, this puts them in a strong position in the CEE markets.

By contrast, exports of CEE manufacturers to China are relatively weak. Indeed, many CEE goods are in direct competition with domestically produced goods and offer no real advantage in the Chinese market.

As a result, the key increase in exports has been in raw materials, such as copper from Poland or iron ore from Ukraine.

Instead of buying CEE goods, the greatest opportunity for money flowing back from China is in joint investments. With many CEE countries desperate to develop their domestic companies and infrastructure, investment from China can be seen as a welcome source of funds, rather than raising political hackles, as would be the case in many Western European countries.

From Premier Wen's Hungarian visit in June alone, Huawei is building its second largest supply center in Hungary, Hainan Airlines is set to make an investment in Malev Airlines, and China plans to help modernize Hungary's rail network.

Moreover, the steady march of Chinese companies into the region is in sharp distinction to the retrenchment by other countries in the face of the global financial crisis. For example, foreign direct investment in Poland and the Czech Republic last year overall was just 75 percent of 2009 levels, and most other countries saw a decrease, with US companies in particular scaling back investment.

By contrast, many Chinese companies are increasing investment in the region as it is a cheaper and easier market to gain access to than advanced economies.

China's accumulated investment in Hungary rose from $54 million (40 million euros) in 2006 to $466 million last year, while in Poland it rose from $87 million to $140 million and the Czech Republic from $14 million to $52 million.

However, there are still concerns about competition, as demonstrated by the termination of China Overseas Engineering Group's $447 million construction of the A2 highway in Poland this year. International and local contractors felt threatened by the Chinese company undercutting their prices, and the company had big difficulties adapting to the local business environment.

While this example will not stop future projects going ahead, both China and CEE countries may be more circumspect in entering into agreements where an initially attractive project can run into problems that are so prominent.

Instead, the chief benefit to Chinese companies may be investing in eastern European Union member countries as that provides far better access to the EU markets than from China itself. The region can be used as a springboard into the richer markets, as well as offering a competitive market for Chinese goods in themselves. This also puts the Chinese companies in partnership with the CEE groups in developing products for trade, rather than in direct competition.

Similarly, many CEE countries are unable to compete directly with Chinese producers in the Chinese market at the moment but are supplying parts and equipment to German and other EU countries' advanced manufacturers, which are then shipping products to China. Working with the Chinese manufacturers themselves may bypass this and lead to greater direct trade along the old Silk Road once again.

The author is head of China research, North Square Blue Oak. The views expressed in the article are not necessarily those of China Daily.