The Price is Right – China and the Balkans
The political economy zeitgeist appears to be giving off static noise. On the one hand we’re told China is seeking to expand its influence through Belt and Road, on the other it is turning its attention inwards to focus on domestic consumption. Perhaps China’s political elite, ever the long-term strategists, are doing both. Well documented issues concerning China’s Local Government Financing Vehicles (LGFVs)[1] are no doubt troubling policy makers. My view, however, is that national debt is reasonably manageable. The differential between interest and growth rates, a key consideration in debt dynamics, is lower in China than most other countries. And while the CCP have always stressed domestic growth priorities over international trade concerns they are apparently keenly aware of the economic possibilities in the Western Balkans. It should come as little surprise that China sees the region as a gateway into European markets (cue looser regulations and procurement practices), and with Europe distracted by Brexit and disappointing Q1 growth figures, it seems that business prospects are too appetising for China to ignore. Last week Chinese Premier Li Keqiang and a 250-person strong delegation led the charge at a 16+1 (Central and Eastern European countries plus China) meeting in Zagreb, Croatia. In addition to signing six infrastructure and agriculture-related contracts with the host nation, Mr Keqiang is understood to have reached several other bi-lateral agreements in the region. Many critics decry Montenegro as the blueprint for China’s ‘debt trap diplomacy’ after the former-Yugoslav Republic took an €809 million loan from China’s Export Import Bank in 2014 to build the country’s largest motorway - swelling government debt from 63 to 80 percent. While the project has been questioned along financial sustainability lines, it would be naïve to think the state-owned company responsible for the project, China Road and Bridge Corporation, will be deterred from finishing the highway. The Chinese government has a vested interest in the region; in the past five years, over 70 percent of China’s €15.4 billion investments into the 16+1 have gone to five non-EU Balkan countries. If the past is any metric of the future, the next five years promise continued development between China and the Balkans.
[1]https://www.spratings.com/documents/20184/0/ChinasHiddenSubnationalDebtsSuggestMoreLGFVDefaultsAreLikely.pdf/00c1bdd1-70c0-9240-12df-850df192c602
