Partners or Rivals? China and Central Eastern Europe

Dr Marta M. Golonka

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Big Debates

The more we know about China, the better prepared we will be for its potential impact; dangers and opportunities

•Identity Crises

•Power, values, interests

•Perception

•Role of the state versus business

•Domestic and international politics

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China’s Growth

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Medium Term Forecasts of GDP

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Kuexue Fazhan Guan

•Hu Jintao’s Sientific Outlook on Development

•Incremental policy reform- transition to Xi Jingping

•CEE- shock therapy versus gradualism

•Development; sustainable and inclusive growth models

•Consumption versus investment

•Unbalanced & uncoordinated- UNSUSTAINABLE

•Middle Income country trap- CEED Institute

Shift to the East- China and CEE in international relations

•China’s potential as well as internal instability

•CEE recovery from global financial crisis

•Chinese Five year plans -

• Peaceful rise and Going Out strategies - to new and previously neglected

regions and sectors

•Public Finance / sovereign debt crisis in Europe

•Current account imbalances in CEE

•Europe –

• getting rid of non-performing assets in need of capital and trade diversification

•Poland as an exception to recession

•Shifting dynamics to the East - growth economies

•Crisis and Opportunity

•Vulnerability

•Similarity between CEE and African investments

•EU as main factor in differentiation

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Scramble for Europe- ECFR

•Chains of influence

transport, logistics, distribution, local assembly

•Trade relations

•Capital, bonds, and reserves

•Credit and Bank financing - EU needs it

•Foreign Direct Investment

M&A, branches and capital investment, joint ventures

•EU - targeting going up the value chain sectors; high and green-technology, brand

names, know how, and supply chains

•Sectors

IT, software development, automobile parts manufacturing, advertising agencies,

water pollution control

•CEE- secondary sector

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Partners or Rivals? Chinese Investments in CEE

•Going Out Strategy

•Intentions? Pragmatic, analytical, geopolitical, and economic

•Sun-Tzu Charm offensive and psychological diplomacy

•Strategic Partnership - April 2012, Warsaw, Wen Jiaobao

•12 Step Strategy

•Economic and public diplomacy

•Big Investments: SOE’s, China Investment Corporation, private investors

•Diaspora- economic migrants and networks of Chinese (Wolka Kosowska, Jaworzno)

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China’s growing presence in CEE

• Less than seven years ago, Chinese investments in the region were almost non-existent. In 2004, the total flow of China’s FDI in the Czech Republic was only 0.35 mln Euro; in Poland, 0.08 mln euro

• In recent years, China has significantly increased its foreign investments in the whole CEE region. China’s outward FDI stock in the area, which was only of 33.66 mln Euro in 2004, augmented to 633.04 mln euro in 2010

• 2010- CIS/ EE- geopolitical strategy (loans, infrastructure)

• 2010- CE - low-tech factory

• In 2011, 633mln Euro went to Pl making it the region’s largest recipient of Chinese FDI

• Poland exported 1.35bln Euro to China in 2011, imported 13.2bln Euro, with a 5% increase on overall volume of trade. HSW was taken over by LiuGong

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China’s outward FDI stock in CEE in MLN’s US$

2004 2005 2006 2007 2008 2009 20100

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200

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900

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China’s outward FDI stock in the CEE region, 2010, mlns of US$

Hungary Poland Romania Czech R. Bulgaria Slovakia Slovenia Lithuania Latvia0

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100

150

200

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350

400

450

500

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China’s main outward FDI stock in the CEE region, 2006&2010, millions of US$

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Poland Romania Hungary Czech R. Bulgaria0

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100

150

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Global distribution of China’s outward FDI flows by industry, 2010

9%

9%

9%

10%

14%

44%

4%

Mining/ Natural ressources

Manufacturing/ Construction

Transport & Logistics

Wholesale and retail

Finance

Leasing and Business Service

Others

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CEE & China

•Active states - Hungary, Czech Republic

•Passive - Poland

•Traditional Allies: Bulgaria and Romania

•Smaller states: Baltic's (Estonia); Slovakia, Slovenia

•Human Rights - Dalai Lama Effect

•China’s own strategy: choosing partners

•Regionalism according to China - political will is clear

•Opportunity for Poland - Strategic Partnership

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Chinese - business, ethics and politics

•Sacred Continent and ancient civilisation- isolation, barbarians

•Old China versus New

•Personal Relations- transaction versus relationship- Guanxi

•Psychological charm offensive

•High Level delegations

•Long term strategy – geopolitical and economic motives

•Confucius society- partnership?

•Double sword and situational ethics

•Divide and conquer

•Reward and punish- human rights

•Gradual observation- five year plans (2010-2015)

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Multicultural Management

•The Covec fiasco May 2012

•Miscommunication and misperception

•Regulatory issues

•Respect for authority

•Political ties

•Budget and competition policy

•Local competition in Poland

•Media

•Consequences

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Public Diplomacy and perception

•Is China really a threat?

•Low success rate of Chinese ODI especially in European M&A’s- 55%

•Lessons of Covec

•Culture and local customs

•Absentee landlord

•Consultants and advisors- young, inexperienced management

•Chinese networks

•Media and public diplomacy offense campaign of the Chinese

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The way forward

• What can CEE sell to China- CA and empty container

• Competitiveness - enterprises unprepared; however adaptable such as EU

market experience

• Economic Diplomacy/ Commercial Services

• Importance of institutions & regulation

• Local presence

• Polish Go China programme- and The Delta of the Yangtze River

• Sectors: amber, jewellery, furniture, cosmetics, food, healthcare, software

programming, culture, education and tourism

• Energy

• Joint ventures and partnerships- win-win

• Global supply chain and production

• EU as platform 18

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Barriers to investment- speculation and analysis

•Trust and miscommunication

•Power

•Values

•Interests

•Diaspora and Big Firm examples

•Lack of knowledge and understanding

•Stereotypes

•Chinese protectionism of its market and in CEE

•Weak commercial diplomacy in CEE

•Pragmatism versus naivety and ignorance

•Strategy?

Situational ethics

•Sun-Tzu in practice

•Calling white, black

•Negotiations tactics

•Saving face and not offending your partner

•The law is powerful, the one breaking it, is even more

•Cultural clashes- misinterpretation

•Chinese lessons- learning by imitation of others

•We should not say yes to every investor

•Unilateral Chinese win

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Eating the Emperor’s Grain

•New China and Old

•Hiding their brightness? (financial crisis changed this)

•Chinese Nationalism

•Contentious intentions

•Uneven development and inequality

•Lack of institutional stability

•Corruption

•Climate for investment into China

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EU policy towards China

• With rising Chinese investment in EU, we should understand what kind of

China we are dealing with

• Chinese Going Out Strategy is long term and cohesive - while flexible/ EU is

inconsistent and fragmented

• Power imbalance

• Lack of prioritisation and coordination in EU

• Shale gas example

• Dangers of divide and conquer

• Not grand idealism, but concrete cases of pragmatism and mutual interest