Partners or Rivals? China and Central Eastern Europe Dr Marta M. Golonka

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 2

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 5

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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 6

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 7

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) 8

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 9

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

900 800 700 200 100 0 600 500 400 300 2004 2005 2006 2007 2008 2009 2010 10

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

300 250 200 150 100 50 0 500 450 400 350 Hungary Poland Romania Czech R.

Bulgaria Slovakia Slovenia Lithuania Latvia 11

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

500 450 400 350 300 250 200 150 100 50 0 Poland Romania Hungary Czech R.

Bulgaria 12

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

44% 4% 9% 15% 9% 10% 9% Mining/ Natural ressources Manufacturing/ Construction Transport & Logistics Wholesale and retail Finance Leasing and Business Service Others 13

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 14

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) 15

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 16

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 17

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

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?

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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 20

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 21

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 22