Czech Republic on the New Silk Road
The Czech Republic was supposed to become China’s Gateway to the European Union.
By Bruno Surdeil
After years of stagnation and the predominance of ideology over the pragmatism, the China – Czech relationship was re-launched in 2013 with the Social Democracy at the helm of both the government and the presidency. Miloš Zeman as the Czech President and Bohuslav Sobotka as Prime Minister (2014-2017) saw the emerging and unique opportunity for their country in the freshly announced „New Silk Road Initiative” – as the signature project of President Xi Jinping, „Belt and Road Initiative”- was known back then. The Czech Republic was supposed to become China’s Gateway to the European Union.
The Belt and Road and the Sino – Czech ‘honeymoon’ years
The milestone, however, was put already in 2012 in Warsaw, where premier Wen Jiabao had announced a new type of the China – Central and Eastern Europe cooperation. It’s known as the „16+1” format and is grouping 11 EU Member States and 5 non-EU Balkan countries. The 16 + 1 was modestly strengthened by a „China – CEE Fund” and various institutions and working groups located in the member states and China. The main event is the China- CEE summit, occuring once every year in different capital city. The problem, however, which was recognized soon afterwards was that each and every of the „16” felt as a unique gate to Europe for China, and the summits became quickly an opportunity for a bilateral „leader – to leader” talks between single participants and Beijing rather than a CEE-bloc and China cooperation. The competition among the CEEs jeopardizes the possible benefits from a stronger bloc-minded attitude. This, however, is not possible as the stakeholders have divergent interests. As a result, there is a growing understanding that the initiative has largely failed to bring concrete, expected results for most of the CEE’s. And this is not necessarily China’s fault.
Since 2013,the Czech President Zeman tried to build a momentum for Prague – Beijing relationship. After his visits in 2014 and 2015 to the Middle Kingdom and meetings with the President Xi Jinping, China’s leader paid a long awaited visit to Prague in the end of March, 2016. This was a real ‘state visit – plus’ with the China’s President hosted in the famous Lány castle – the summer residence of Czech presidents. At the political level, the visit was crowned with the establishment of a Sino-Czech Strategic Partnership. The business and economic dimension was fruitful too. Both leaders signed 17 agreements that were expected to bring the Centre-European country around EUR 3 billion by the end of 2016, and by 2020 a total of around EUR 7 billion. In November 2018, Czech presidentvisited China again, on the occasion of the first International Import Expo in Shanghai. He visited the Middle Kingdom in the spring of 2019too, to take part in a Belt and Road Forum.
Someprominent former politicians have been supporting the Belt and Road Initiative or engaged in the China – Czech business. The former foreign minister, Jan Kohout, had set up the New Silk Road Inistitute in Prague. Former prime minister, Petr Nečas helped to launch a cooperation between the Czech private company Delta Medical Holding and Tongrentang, China’s largest state health facility. They had ambitions to introduce the Chinese traditional medicine to the Czech Republic.
The investments from the Middle Kingdom covered very diverse branches of the Czech business landscape and included such mergers and acquisitions or stakes inCzech companies as for example the Slovak-Czech J&T Financial Group, the largest Czech online travel agency Invia.cz,the biggest private airlines Travel Service, Pivovary Lobkowicz breweries, engineering and metallurgy company ŽĎAS;media organizations: Medea Group and Empressa Media, TV Barrandov, but also some rather eccentric purchases like the football club SK Slavia Praha and the Eden Arena – (now) Sinobo Stadium in Prague as well as several premium properties and hotels:Florentinum – the largest administrative/ office complex in Prague; Mandarin Oriental Prague and Le Palais Art Hotel.The most interesting thing, however, is that all the above mentioned investments were made by just one single company: CEFC – China Energy Company Limited with the headquarters in Shanghai. According to the company’s own information, it’s „a private collective enterprise with energy and financial services as its core business.” That time it was also „China’s fourth-largest oil conglomerate”.
In 2015, CEFC was brought to the Czech Republic by the former defense minister Jaroslav Tvrdik who became its representative for Europe with the headquarters in Prague. In October, 2017, the Supervisor Board of the CEFC Group Europe was joined by Stefan Fule who served as the European Commissioner for Enlargement and European Neighbourhood Policy from February 2010 until October 2014.
In the meantime, CEFC’s chairman and founder, Ye Jianming was selected by Czech President Zeman as his adviser for Asia. As of early 2018, CEFC Europe had managed assets worth over EUR 1.5 billion in the Czech Republic alone. It employed more then 4000 people there.
Chinese investments in the Czech Republic have not been just mergers and acquisitions – although these are dominant. Already in 2007, Sichuan Changhong Electric Co – one of China’s leading TV manufacturers, started operation in the central Bohemian town of Nymburk where it made a greenfield investment worth of USD 15 million and employing 160 people.
Among others, Saar Gummi Czech, s.r.o. (SGC) in Červený Kostelec is part of the multinational Saar Gummi group based in Luxembourg, owned by Chongqing Light Industry & Textile Holding (CQLT) since June 2011. The company focuses on the production of rubber sealing profiles for car body seals (90% turnover) and production of molded parts of technical rubber (10% turnover). Among the most important customers of the company are VW (including Škoda and Audi), BMW, Daimler, Opel and Ford. The company holds 20% of the European market in its main assortment.”
In 2011, the Chinese company Yapp had set up its subsidiary in the Czech Republic in Mladá Boleslav as Yapp Czech Automotive Systems. It has been cooperating with the German automaker Volkswagen and supplying it with parts since 1988.The Volkswagen is the owner of the Czech Škoda Auto and both Yapp and the German company decided to work together also in Europe.
From among the more recent investments (2016), it’s woth noting the purchase by the Chinese investment firm Eurasia Development Group Limited, based in Hong Kong – of the majority stakes in the Mountfield chain, which focuses on the sale of gardening and DIY equipment. At present, the company has 57 outlets in the Czech Republic, and 17 in Slovakia.
2016 saw also the acquisition of the second largest Czech solar energy company, Energy 21, by the China-CEE Fund. The firm had over 30 power plants in the country. What’s important, the China-CEE Fund belongs to China Exim Bank.
The New Silk Road: its critics and winners in Czech Republic
Some critics say that the Chinese investments in the country have not been corresponding in size to the high level of political exchanges between Prague and Beijing. In 2016, the total value of Chinese investments was EUR 631 million – according to the data collected by the Czech National Bank. The Rhodium Groups says that between 2005 and 2016, the FDI’s reached EUR 568 million. This is obviously only a fraction of what was hoped by the Czechs to come as the result of the “re-launch” of the mutual relationship and the Belt and Road Initiative. The numbers are also small in comparison to the investments of other East Asian economic powers in the country: Japanese FDI’s amounted to EUR 1.5 billion in 2016, and Korean investments over EUR 3 billion. Other critics have calculated that “From among 17 economic agreements concluded by President Milos Zeman and his Chinese counterpart Xi Jinping in 2016 in Prague, only two have been fully completed, one in part.”
There is also harsh criticism of the personal engagement of the Czech politicians – mentioned above – in the development of Prague – Beijing relationship. There are suggestions on the part of some sinologists, activists and politicians that “there is a risk that most of the big Chinese companies that expand abroad are in some way connected with state structures”. Actually, one of those big Chinese state-owned companies had been chosen to take over most of the CEFC assets in Czech Republic in the spring of 2018. This is the CITIC Group Corporation Ltd. The reason for the takeover have been debts and other legal issuesthe CEFC and its founder Ye Jianming – President Zeman’s advisor – have been facing in China since early 2018.
If the Chinese market is truly hard for the Eastern European companies to make business and succeed in – there is at least one exception: the Czech billionaire Petr Kellner. His PPF investment firm and Home Credit he has majority stakes in,have been the big winners – and also champions – of the warming ties between Czech Republic and the Middle Kingdom. The Home Credit has become one of the biggest non-bank consumer lending companies in China, and it has received its country-wide licence in 2014: the year of a joint declaration of friendship between Prague and Beijing.
The Sino – Czech „honeymoon” had come to a close – or at least took a pause – with a new government in Prague since December, 2017. The new Prime Minister –a controversial billionaire and politician – Andrej Babiš – who won the elections with his ANO Party – served as Minister of Finance and Deputy Prime Minister for the Economy in the previous government. His views, however, of the Belt and Road and the Czech – China cooperation are more sceptical than those of the President Zeman who won a second term as Czech President, or former Prime Minister Sobotka who is still working for BRI’s success as a private person.
One of the perceived problems is that according to Czech state data, the value of China’s investments in the Czech Republic is less than 1 percent of total direct investment (FDI) in the country. Quite naturally, 90% of FDI’s come from the European Union. Another issue is the trade deficit which amounted to almost 16 bln USD in 2016, and around 18 bln USD in 2017. Domestic firms’ exports to China fell by 1.7 percent in January-September 2018, while imports from China rose by 13 percent. As Czech Exporters’ Association says, „China has never been a bastion of Czech exports, not only because of its geographic distance, the language barriers and cultural differences, but mainly because China is able to produce most of the goods that we [Czechs] can offer, more cheeply and without any time delay or the costs connected with transport”.
On the othe hand, there are also opinions, that „Czech companies don’t know how to use the potential offered by the huge [Chinese] economy enough to their advantage and, unlike other European countries, the Czech Republic is not sufficiently active in the country. Czech exports are entering a phase of stagnation, which is likely to transform into a recession within a few months”.
The whole situation with the Czech – Middle Kingdom’s relationship has been complicated by the State intelligence services – „BIS” – „Security Information Service” and its recent report on alleged Chinese espionage in the Czech Republic. Some would say it’s a ‘stern warning’ for the Government and the general public about a Russian-style „hybrid” activities, but others would call it kind of „Sinophobia”. The BIS’s report says that the intensity of Chinese agents working under diplomatic cover increased significantly in 2017. The various methods of ‘pressure’ to promote Chinese interests were also allegedly used by professional diplomats. The Chinese approach is therefore similarly hybrid-like as in the case of Russia. According to BIS, China is trying to disrupt the EU’s uniform policy through “Czech entities”. Chinese agents are allegedly interested in key sectors in the Czech Republic, such as energy, telecommunications, finances, logistics, healthcare and state-of-the-art technologies. TheCzech counterintelligence, as well as military intelligence – are concerned about the Chinese intelligence activities and influence in the field of politics, legislation and of course the economy.The Czech National Cyber and Information Security Agencyhad also issued a stern warning on using Huawei and ZTE equipment. In response to the warnings, the spokesman for President Milos Zeman- Jiří Ovčáček said that a confident and strong democratic state does not have to be afraid, and the Czech Republic is interested in the widest possible economic cooperation with China. The same was also claimed by the Czech President Zeman during his visit in Beijing on the occasion of the Second Belt and Road Forum.
The European Union had approved the launch of joint screening mechanism for foreign (in fact: Chinese) investments in strategic sectors of European economy on November 20, 2018. In Czech Republic, in September, 2018, met for the first time „the members of the Working Group on Impact Assessment for the possible screening of foreign investments for reasons of national security. The Group was created in accordance with the June [2018] Resolution of the State Security Council and its task is to evaluate in detail the possible scenarios of the Czech Republic’s further approach to foreign investment.” It looks like the Chinese investments in the Czech Republic will be subject to much tighter scritiny.
(Dr. Bruno Surdeil is a political analyst, Centre for International Relations, Warsaw, Poland)
