East meets east

Updated: 2011-11-25 08:51

By Andrew Moody (China Daily)

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East meets east

Eastern and central Europe is a growing market for China and a gateway to the western region of the continent

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The medieval splendor of Prague seems far removed from the skyscrapers of China's modern urban metropolises of Shanghai and Shenzhen - but there is an increasingly close and important trading relationship between Central and Eastern European (CEE) countries and the world's second-largest economy.

Rows over the value of the yuan might overshadow China's trade relationship with the United States and Western Europe but trade between CEE countries and China stands at more than 10 times the level in 2001 and has grown at 32 percent a year over the past 10 years.

In the year 2010 alone, trade increased by 34.1 percent to $41.1 billion (30.5 billion euros), according to Chinese Ministry of Commerce figures.

The importance of the relationship was evidenced as senior trade and political figures from China and CEE countries descended on the Czech National Bank building at Senovazne Square in the Czech Republic capital for the second China Investment Forum this month.

Peter Hyl, the charismatic 28-year-old executive chairman of the forum, says the Chinese and CEE economies have much in common in that they are both suppliers of goods and services to Western markets.

"China can be characterized as being a manufacturing base supplying Western economies and that is the same with large parts of central and eastern Europe. The structure of the economies is very similar," he says.

The trade relationship between China and CEE came into focus last June when Chinese Premier Wen Jiabao visited Hungary, where he announced 400 million euros of financial support for a European logistics base, including an airfield with road access, which would be a hub for Chinese goods entering Europe.

Other major Chinese investments in the region include those of Chinese battery and electric car maker BYD, which has a major battery plant in Hungary.

Great Wall Motors is to open a new factory in Bulgaria at the end of this year, from where it will assemble 50,000 cars a year.

CEE companies are also making major investments in China. Skoda, one of the Czech Republic's most iconic brands and a general partner of the forum, began manufacturing cars in Shanghai in 2007 and expects to produce more than 200,000 this year.

PPF, the largest financial and investment company in CEE and whose majority shareholder is Czech billionaire Petr Kellner, is making big inroads in the consumer finance market in China with its Home Credit brand and has already issued 1.3 million loans.

Ren Hongbin, vice-president of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, a keynote speaker at the forum, says it was easier for Chinese companies to do business in CEE countries than in the European Union, whose market is often more difficult to access.

"The European Union is very conservative and often a closed circle with much of its imports and exports being within its borders," he says.

Ren says the close relationship with CEE countries is long standing, beginning when many of them were among the first to recognize the People's Republic of China in 1949.

"Because this part of Europe established diplomatic relations with China 62 years ago, we have a very good background foundation."

Miranda Carr, head of China research at NSBO, an investment research company that has offices in London and Beijing, says the Chinese often feel more comfortable dealing with companies from CEE countries.

She says they are often more collaborative in their approach and less likely to give lectures than their US and Western European counterparts on how to do business.

"Instead of Western companies going into China and saying we want to invest and this is how we want to do it, there is more an attitude of wanting to work together from central and eastern European companies.

"It is also more of two-way process. They are more likely to give access to their home markets in return for access to the China market. The problem with a lot of the US and western European dialogue is that they want to get into China but don't want China to access their markets."

Countries like Hungary have very close investment and trade ties with China. It was one of the only European countries to offer no-visa access to Chinese citizens in the early 1990s and as such there are now 50,000 Chinese citizens in Budapest alone.

Chinese foreign direct investment in Hungary was $370.1 million in 2010, up from just $400,000 in 2004, according to the Chinese Ministry of Commerce.

Some 15 percent of Hungary's own outbound investment is also in China, more than any other CEE country, according to the United Nations Conference on Trade and Development.

China's outbound investment in other CEE countries is still relatively low and in the Czech Republic amounted to just $2.1 million in 2010.

Some believe there is a fear of Chinese investment in some CEE countries, whereas American and western European investment is more warmly welcomed.

Michal Mejstrik, chairman of the International Chamber of Commerce in the Czech Republic, insists this is not the case.

"The reason why the Chinese FDI figures are low is that many of the Czech state-owned industries were privatized in the early 1990s when the Chinese had no money," he says.

"Let me talk of the assets I am now responsible for on behalf of the government. Czech Airlines is on the list. I can say that Chinese investors are welcome."

Kamil Blazek, chairman of the steering committee of the Association for Foreign Investment based in Prague, believes there is a certain complacency within the Czech Republic.

"I think there is a sense that China needs the Czech Republic as much as the Czech Republic needs China. The reality, of course, is that China can live without the Czech Republic. It is a giant market," he says.

Even members of the Chinese delegation attending the Prague forum had difficulties with their visas and found themselves spending an afternoon at the police station for an extension.

Despite being from the Chinese Ministry of Commerce, Ren was one of those who was held up.

"The ease with which you can obtain a visa is the business card of a particular country. When I worked at the Chinese embassy in the Czech Republic there was several cases of businessmen from China getting similar treatment," he recalls.

"I remember one case where some very big bosses from China were not being prepared to put up with it and just turned back and returned to China."

Milan Hovorka, vice-minister of industry and trade of the Czech Republic, was apologetic in a meeting hall in the impressive trade ministry building in central Prague.

"I don't have any particular information about this case but there must be some misunderstanding. We would like to improve our visa system and be more welcoming," he said.

He says one of the problems was the Schengen visa system under which countries like the Czech Republic are seen as a weak link in people getting entry into western Europe.

"We have set up a special department that can help business people and companies from China obtain a fast visa," he added.

Most CEE countries trading with China have huge trade deficits. Poland, one of the major countries in the region, imported goods worth $7.49 billion from China, five times the level of its exports of $1.51 billion to China in 2009, according to China's General Administration of Customs.

It is a familiar pattern across the region. Bulgaria's China imports of $600 million were more than four times its exports the other way.

East meets east

Ren Hongbin, vice-president of the Chinese Academy of International Trade and Economic Co-operation. Provided to China Daily

Hungary's imports from China were $5.34 billion, more than three times exports of $1.47 billion to China. As for the Czech Republic its imports of $5.02 billion were 4.5 times its exports of $1.13 billion.

The only European country to have a trade surplus with China was Germany, with China importing $55.7 billion of goods and exporting just $49.9 billion.

Maris Elerts, deputy director of the Investment and Development Agency, based in Riga, says the problem for small countries like Latvia is having sufficient volumes of trade to be of sufficient interest to China.

It exported just 25 million euros of mainly scrap copper and aluminum as well as timber products to China and imported goods worth 300 million euros, giving it a significant trade deficit.

"The issue is that entrepreneurs from China want large volumes and companies in Latvia - because of the size of the economy - cannot supply these.

"This sometimes means that entrepreneurs on our side often have to cooperate with Lithuania, Estonia and even with Poland to put together the volumes."

Elerts is particularly keen for Chinese companies to consider investing in warehousing and distribution centers and even building port terminals in Riga. Currently Chinese investment in the country is less than 1 million euros, mainly made up of those running Chinese restaurants.

"There is land available they could rent for 50 years to build terminals. Latvia has the potential to be a major distribution hub for China. It takes just 14 days by rail to transport goods via Kazakhstan to Riga," he adds.

Ivan Hodac, the Brussels-based secretary-general of the European Automobile Manufacturers Association, says Chinese car manufacturers can take advantage of CEE markets in a way that was not available to Japanese and South Korean car companies when they were expanding into Europe a generation ago.

"It would have been almost impossible for them to invest in this part of the world because it was behind the Iron Curtain and had no purchasing power. The Japanese invested in the UK and France instead," he says.

He believes a number of car companies will follow Great Wall's example and set up manufacturing plants in CEE countries.

"I think over time it will be a necessity. When you look at central and eastern European countries they are still unsaturated compared to western Europe. The cost of production is lower and they are close to markets with big potential such as Russia and the Ukraine."

Hyl, the organizer of the forum, believes the relationship between CEE countries and China can only grow.

He believes the region provides a vital bridge to western Europe and also many investment opportunities for Chinese companies wanting to develop their operations.

"To buy a company in the Czech Republic, for example, would be much cheaper than in Germany and if their motive was acquiring technology, it would be of at least an equivalent level to that in western Europe," he says.

 East meets east

Clockwise from above: Business and political figures from China and Central and Eastern European countries meet in Prague for the second China Investment Forum earlier this month; Ivan Hodac, secretary general of the European Automobile Manufacturers Association; and Peter Hyl, executive chairman of the forum. Provided to China Daily Provided to China Daily Zhu Xingxin / China Daily