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Report: “Mismanagement” stalling building projects across China

Work continues on the Darui Railroad in western Yunnan Image credit :cr8gc

Work continues on the Darui Railroad in western Yunnan. Image credit: cr8gc

Hundreds of highway and railroad projects are facing delays or otherwise running far behind originally envisioned construction timetables. This, according to a report issued by China’s National Audit Office, is a result of local governments improperly managing infrastructure funds — actions thought to have a direct effect on the country’s stalling economy.

In total, the audit of projects nationwide looked into 815 infrastructure programs across the country. More than 20 percent — 193 in total — were found “to be experiencing significant implementation lags due to a lack of funds or poor initial planning.” Together, the behind-schedule ventures represent government investment of 287 billion yuan (US$45.2 billion).

The architects of China’s economy have traditionally relied heavily on state-funded building projects as a means to revitalize the financial system in times of decline. Therefore, those lagging behind schedule due to mismanagement or misuse are seen as harming the economy in two ways, according to the audit. Not only are funds not being spent as quickly as they are authorized, but the benefits to localities through which new infrastructure projects pass must wait idly for any expected economic uplift.

In Yunnan, this is especially true in the province’s west. A railroad from Dali — traveling through Yongping, Baoshan, Mangshi and terminating at Ruili on the Burmese border — was originally expected to be completed in 2014. It will provide some of the most populated regions in western Yunnan direct rail access to Kunming for the first time ever. However, due to cost over-runs and awkward mountainous terrain, the line is now expected to open as late as 2019.

In an effort to speed up construction along the single-track Darui Railroad (大瑞铁路), Beijing injected a further five billion yuan (US$788 million) in annual funding for the endeavor beginning in 2012. The 335 kilometer railway is 75 percent tunnels and bridges, making for difficult surveys and slow progress, especially in places where engineers must dig under theGaoligong Mountains.

The railway was first conceived of in 1938 as a way to connect Kunming with the British colony of Burma. The outbreak of World War II scuttled those plans. However, they have since been resurrected as one part of the massive BCIM trade corridor, which Beijing hopes will one day provide an overland link between Kunming and seaports on the Indian coast some 2,800 kilometers away.

This post was originally published on GoKunming and written by Patrick Scally. It is reprinted here, in its entirety, with permission from the author. 

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Who’s afraid of China’s One Belt One Road Initiative?

A month ago China unveiled an action plan for China’s controversial One Belt, One Road initiative. The action plan introduces a series infrastructure development projects and trade related agreements along three Silk Roads emanating from China and reaching as far as Europe, Africa, and South America. It undoubtedly will be the subject of scrutiny as analysts and pundits on both sides of the Pacific chime in to make hasty comparisons to China’s 14th century maritime expansion and the more recent U.S. led Marshall Plan.  Some may even go as far to equate the One Belt, One Road to Japan’s pernicious WWII era East Asia Co-Prosperity Sphere – this analogy, to the Chinese, is ultimately insulting.

Scrutiny and false comparisons aside, China and the world will be made economically better off by a successful implementation of the One Road, One Belt initiative.  China estimates the total benefit stream for investors and firms that participate in the initiative to reach an astronomical USD 21 trillion. Moreover, the prospects of such benefits are particularly timely at a time when global aggregate demand is on a downslide.   During a series of fall 2013 visits to Asian neighbors, China’s president Xi Jinping first announced the One Road, One Belt proposal as an umbrella concept describing three economic belts extending westward from China toward Europe and Africa.  The three economic belts roughly follow historical trade routes linking China with the West and are known as the New Silk Road, South Silk Road, and the 21st Century Maritime Silk Road (See map).

One Belt One Road

According to the Chinese Foreign Ministry, the initiative seeks to strengthen economic collaboration, improve road connectivity, promote trade and investment, promote currency conversion, and bolster people-to-people exchanges.  The timing of the initiative is critical.  China’s current development trajectory requires an infusion of economic growth emanating from its under-developed interior using an outward focused plan to export its finished products abroad while importing much needed raw materials and foodstuffs from the rest of the world.

The catchword among the planners of the Belt and Road system is youwai zhinei (由外至内) or ‘to bring the outside in.’ This concept reveals the actual logic of the plan as an outward looking plan that fills domestic economic needs first. Xi Jinping is betting his political future, and by extension, the continued legitimacy of the Chinese Communist Party, on this plan to solve China’s economic woes and deliver successful reforms.  Thus, criticism should not pontificate on how the initiative is China’s grand strategy for global domination, but rather focus on assessing the efficiency of the various related project and prognosticating whether Xi can drive the initiative’s benefits home in time to stave off an economic slowdown.

To address current criticism, pundits are quick to draw historical comparisons to when Ming dynasty Admiral Zheng He, a court eunuch whose naval fleets, sailed as far as the east African coastline collecting tribute and expanding China’s sphere of influence.  To be sure, Zheng He’s ships were equipped with soldiers and were not simply diplomatic missions.  However, historian Jeremiah Jenne Executive Director of The Hutong in Beijing says, “Zheng was not trying to conquer or colonize in the name of the Ming Court. China gets into a lot of trouble in contemporary diplomacy because there seem to be elements in the foreign policy and military establishments and a whole swath of the general population who have trouble separating tributary arrangements from actual control and sovereignty.”

Jenne’s comments are generally made in reference to China’s historical claims to most of the South China Sea, many of which are based on Zheng He’s naval explorations.  However, on equal measure, Western detractors of the One Belt One Road plans should also not claim Zheng He as a world conqueror or challenger to the status quo.

Some analysts suggest the cheap financing and aid packages attached to the One Belt One Road plan are part of a political strategy for China to placate its neighbors over territorial disagreements with trade incentives and cash.  China indeed ill-advisedly attempted this strategy in the mid 1990s with its economic cooperation strategies vis-à-vis mainland Southeast Asia, but its track record with this strategy, particularly with Vietnam and Indonesia is spotty and has not produced desired results.

Yun Sun, resident fellow and Chinese foreign policy expert at the Stimson Center in Washington D.C. does not quite agree with the view that One Belt, One Road is motivated primarily by strategic and political calculations. She says, “The plan is primarily an economic campaign designed to serve China’s economic restructuring and export needs. It will benefit the region, as well as China.”  She admits the initiative will inevitably have a political impact and Beijing conceivably sees the political benefit as a part of the package.

“Using the counter-factual approach,” continues Sun, “China would still pursue One Belt, One Road without South China Sea disputes, so we can’t really say that the South China Seas or mending ties due to disputes there is the cause of China’s One Belt One Road.”

The post-WII Marshall plan which successfully lifted both the US and Europe out of its post-WWII economic woes and acted as the keystone to US led global restructuring models such as the Bretton Woods system indeed serves as a useful comparison to the One Belt, One Road initiative.   While we should be mindful that there is no guarantee the plan will deliver the local and global economic benefits that China hopes for, we should be more mindful that unlike the Marshall Plan, China has no economic restructuring model to offer the rest of the world, its stock of soft power is not necessarily improving, and this plan, still in its proposal stage, will be no easy sell.

To provide a comparison, China’s scorecard in regard to economic belt and road development in mainland Southeast Asia is murky and has contributed much to its current reputation rising regional power with unclear intentions.  Vietnam has stringently followed China’s export-led growth model and as a result is currently heading toward dire and inexorable economic straits unless it considers other alternatives.  Even in poor countries like Laos, where mid-to-high-value Chinese exports are not preferred to Thai or even Vietnamese products, scant evidence exists to demonstrate the “Made in China” image is improving.

The record of Chinese firms abroad in regard to environmental protection and labor practices is abysmal in countries like Laos, Myanmar, and Cambodia with no evidenced improvement in corporate social responsibility practices. Tied to this, Xi Jinping’s anti-corruption crackdown will reveal deep corruption and graft in many of China’s overseas infrastructure development projects.  Moreover, Xi Jinping is pledging to break-up the monopolies of many of China’s powerful state firms – construction and energy firms are already in his sights – thus, it is unclear who will build the One Belt, One Road projects.

To reiterate, these are the issues that deserve scrutiny and attention rather than the high-level rhetoric of China’s grand strategy.

Liu Jinxin, regional logistics expert and chief architect of the Bangladesh-China-India-Myanmar Corridor (a westward stretching leg of the South Silk Road – see map), says that the greatest challenge facing the One Belt, One Road strategy is in China’s public relations strategy.  “Too many out there misunderstand China’s intentions, and factions, particularly within democratic countries, will misinterpret the benefit flows that this plan will deliver.”  Liu also cites the need for harmonizing legal structures between cooperative partners in sectors related to trade, commerce, and logistics.  “China will learn the most from this process, specifically through interaction with countries in Europe where the rule of law is strong.  However, since China’s legal system is not based on rule of law, it will be difficult for China to emerge as a conversation leader on this initiative.  In many ways China’s role is passive.”

Thailand’s refusal to pass a regional cross-border transportation agreement sponsored by the Asian Development Bank (which China and other mainland Southeast Asian states have ratified) is reflective of Liu’s commentary.  The ratification of this agreement would require the break-up of many entrenched factions within Thailand’s customs and inspection agencies as well as the military – a move these powerful groups are unwilling to budge on despite Thailand’s overall enthusiasm for economic cooperation with China.

When applying a critical eye to the One Belt, One Road initiative, its best to begin with a consideration toward the feasibility of such a project and looking at China’s real capabilities. Many worthwhile questions arise amidst such an inquiry, and certainly no one should take for granted that China can pull such an endeavor.  The functionality of the initiative is to push China successfully through its next wave of economic reforms promising further stability to East Asia and delivering a substantial contribution to global economic growth.

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Kunming party chief falls to corruption probe; held post for less than 8 months

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Former Kunming party secretary, Gao Jinsong

 

It’s official: there is no government posting more inauspicious than that of Kunming Communist Party Secretary.

On April 10, the Yunnan discipline inspection commission announced that current Kunming party chief Gao Jinsong (高劲松) is being investigated for “serious violations of party discipline and law,” official jargon for corruption. He had served as the Yunnan provincial capital’s party chief for less than eight months.

Gao, 51, is the third consecutive Kunming party chief to have fallen victim to President Xi Jinping’s anti-corruption campaign. His predecessor, Zhang Tianxin (张田欣) was forced to step down in July 2014 and Qiu He (仇和), who held the post from 2011-2014 was investigated just last month.

Before assuming his post in Kunming, Gao Jinsong was the Communist Party secretary of Yunnan’s Qujing prefecture from 2012 to 2014. Along with Kunming party secretary, Gao was also party secretary of the city’s garrison command. He was not, however a member of Yunnan’s standing committee, the top level of party leadership in the province.

According to a report by Caixin, Gao’s investigation is linked to the case against Bai Enpei (白恩培). The former Yunnan provincial party secretary, Bai was investigated for corruption and in August 2014. Gao reportedly gave Bai Enpei millions of yuan in bribes. “Bai and his wife confessed … regarding the bribes they took, which implicated many officials currently in office,” Caixin cited an anonymous Yunnan official as saying.

Gao’s investigation marks a new direction for the current anti-corruption drive. When Gao was announced as the replacement for the disgraced Zhang Tianxin in August 2014, many locals thought him to be a safe choice. It was assumed that the central government had properly vetted him and that his term as party secretary would last longer than eight months. It’s obvious now that something went wrong.

It is certainly possible that Gao’s investigation is directly related to the Bai Enpei case. However, the investigations and court proceedings in official corruption cases are done behind closed doors, the details of which are only released through state-run media.

Indeed, it would make sense that Gao Jinsong had corrupt dealings with Bai Enpei. Bai, who was the provincial secretary from 2001 to 2011, was a kingmaker of Yunnan’s party leadership and Gao’s political rise coincided with Bai’s tenure.

Regardless of the exact details of Gao’s case, what is becoming clearer with each disgraced official is that the central government is displeased with Yunnan. It is a troubling new face of the province’s relationship with Beijing.

In the early 2000’s provincial leaders took pride in their appointment to serve as China’s chief representatives for carrying out the country’s economic policies and cooperation initiatives with neighboring Southeast Asia.  Now the Yunnan provincial leadership’s role is tarnished and uncertain.

In an action plan for China’s One Belt, One Road Initiative revealed last month at the Bo’ao Forum, Yunnan province was not listed as a key province despite its geographic significance in the current and future development of the South Silk Road.  Furthermore, the future of Luosiwan International Trade City, which acts as a logistics hub for all Chinese goods travelling overland into Southeast Asia, is surrounded by uncertainty after its owner, Liu Weigao, was arrested for corruption earlier this year.

In the past thirteen months, the entire Communist Party leadership of Yunnan has fallen one by one to charges of corruption. That the man chosen to replace one of these fallen leaders has now been investigated himself for graft only reinforces the notion that something is wrong in Yunnan’s politics. Is it that the profits from province’s tin and copper mines are too tempting for these top officials? Is it their connections to the disgraced security czar Zhou Yongkang and his Sichuan-based clique? Or is it something else?

Whatever the reason, Yunnan’s relationship with the center is clearly troubled with no solution in sight. Those next in line for the province’s party leadership will be desperate to find one; their role in China’s development in Southeast Asia depends on it.

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China’s Maritime Silk Road Gamble

Ever since Xi Jinping announced the creation of a Maritime Silk Road in an October 2013 speech to the Indonesian parliament, China’s vision for “one road” running through Southeast and South Asia has driven a significant portion of Chinese foreign policy in its periphery. This has led to both thecontroversial Asian Infrastructure Investment Bank (AIIB) (announced in the same speech) and complementary investment funds such as the Maritime Silk Road Bank, as well as high-level diplomatic visits by Chinese leaders to countries in the region. In addition, China sees its “Silk Road Economic Belt” among its Central Asian neighbors as indivisible from the “21st Century Maritime Silk Road,” as seen by China’s slogan 一带一路 (“one belt, one road”) and its public diplomacy effort to promote both policies together. All of this indicates that, like many Chinese foreign policy initiatives, the “21st Century Maritime Silk Road” is multi-pronged: it is intended to serve diplomatic, economic, and strategic purposes.

First and foremost, the Maritime Silk Road is designed to pacify neighboring countries threatened by China’s aggressive territorial claims in the South China Sea. Curiously, China has attempted to both aggravate tensions among its Southeast Asian neighbors and soothe them at the same time, contrary to its normal pattern of swinging back and forth between aggressive brinksmanship and diplomatic rapprochement (such as in China’s relationship with Taiwan or its cutting off and then reestablishing of military to military ties with the United States). Despite the idealistic claims of‘peaceful economic development absent political strings’ made by Chinese leaders and state media about the Maritime Silk Road, China has continued unabated to strengthen its unilateral claim to vast maritime territory in the South China Sea, turning reefs and other undersea maritime features into full-fledged islands, complete with airstrips that could be used by the People’s Liberation Army.

Conversely, the Maritime Silk Road is also designed to cement relationships with countries that are tacitly friendly to China such as Malaysia, Cambodia, Sri Lanka, and Pakistan. This will be accomplished primarily through economic incentives like infrastructure development and trade deals. In this sense, the Maritime Silk Road not only stands side by side with the Silk Road Economic Belt, but also as part of a historical continuum that includes China’s past investment in maritime-related infrastructure, which has been referred to by some as a “String of Pearls” policy. If one wants to know what kind of infrastructure projects China will fund in the future, look to what it has done in the past: oil and natural gas links to Myanmar’s port in Sittwe, ports in Sri Lanka such as the Hambantota and Colombo Port City projects, and the Pakistani port in Gwadar. Indeed, China and Malaysia have already announced a joint port project in Malacca. Meanwhile, China, which is already the largest trading partner for most countries in Southeast and South Asia, is also signing new free trade agreements with countries such as Sri Lanka.

Chinese infrastructure investment, intended primarily to strengthen China’s energy security and increase trade between China and its neighbors, will now get a huge boost with the creation of both the AIIB and more specialized investment vehicles such as the Maritime Silk Road Bank and the Silk Road Fund. While the AIIB has had the flashiest rollout with China contributing $50 billion USD to a planned $100 billion USD in capital, the other two funds are no slouches: the Silk Road Fund has plans for $40 billion USD in capital, while the Maritime Silk Road Bank hopes to attract$100 billion RMB in investment.

Finally, unmentioned in authoritative Chinese sources is that the Maritime Silk Road, and especially Chinese infrastructure investment, is implicitly intended to facilitate more frequent People’s Liberation Army Navy (PLAN) deployments in the Indian Ocean and beyond. The PLAN needs reliable logistics chains across Sea Lines of Communication (SLOCs) throughout Southeast and South Asia; ships cannot go far without a reliable supply of fuel, food, and armaments. But for the foreseeable future, China is at a serious disadvantage in this regard: the US Navy and allied navies have such a preponderance of force and ability to project power throughout the region that the PLAN is ill-equipped to compete. Given the PLANs current capabilities, China’s logistics capacity would only be dependable during peacetime; they would not survive in a contested environment, particularly if the US decided to close off key chokepoints like the Malacca and Sunda Straits. Therefore, the first step to strengthen the PLAN’s capabilities is to build reliable logistical infrastructure in key friendly states, such as the aforementioned projects in Malaysia, Sri Lanka, and Pakistan. These logistical links would still be quite vulnerable in a conflict scenario, given the tenuous relationship China would have with even putatively friendly countries if China went to war. Therefore, the primary benefit for the PLAN is to demonstrate presence in peacetime, and to show that it can operate far from its own shores.

The Maritime Silk Road, along with the attendant Silk Road Economic Belt, is truly a multi-headed dragon, so large that it is difficult to disaggregate its many parts. The most difficult challenge for China, however, will not be building infrastructure and signing trade deals—these are no doubt massive undertakings, but they are fundamentally instrumental tasks that will not receive much opposition from countries in the region. The more difficult objective for China is translating investment and trade into building a coalition of states in the region that align their values and foreign policy goals with those of China, and indeed identify with China at the expense of competitors like the US. China will likely find this kind of bandwagoning hard to pull off—when it comes down to it, the Maritime Silk Road may wash away like sand.

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China & Europe: Reconnecting Across a New Silk Road

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Since 2013, economic and trade relations between China and Europe have grown significantly. In this article, the authors look beyond conventional economic indicators, like trade, and political issues, like human rights, instead focusing on transport infrastructure, real estate and tourism to show that a new page is unfolding in the history of China-Europe relations.

China and Europe have been closely linked since the Opium Wars, but the relative economic positions and power have reversed. Nothing illustrates this more symbolically than a stroll along the Bund in Shanghai: the low rise and old European-style buildings on the West side of the Huangpu River are dwarfed and eclipsed by the sparkling skyscrapers in Pudong on the east bank. The built environment of Shanghai, with its historic European-style buildings and modern China-built skyscrapers, is a physical manifestation of the reconfigured dynamic between China and Europe.

Since 2013, China’s connections with Europe have expanded since developing its official policy of building a westward economic corridor — a new Silk Road — along its ancient route. Most recently, in December 2014, China agreed with Hungary, Serbia, and Macedonia to build a rail link between Budapest and Belgrade, which will be financed by Chinese companies and completed by 2017. This rail line will then be connected to the Macedonian capital of Skopje and the Greek port city of Piraeus where COSCO, the Chinese shipping giant, operates two piers for container units. While the linked land-sea project will strengthen cross-border transport between Central and Southeastern Europe by reducing train travel times between Budapest and Belgrade from eight to three hours, it really is designed to enlarge and accelerate the movement of goods between China and Europe.

Having grown fivefold since 2003, trade between China and Europe reached $559 billion in 2013, solidifying the EU as China’s largest trading partner for the past 10 years. While the EU has invested more in China than the latter’s direct investment in the former, a US consulting company expects the EU to attract $250-500 billion more Chinese direct investment by 2020.1 A scenario likely to occur in the next few years is that China will invest more in Europe, instead of vice versa. This will be another telling sign that fortune and power are shifting in China’s favour.

These developments are not isolated and random. They represent a new structure of interactions between the older European economies and a rising Chinese power. We can understand this structure well by examining its conventional macroeconomic dimensions of bilateral trade and investment. In this essay, however, we make better sense of the new China-Europe relationship through a set of less used lenses: transport infrastructure, real estate, and tourism. They offer new insights into areas where China exerts a large and heavy footprint in Europe, via official channels and from the ground up.

 

Transport Infrastructure and Connectivity

In thinking about China and Europe today, transport infrastructure does not usually come to mind due to the long distance between them and Europe’s own well connected transport networks. Having built the world’s longest highway, railway, and more bridges and buildings than any other country over the past two decades, China has been constructing an extensive transport and municipal infrastructure within its Asian neighbours and far-flung African cities.2 More recently, China has also turned to Europe in strengthening their long-distance transport connections, aiming to improve the overland movement of traded goods. Less expected is China’s new foray into the domestic infrastructure sector of a few European countries. Both moves make infrastructure a major avenue for China to forge direct physical connections to Europe.

The most important connection thus far is the Trans-Eurasia railroad from the city of Chongqing in southwestern China to Duisburg, Germany. Launched into operation in 2011 by a joint venture with Germany, China, Kazakhstan, and Russia, the 11,179-kilometre rail line snakes through six countries including Belarus and Poland (see Figure 1). China is the largest beneficiary of this freight-focused rail network, having already shipped $2.5 billion worth of goods on this route to Europe since 2011. As labour and land costs in coastal cities like Shanghai and Shenzhen have gone up, the Chinese government has been pushing and inducing foreign investors and domestic producers to move inland through its “Go West” policy. Interior megacities like Chongqing and Chengdu have been booming as major destinations for large new manufacturing projects. Having set up what would be Asia’s largest laptop factory in Chongqing, US computer giant Hewlett Packard has already shipped more than four million notebook computers to Europe by the Chongqing-Duisburg rail since 2011.

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As manufacturing becomes more concentrated in Chongqing and Chengdu, it will reap more savings from reduced transport costs. About 60% of the material inputs for laptops and 30% of the finished laptops depend on rail transport. Bringing them in and out by sea is very expensive and time-consuming. It requires a long train ride to Shanghai or Hong Kong from where container units are shipped to Europe. In the other direction, growing demands in interior China for European foods and cars can also benefit from a greater use of the Chongqing-Duisburg rail connection. It typically takes 2-3 months for a customer in Chengdu to receive the delivery of a European car by sea as it has to come through the port city of Tianjin. This wait can be reduced to 25 days if the car is transported by train from Europe to Chengdu.3

While this overland rail route can yield major economic benefits for China and Europe, its greater potential won’t be realised without policies for overcoming existing barriers. The Chinese government has recently approved the status of an international land port for Chengdu and Chongqing. This allows the direct and full import of European meats and cars to fill the train cars going back to China that would otherwise only be partially filled after carrying full loads of exported electronic products to the European markets. A fully loaded train has recently brought car parts from Germany to a Ford plant in Chongqing using the Trans-Eurasia railroad.

Another obstacle is that Chinese and European railways use different gauges than Russia and its former satellite states. So far the Chongqing to Duisburg route has met this standardisation challenge by transferring to cars with new gauges at relevant border crossings to meet varied national track requirements. It will need to adapt to other differences in technologies, signalling systems, and gauges that add costs to coordination across several countries.4 However, the existing and potential benefits for China and the other countries along this rail route will motivate them to co-operate in overcoming the remaining hurdles. So far it is China that has been moving at full speed. It has already sent a total of 239 (100 during the first seven months of 2014) trains carrying container units to Europe, including a train from the city of Zhengzhou in the central province of Henan bound for Hamburg.5

As China’s rail transport connections to Europe multiply, China has also launched an infrastructure build-up within Europe with an initial focus on the geographically closer and economically weaker Central and Eastern Europe. In December 2014, China and Serbia inaugurated the first ever bridge in Europe across the Danube River financed and built by China. Named after Mihajlo Pupin, a renowned Serbian scientist, the 1,500-metre bridge connects the southern industrial district of Zemun with the northern residential area of Borca in Belgrade, cutting the travel time across the Danube from more than one hour to just 10 minutes. China has also landed the contracts for the Stanari Thermal Power Plant in Bosnia (up to $1.7 billion) and the Bar-Boljare motorway in Montenegro with a link to Serbia ($984 million).6 Infrastructure projects of this scale have been very rare in these countries for more than 20 years, given the bad economic conditions in Croatia, Serbia, and Bosnia-Herzegovina, with nearly 1.5 million unemployed, due to the post-Yugoslavian political instability, ethnic conflicts, and natural disasters like flooding. China’s major efforts to finance and upgrade the outdated transport and municipal infrastructure in these countries opens up a new era of China’s local presence and influence in Europe.

 

Going After European Property

As China is making inroads into Europe’s infrastructure sector, the real estate sector cannot be far behind as an investment target. Southern European countries like Italy and Portugal, which have been adversely affected by the financial crisis, are seen as especially good opportunities for Chinese investors, as the property prices there are lower than in other European countries, like the United Kingdom and France, that have managed to weather the crisis better. Homes in southern Europe are also attractive compared with those of China as 300,000 euros buys a 200 square metre villa facing the sea. That amount only buys an apartment of 68 square metres in central Shanghai7 where property prices have been artificially inflated due to years of speculative supply and persistently strong demand.

Besides their low property prices, countries such as Cyprus, Portugal, and Greece are offering resident permits to property buyers who are not already residents of the European Union. This appeals to Chinese investors who have the capital to buy the properties but not the residency or citizenship benefits to use them within Europe. In exchange for a minimum amount of investment in property in a European country (amounts vary depending on the country, but the starting price is generally upwards of 250,000 euros), the investor may be granted a visa that allows him or her to live and travel within the Schengen Area, which consists of 26 European countries. A recent trend among Chinese investors is to buy a property in Southern Europe and then secure permanent residency there once their visas have been approved. A reporter from Bloomberg observed that “most (Chinese investors) are getting homes for personal use or to send their children to schools there.”8 By July 2014, Chinese citizens had received 282 of the 1,880 “golden visas” or permanent residencies granted by the Spanish government to those who bought local property.9 Since October 2013, the Portuguese immigration office has approved 1,681 property purchase applications, 1,429 of them from China, about 85% of the total.10

Besides property value and permanent residency, the measure of the Chinese yuan (RMB) against the euro is another important consideration, and one that has contributed to the rise of Chinese investment in European property. The euro depreciated approximately 17% against the yuan from 2010 to July 2014. Chinese investors bought 3.05 billion euros’ worth of European property in 2013, an increase from the 978 million euros spent in 2012. The Financial Times found that Chinese direct investment in Europe tripled in just two years (2010-2012), from 9 billion euros to 27 billion euros.11

 

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The large volume of this investment in European property reflects a major shift in China’s overall outbound investment, from securing natural resources in developing countries to acquiring brands, technology, and other assets in developed countries. A major Chinese real estate developer has recently committed $1.6 billion to convert the derelict Royal Albert Dock in London into a global trading hub. Intended to attract Chinese companies as tenants, this project is planned for 4.5 million square feet of office space to be developed in phases through 2020. London’s Mayor Boris Johnson has strongly endorsed this project for its prospect of generating about $10 billion for the national and local economies. He has lauded the project’s potential ability to turn what was once one of “the throbbing arteries of UK trade and commerce” into “a world-class international business district.”12

In June 2014, Wang Jianlin, one of China’s largest real estate investors and richest men, bought the 25-story Edificio España in Madrid, a landmark Franco-era building that was also Spain’s tallest, for 265 million euros or $340 million. Sitting empty since the Spanish real estate market’s collapse in 2008, the building will be renovated to include luxury apartments and a hotel as part of a larger-scale neighbourhood regeneration.13

The scope of Chinese investment in European property represents a powerful combination of China’s surplus corporate and private capital that can affect the urban landscape in European cities. Its long-term impact, however, will depend on the pace and volume of its outflow from China, and its geographical concentration and spread within Europe.

 

Big-Spending Chinese Tourists

As a relatively small but growing number of wealthy Chinese investors put their money into European real estate, a much larger number of middle and upper middle class tourists from China are coming to Europe to buy a lot of luxury goods. China’s rapid economic growth has created a huge number of middle and upper middle class consumers with insatiable desire and startling purchasing power. In 2013, Chinese citizens made approximately 100 million overseas trips and spent over $100 billion on their trips, mostly on luxury goods, overtaking the United States and Germany as the world’s number one tourist spending nation. Today nearly one-third of the world’s personal luxury goods are bought by Chinese consumers.

In 2014, Europe accounted for 3.5% of overseas travel destinations for Chinese citizens; this was the second most popular regional destination after Asia, which accounted for 70.4% of overseas tourism. Visa applications to enter the Schengen Area from China accounted for approximately 1.5 million of the total applications in 2013, ranking China third overall, behind Russia and Ukraine.14 In its 2014 report, hotels.com observed that “European destinations are the most popular amongst Chinese travellers in terms of places they wish to visit in the next 12 months.” By surveying the number of rooms and the length of stay in hotels booked through its website, hotels.com placed France, the United Kingdom, and Italy in the top ten destinations for Chinese travellers in 2013 as all three countries experienced growth in the amount of tourism from China.15The German National Tourist Board recently showed Germany, France, Italy, and Switzerland as the top four European destinations for Chinese tourists.

While many Chinese tourists in Europe are interested in seeing sites of historical interest and established landmarks like the Eiffel Tower and Venice’s Grand Canal, they are there for a much more passionate interest: shopping, especially for brand-name and luxury goods. Paris is the most popular destination for this shopping spree. It is where Chinese tourists head to the Louis Vuitton shops in much larger numbers than to the Louvre. As early as 2009, Chinese tourists overtook Russians as the highest spending visitors to France. Wealthy Chinese tourists also head south to the wine country of Bordeaux where they snap up expensive wine, paying as much as $800 for a bottle.16 They bring the wine back to China where it can be displayed and then drunk as a prized possession; red wine has become increasingly popular at dinner parties, replacing beer and traditional Chinese liquor.

McKinsey’s survey of Chinese luxury consumers in 2012 found that “Europe is growing in appeal among Chinese luxury consumers, with about one-fifth of them reporting this year that their most recent overseas purchases occurred in a European city. That is more than double the European share two years ago.”17 A study by the European Travel Commission estimated that Chinese tourists reserve more than a third of their trip budgets for shopping. To be able to do so, they compromise on eating and sleeping. A survey in 2006 found that Chinese travellers in Europe had eaten “European food” only once, and 10% not at all. Many in tour groups arranged by Chinese travel agencies would stay in cheaper hotels and eat instant noodles, even though they could afford luxurious hotels and lavish meals.18 The average Chinese tourist spends around $5,000 during a European trip, more than any other country. This is not surprising when one often sees groups of Chinese tourists getting dropped off at expensive stores and coming out with their suitcases full of brand name clothes, handbags, and cosmetics.

There are several reasons for Chinese tourists to buy luxury goods heavily in Europe. Besides the obvious factor of their rising affluence, Chinese tourists pay less for luxury consumption in Europe than in China. Taxes on certain items and tariffs on imported goods increase the price of luxury goods produced elsewhere and sold in China. According to The Economist, taxes and tariffs can increase prices in China to 50% more than a shopper would pay elsewhere. For example, a Louis Vuitton handbag costs 30% more in Beijing than in Paris.19 The purchase of luxury goods while travelling in Europe connotes the high income and status of the consumer. A study published by the University of Pennsylvania’s Wharton Business School found that “travelling has become part of the luxury lifestyle in China and is considered a status symbol: there is greater cachet in being able to say you purchased your bag at the place of origin in Paris rather than a branch in Tianjin.”20 Chinese consumers also perceive a higher quality and a greater variety of luxury goods if bought in the places of origin. In addition, while the appreciation of the Chinese yuan against the euro has helped, Chinese tourists have benefited from a greater ease in getting European visas.

European countries have made getting visas easier for Chinese tourists. Recent initiatives include changes in the visa process for tourists wishing to visit the Schengen area. Visa applications can be submitted up to six months in advance instead of three, allowing people to plan their trips earlier, and travel medical insurance is no longer required. The time it takes to process applications from China has been reduced. When Chinese Premier Li Keqiang visited Germany in October 2014, the two sides agreed to reduce the visa application process from between three and five working days to 48 hours for Chinese tourists. The French embassy in China also shortened its visa processing time for Chinese visitors to 48 hours and simplified the application documents. Italy has already cut its visa approval for Chinese tourists to 36 hours. The United Kingdom has recently introduced the 24-hour Super Priority Visa service in Beijing, Shanghai, and Guangzhou. With 12 visa application centres across China now, the United Kingdom issued more than 320,000 visas to Chinese tourists during January-August 2014, the highest number ever.21 This competitive rush of European countries to simplify and speed up visa applications for high spending Chinese tourists will help boost their sluggish economies.

 

Money and More

The sum of Chinese investment and spending in Europe’s infrastructure, real estate, and tourism sectors amounts to a huge influx of money that reflects the changed economic positions of China and Europe and their long-distance connections. Many may see this as the relative decline of Europe and the continuing rise of China that implies a reversal of power and fortune. But there is both change and continuity to the new China-Europe relationship that makes it more complex than a one-way flow of surplus Chinese money. In 2013, the EU invested $6.5 billion in China, up 21.9% from 2012, which doubled China’s $3.6 billion in the other direction, an increase of only 6.2%. While this sustains the earlier pattern of bilateral investment, individual European countries have taken more differentiated economic approaches in dealing with China. Through the agreement between the Bank of England and the People’s Bank of China to clear and settle Chinese currency in London, the British government has gone ahead of most other European countries in making London the leading hub for trade with China. By the end of 2013, China’s cumulative investment in the United Kingdom reached $32 billion, far exceeding the $18 billion the other way around.22 Not to be left behind, Switzerland’s central bank joined its Chinese counterpart in January 2015, making Zurich Europe’s newest hub for trading the Chinese currency (RMB). As the China-Europe economic relationship becomes stronger, it has become more varied and specific to individual countries.

chen 4
The uneven penetration of China’s economic influence has begun to generate a sort of cultural backlash, which is illustrated by a recent cartoon that made the cover of Fluide Glacial, a French monthly comic book (see Figure 2). Despite an underlying negative headline of “Yellow Peril: What if it is too late?” the restaurant window shows a harmless sign: “Chinese spoken here.” But the joke is a man bearing the words “I am hungry” sitting at the door of a restaurant that advertises steamed Chinese dumplings with a French twist: the addition of béarnaise sauce. Adding to the insult is a Frenchman pulling a rickshaw that carries a Chinese man in traditional high-class clothing with a blonde European woman. The humour aside, this cartoon reveals an unfavourable view of China, or at least its economic wealth in Paris and in Europe. It immediately drew a harsh response from The Global Times, a Chinese daily with close links to the government, saying that the French magazine possibly attempted to gain attention by following Charlie Hebdo whose Paris offices were savagely attacked by Islamist gunmen on January 7, 2015.

This media episode matters little to the massive scope of China-Europe interactions. When we look beyond conventional economic indicators like trade and political issues like human rights as in this article, we see a new page unfolding in the history of China-Europe relations. While it features continued bilateral official policies that have led to new infrastructure deals, bottom-up activities in real estate investment and tourism have become more prominent. With the Trans-Eurasia railroad already in operation and millions of Chinese tourists moving around Europe, China’s ancient dream of connecting to Europe via Central Asia along the old Silk Road has come true. Yet the new Silk Road envisioned by China for the 21st century is just beginning to take shape. Its full opportunities for both China and Europe are yet to come.

This article was written by Xiangming Chen and Julia Mardeusz and originally published here in the European Financial Review on February 10, 2015.

About the Authors


Xiangming Chen
is the Dean and Director of the Center for Urban and Global Studies and Paul E. Raether Distinguished Professor of Global Urban Studies and Sociology at Trinity College, Connecticut, and a distinguished guest professor at Fudan University, Shanghai. He has published extensively on urbanisation and globalisation with a focus on China and Asia. His many books include Shanghai Rising: State Power and Local Transformations in a Global Megacity (University of Minnesota Press, 2009; Chinese Edition, 2009).

Julia Mardeusz is currently a junior at Trinity College, Connecticut, majoring in Public Policy and Law. Her interests include American public policy and European politics and policy. She has been a student researcher at the Center for Urban and Global Studies at Trinity College since 2013 and studied in Paris during fall 2014.

 

References

1. Reported by The People’s Daily, June 23, 2014, p. 4.

2. See Xiangming Chen and Curtis Stone, “China and Southeast Asia: Unbalanced Development in the Greater Mekong Subregion”, The European Financial Review (August 2013). pp. 7-11; Xiangming Chen and Garth Myers, “China and Africa: The Crucial Urban Connection”, The European Financial Review (December 2013). pp. 89-93.

3. “European meats are transported directly to Chengdu”, The People’s Daily, April 26, 2014, p. 6.

4. “’Silk Road’ railways link Europe and Asia”, The Gateway, CNN News, June 27, 2013; accessed from http://edition.cnn.com/2013/06/27/business/silk-railroad-trading-network/.

5. “The 100th China-Europe train this year has departed”, The People’s Daily, August 2, 2014, p. 1.

6. “Li forges new link in Serbian relations”, The China Daily, December 19, 2014, p. 1.

7. Henrique Almeida, “Needy EU nations woo Chinese home buyers to ease slump,” Bloomberg News; accessed from http://www.bloomberg.com/news/2013-08-21/needy-eu-nations-woo-chinese-home-buyers-to-ease-slump.html.

8. See note 7.

9. “Sale of a landmark skyscraper puts Spain on the map of Chinese investors”, The New York Times, September 23, 2014, p. B3.

10. Fu Yao, “A place in the sun”, NewsChina, February 2015, pp. 34-37.

11. Jamil Anderlini, “Chinese investors surged into the EU at height of debt crisis,” The Financial Times, October 6, 2014; access from http://www.ft.com/intl/cms/s/2/53b7a268-44a6-11e4-ab0c-00144feabdc0.html#axzz3NduHcZzt.

12. “Chinese developer envisions a future for abandoned London docks,” The New York Times, Business Section, February 19, 2014, pp. B1, B6.

13. See note 9.

14. National Tourism Administration of the People’s Republic of China, “European Countries Fight for Chinese Tourists”, accessed from http://en.cnta.gov.cn/html/2014-7/2014-7-3-9-57-70413.html.

15. Hotels.com, “Chinese international travel monitor 2014”, p. 21; accessed from http://press.hotels.com/content/themes/CITM/assets/pdf/CITM_UK_PDF_2014.pdf.

16. “A new grant tour”, The Economist, December 10, 2010, p. 114.

17. Atsmon, Yuval, Diane Ducarme, Max Magni, and Cathy Wu, Luxury Without Borders: China’s vNew Class of Shoppers Take on the World. The McKinsey Chinese Luxury Consumer Survey, McKinsey Insight China, December 2012; accessed from https://solutions.mckinsey.com/insightschina/.

18. See note 14.

19. “China’s addiction to luxury goods”, The Economist, April 29, 2014; accessed from http://www.economist.com/blogs/economist-explains/2014/04/economist-explains-17.

20. Knowledge@Wharton Blog, “Louis Vuitton and the traveling Chinese consumer”, Knowledge@Wharton, January 3, 2012; accessed from http://knowledge.wharton.upenn.edu/article/louis-vuitton-and-the-traveling-chinese-consumer/.

21. “European countries compete for Chinese tourists”, The China Daily, Travel Section, December 20-21, 2014, p. 19.22. Reported in The People’s Daily, June 20, 2014, p. 4.

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