Serbia and China - misconceptions and reality of cooperation with a giant partner

The first important note in the context of the statement of the then minister in the Government of the Republic of Serbia is that six years later, the "16+1" initiative, which brought together the countries of Central and Eastern Europe that want to achieve a higher level of cooperation with China, no longer exists in its original format. and now gathers 14 members after three Baltic states left it.

This is supported by the fact that for the third year in a row, the summit of leaders of governments and states, which was the most important mechanism of cooperation within this platform, was not organized.

Another note is that, at least declaratively, Serbian officials do not differentiate between loans and investments that China places in Serbia. This presentation of the inflow of Chinese capital was the basis for one of the main doubts about the results of cooperation between Serbia and China and its interpretation. Chinese investments in Serbia have never reached the level of 16 billion, six years after Zorana Mihajlović's statement, they are cumulatively many times less.

On the other hand, the total value of joint projects is not far from the stated figure, but what we now know is that the largest part of the value of those projects was realized through loans that the Republic of Serbia took from Chinese state banks and hired Chinese companies to implement infrastructure projects throughout Serbia.

In addition to foreign direct investments and joint infrastructure projects, the third significant aspect of economic cooperation between Serbia and China is foreign trade. By signing the free trade agreement between the two countries in October 2023, the basis for raising cooperation in this area to a higher level has been laid. The agreement and the possibility of penetrating the Chinese market are presented as a great opportunity for the Serbian economy, within which the space for companies from Serbia will be opened for different types of products that will be possible to export.

Each of the mentioned elements of economic cooperation between Serbia and China is not developed separately from other aspects of bilateral relations, including political cooperation, security cooperation and cooperation in the field of culture. What makes economic cooperation particularly important is the possibility of communicating it with the wider population and easily promoting bilateral cooperation by sending messages about China's contribution to Serbia's economic development.

 

That is why it is of crucial importance to understand the defining elements of economic cooperation between Serbia and China, and to clarify the main doubts that permeate the public narrative about the relationship between the two countries in this sector.

 

 

The first doubt - China is the biggest investor in Serbia

The beginning of modern relations between Serbia and China is linked to the year 2009 and the signing of a mutual agreement in the field of infrastructure, since then the cooperation between these two partners has continuously intensified. In the period after the signing, the dominant form of cooperation was infrastructural projects, however, they did not represent investments per se, but loans.

According to data from the National Bank of Serbia, the total amount of foreign direct investments from China in the period from 2010 to 2023 was 5.5 billion euros. Several important trends need to be highlighted. Until 2016, those investments were at a negligible level. However, from 2010 to 2023, investments are steadily increasing. For the sake of comparison, in 2010, the total amount of investments from China in Serbia amounted to 2.4 million euros, in 2015 this amount increased to 66.4 million euros, while in 2023 it reached the amount of 1.3 billion.

An evident jump in the increase in the level of investments was recorded in 2016 after the first major brownfield investment (investment in already existing infrastructure) was recorded in Serbia with the purchase of the ironworks in Smederevo. However, the most significant year for the increase of investments from China in Serbia was 2018, when two large Chinese companies placed investments in Bor and Zrenjanin.

The investment in Bor represents a combination of brownfield investment and greenfield investment, because in addition to purchasing the existing capacities of the Bor mining and smelting basin, the Chinese Ziđin also bought exploitation rights in the area of the Čukaru Peki mine, and opened a completely new mine there. Besides Bor, the other significant investment of that year, Linglong, was, to date, the largest greenfield investment by a Chinese company in Serbia - a factory for the production of tires for various types of vehicles in Zrenjanin.

These investments were accompanied by an increase in the presence of other Chinese companies, dominantly in the automotive industry with investments by Mint in Loznica and Šabac, Lianbo in Novi Sad, Yanfeng in Kragujevac and Xingju in Niš.

The loudest criticism of Chinese capital in Serbia is related to some of these investments, both in terms of endangering the environment and violating the labor rights of employees, working without proper permits and transparency.

Chinese investments, however, still represent a significant share of the total inflow of foreign direct investments in Serbia. Thus, in 2023, the share of Chinese investments amounted to 32.3 percent of total investments. In the period from 2021, the amount of investments received from China is higher than the amount from any other individual country, and by quite a margin.

 

For example, in 2023, China was the largest single investor with 1.37 billion euros, while the Netherlands was in second place (where the amount must be taken with a margin because it is a country with a large number of registered companies from other countries due to tax conditions ) with 774 million euros.

So, is China the biggest investor in Serbia? Depending on what kind of message you want to send, the answer can be both "yes" and "no".

 

First of all, the level of investment from China has increased significantly in the last eight years, so it can be said that there is not a long enough time frame for comparison with other actors. In the period from 2010, out of China's 5.5 billion, the countries of the European Union invested 20.6 billion, the Russian Federation 2.7 billion, Great Britain 1.4 billion, and the United States 800 million.

The conclusion would be that the presentation of China as the largest investor can be true if one specific set of criteria is used, while another set of criteria points to other sources of investment as dominant.

Yes, as of 2021, China has become the single country from which the highest level of investment in Serbia arrives, but cumulatively, Western countries are still dominant in this area. China is still not at the level of the combined investments of the European Union countries, and if the United States of America and Great Britain are added to that, from these countries, in the period from 2010 to 2023, four times more foreign direct investments arrived than from China.

In order to get a complete picture of the impact of investments, other criteria must be taken into account, such as the quality of jobs, comprehensive impact on community development, impact on the level of economic development of the state, transfer of knowledge and technologies, compatibility with other elements of the economy. Such analyzes and assessments are often absent, and when attracting investments, only quantity is usually taken into account. Therefore, it can be expected that investments from China will continue to arrive in the current volume, but will not reach the level of the European Union or Western countries in general.

 

Another doubt - Cooperation with China will drive Serbia into debt slavery

Debt slavery is a term used to describe the tendency to use financial arrangements to create a situation in which the lending state burdens the finances of the borrowing state so much that it is unable to service the loan. In that case, the lending state would have the opportunity to collect the debt by taking over the management and/or ownership of the strategically important infrastructure of the state that is unable to repay the loan.

That this scenario is not unrealistic in the Western Balkans is also indicated by the case of Montenegro, which in 2021 found itself in a situation where the amount of its public debt exceeded the total amount of gross domestic product.

In May 2021, the public debt of Montenegro amounted to 105 percent of its total GDP and there was a real possibility that Montenegro would not be able to repay the installment of the loan to the Chinese Exim Bank, the provider of financial resources for the construction of 42 kilometers of highway from Mateševo to Smokovac.

 

By reaching an agreement on the hedge arrangement, Montenegro avoided the worst scenario, but it remained a cautionary tale that there is a necessity for additional caution when signing contracts with foreign creditors, in this case with the Chinese state bank.

 

The situation in Serbia is far from dramatic, but it is necessary to point out that there is a need for a certain amount of caution. Namely, the Public Debt Administration states in the September 2024 report that Serbia's debt to the Chinese Exim Bank is EUR 2.7 billion.

What is important to note is that the total value of the projects is higher, and that a part of the debt to the Chinese bank has been repaid, while the valid contracts will be repaid until 2042. The amount of 2.7 billion currently represents seven percent of the state's public debt, with the total public debt at the level of 46.5 percent of GDP.

This relationship can be interpreted as favorable, and indicate that Serbia is not in a position that will lead it to debt slavery in the short term. Then, Eksim Bank's loans are not the only loans that Serbia took from China. Serbia's budget for 2024 lists the amount of 1.44 billion euros as an approved amount for further borrowing from (unnamed) Chinese banks for various projects, including the purchase of electric trains, the construction of the Mihajlo Pupin industrial park and the construction of sewage infrastructure (the Clean Serbia project).  

In addition, Chinese companies, especially construction companies, are engaged in projects that were not financed by Chinese loans (among others, the expansion of the capacity of the airport in Niš, the Danube highway), which indicates that the engagement of Chinese companies is not conditioned (exclusively) by Chinese loans, but that they are become a desirable partner even when the source of financing is located elsewhere.

Taking into account these elements of cooperation between Serbia and China in the field of infrastructure development, debt slavery is not on the list of the most risky elements of cooperation.

Several other elementary problems weigh on cooperation in this area. The most frequently cited problem is the problem of transparency. Namely, all contracts signed by Serbia with Chinese banks were signed under the auspices of the 2009 agreement.

This means that these contracts have priority in application in relation to domestic laws, and this exempts them from compliance with public procurement rules and tender procedures. What this type of business enables is the engagement of Chinese companies on a discretionary basis, and this is also a prerequisite for interstate loan agreements with Chinese banks. In addition, the problem of transparency is additionally emphasized in the form of the secrecy of commercial contracts between the state of Serbia and Chinese companies that Serbia must hire based on the signed interstate contract.

The issue of jurisdiction over disputes is also something that potentially harms Serbia's interests. Namely, every contract that is signed with the Chinese state bank implies two separate elements of dispute resolution (for example, delays in works, insufficient quality of performed works, but also delays in the payment of loan installments). The first are "friendly consultations", i.e. the possibility to resolve disputes directly between the signatories of the contract. The second one is somewhat less friendly defined – in case the two parties do not reach a compromise on a certain dispute, the Chinese Commission for International Economic and Trade Arbitration ("CIETAC") is competent to resolve it.

Also, the borrower (in this case Serbia) irrevocably waives the right to object to the choice of China as the venue for legal proceedings related to this agreement. It also agrees that the arbitral award shall be final and enforceable in any jurisdiction, with a certified copy of the award constituting evidence of its obligation.

 

Finally, the problem pointed to is the question of responsibility. Directly related to the problem of lack of transparency, if the elements of the contract are not known, it is difficult for any of the parties to be held responsible in the event that any damage (or tragedy) occurs as a result of working on joint infrastructure projects. Considering the scope and importance of the projects that have been carried out, taking responsibility should be one of the key aspects, which is certainly not the case at the moment.

 

Third doubt - Increasing the volume of foreign trade exchange is good for Serbia

China has positioned itself as one of the most important foreign trade partners of Serbia. One of the main characteristics of the increase in the volume of foreign trade exchange between Serbia and China is the increase in the external deficit on the Serbian side. The fact is that China's economy is many times larger than the largest number of countries in the world and that the deficit in relations with this country is standard.

A new era of foreign trade exchange began with the start of the implementation of the free trade agreement between the two countries on July 1 of this year.

This agreement should contribute to the easier access of Serbian companies to the Chinese market, to Chinese products coming to the Serbian market on more favorable terms, and to Serbia becoming a potentially attractive location for companies from third countries that, through the relocation of production to Serbia, would potentially facilitate access to the Chinese market for their products.

These are the main messages that Serbian officials made public during the signing of the agreement, during the visit of Chinese President Xi Jinping to Serbia and when the implementation of the agreement began. Whether the results will be such remains to be assessed after a certain time, but based on the current situation, it is possible to conclude that the short-term benefit of cooperation in this area will go predominantly to the Chinese side.

The reason for this is primarily the structure of exports from Serbia. Namely, the dominant products currently exported from Serbia to China are the products of Chinese companies operating in Serbia. The total value of foreign trade exchange between the two countries in 2023 reached 5.6 billion euros, but with the share of exports from Serbia of only 1.14 billion euros, which shows an extremely unbalanced relationship.

 

What is additionally problematic is the structure of that export. Namely, as much as 92.1 percent of the total export from Serbia consisted of copper in the form of ores and cathodes, which is a value of 1.05 billion euros.

Other products were presented on a much smaller scale, such as beech wood (23 million euros), oak wood (3.5 million euros), and pushbutton switches (3.4 million euros). This clearly indicates the dominance of raw materials as the basis of exports, where especially copper is a product of Chinese companies operating in Serbia.

This export structure indicates a dependence on natural resources rather than high-tech or industrial products with higher added value.

Simply put, the benefit is attributed (dominantly) to Chinese companies in a narrow industrial activity and does not contribute to the transfer of technology and knowledge to domestic actors, thus limiting the potential for the development of domestic Serbian companies and industries.

Chinese companies use the natural resources of Serbia and transfer them to China, which calls into question the benefits that Serbia has from this trade and from the signing of the free trade agreement. The question arises to what extent this agreement contributes to the development of domestic Serbian companies, given that this kind of trade relationship mainly favors Chinese interests.

All of the above leads to the conclusion that, if Serbia wants to achieve more equal trade cooperation and real benefits from trade agreements, it is necessary to diversify exports and develop capacities for the production of products with higher added value.

This could include investing in domestic production capacity and encouraging sectors that enable a stronger economic base for Serbia, without relying solely on the exploitation of natural resources for the benefit of foreign companies.

 

 

CONCLUSION

 

The published analysis attempts to resolve certain doubts when it comes to economic cooperation between Serbia and China. Supported by facts and (available) documents, the analysis once again points to the (ultimately) unfavorable position of Serbia when it comes to borrowing from Chinese banks and creditors, Chinese investments in Serbia, but also mutual trade between the two countries. The statements in the text repeat the warnings to the authorities in Serbia when it comes to credit funds and investments, but also trade between the two countries, which is largely on the side of China. In addition, exports from Serbia to China are actually exports of Chinese companies that export raw materials from Serbia to China (mostly copper), which creates additional damage on the Serbian side.

The warning that contracts with Chinese investors and creditors are non-transparent and that the public is not familiar with them is repeated here, as one of the main characteristics of the business of Chinese companies not only in Serbia, but also in other countries of the Western Balkans.

Chinese companies are the most common and (almost) mandatory contractors on projects financed by Chinese creditors, which again puts Serbia and its companies at a disadvantage, as they can only appear as subcontractors on significant projects – according to Chinese rules, of course.

A particularly problematic fact is that the issue of any disputes between Chinese investors and creditors is the responsibility of the competent court (in this case the Commission) in China, whose decisions are enforceable and binding, which casts justified doubt on the objectivity of these decisions.