Written by Sarmiza Pencea.

For decades China has succeeded in attracting and turning to good account substantial foreign capital inflows, which have contributed to its torrid growth and development. Given its changed economic fundamentals after decades of accelerated transformation, the country is now adjusting to its new internal and external realities and implementing comprehensive rebalancing reforms, including some touching on international capital movements. As such, in recent years, it has swiftly raised its outbound direct investments, becoming an increasingly important source of capital in the global markets. In this endeavour, it obviously follows its own interests of securing access to natural resources, new technologies, sources of knowledge and innovation, new markets and reputed foreign brands, but it also acts as a growth engine for the economies where its investments go to. Consequently, other countries, either developed or developing, strive for Chinese capital inflows, all the more so in the aftermath of the global economic crisis.

The Central and Eastern European (CEE) countries are no exception, as they attempt to catch up with their Western neighbours and recover after the crisis. They need considerable investments. Business opportunities abound in their economies and they make good locations for economic activities by foreign investors, but, eager as they are to invest and aware of the potential, Chinese companies seem very prudent, measuring attentively each step and decision they make.

To date, Chinese investment flows have located mainly in the EU15 group of developed economies and not in CEE, although trends are changing. The global economic crisis has obviously altered China’s strategy to Europe, bringing this investment destination more to the forefront. The lingering crises in “developed Europe” allowed China to strike cut-price deals, taking over firms and acquiring stakes in companies, harbours and airports and narrowed the EU’s capacity to invest in its peripheral regions, thus encouraging China to make inroads into “emerging Europe”. China’s need to change its investment-driven development model and rebalance its economic structure imply a switch in its outward investment pattern too, both in terms of objectives and geographic reach: investments in primary sectors, aiming at securing commodities from Africa, Australia or Latin America for China’s insatiable resource-intensive industries might gradually lose prominence in favour of those securing access to European and American proprietary technology, know-how, best practice, reputed brand names and distribution networks. While in the Northern and Western Europe Chinese investments will be mainly seeking access to such inputs, vital for their future innovation-led development, in CEE they will try to penetrate local strategic markets (infrastructure, energy, transport, agriculture) and/or to implement trade-substituting investment strategies, to circumvent trade restrictions and preserve/extend market shares in the EU.

CEE economies, with their geographic location, lower costs, cheaper but skilled labour, make ideal locations for investments in export-oriented manufacturing, and that is why in the early 2000s the Chinese official plan for this region was to turn it into a manufacturing base for “made in Europe” Chinese goods. Among the targeted CEE countries, Romania was the first choice, followed by Poland, the Czech Republic and Hungary. Not only in the official guidelines but actual Chinese investments in Europe showed a bias for Romania: in 2005, Romania counted for two thirds of the overall Chinese investment stock in CEE, mostly investments by small and medium size family companies involved in trade or low-to-medium technology manufacturing. Although great in number they had little capital. Still, they indicated a comparative advantage which could have been better capitalized on, but Romania was completely absorbed by its efforts to join the EU and didn’t devise any specific strategy to build on this advantage.

Even though Romania hosts the greatest number of Chinese companies in Europe (ahead of Germany, Serbia, the Czech Republic and Hungary) and Bucharest has the largest Chinese community (ahead of Belgrade, Prague, Budapest and Hamburg), in terms of Chinese investment stocks, Romania has relinquished its position as number one within the CEE group, falling to second in 2006, third between 2007-2011 and finally to fourth after 2012. This descent occurred as Hungary, Poland and, latterly, the Czech Republic, managed to strike large investment deals with powerful Chinese state owned enterprises.

Statistics are contradictory and confusing about the overall value of Chinese investment in Romania, but its amount is at best somewhere between €0.5-1.0 billion, accounting for only around 2% of the total. However, although in value terms investments are modest and a lot of potential remains untapped, there are some significant achievements from the first wave of small investments. The €200 million “Red Dragon” trade hub and its neighbouring €100 million Chinatown near Bucharest; the €100 million Pârşcov industrial park including five factories with production, distribution and foreign trade operations in garments, wood processing, cigarettes, electronics, electric appliances, ecologic electric bulbs, fresh fruit and vegetables; other successful investments in bicycle production, recycling, construction materials, industrial printing.

There is also a more recent, second wave of larger and more powerful Chinese investors in Romania. Although they are not numerous, the fields they are in and the amounts they are investing are very important. First, there are outstanding companies in information technology, which came in the early 2000s, but only very recently have shown their readiness to make sizeable investments. ZTE, the largest Chinese producer of telecommunications equipment, and Huawei, the largest global provider of IT&C solutions among them. Moreover, there are high-technology businesses involved in renewable energy projects, especially in building and operating photovoltaic parks and wind farms.

But the big question is still unanswered: will there eventually be a third, truly substantial, Chinese investment wave in Romania? Following the 2013 China-CEE Forum in Bucharest and the subsequent bilateral meetings with Chinese partners, Romania seems to have a renewed opportunity to finalize negotiations on older large projects in energy and infrastructure and to advance some new, even higher value ones.

Both Romania and the other CEE countries have good opportunities to capitalize now on China’s interest to expand globally in sectors it has identified as strategic (infrastructure, energy, telecommunications, agriculture), to take advantage of its need to consolidate its position as a global leader in the low-cost versions of high value-added technologies (such as high speed rail, or renewable energy) and also to benefit from its strategies aiming at building an integrated Eurasian trade and cooperation corridor (a modern Silk Road). But attractive opportunities always come with significant risks attached and, therefore, require an intelligent strategy on the European side and coordination as a group with common interests to avoid competing with one another in a “race to the bottom”.

Sarmiza Pencea is a senior researcher with the Institute for World Economy of the Romanian Academy, Bucharest