Huawei Scandal Bares Rift Among Europeans Chasing China Cash

(Bloomberg) -- In 2010, the Dalai Lama received honorary citizenship of Budapest, the sort of symbolic gesture that risks drawing Beijing’s ire -- even if bestowed by the city’s opposition mayor at the time.

By last year, it was Hungarian Prime Minister Viktor Orban who was met by Chinese President Xi Jinping at the International Import Expo in Shanghai. That level of attention was emblematic of the Hungarian leader’s emergence as a forceful advocate for closer ties between China and Europe’s former communist countries -- a blooming relationship now tested by the arrest of a now former Huawei Technologies Co. employee on espionage charges in Poland.

China has been courting eastern European governments to widen its footprint on the continent, even if progress has been halting. For the Hungarian leader and his populist allies, the stronger ties offer a potential counterbalance as their conflicts elsewhere in the European Union pile up. And while some countries in the region are more skeptical of China, Hungary is opening its doors.

“For Orban, the relationship with China is as much about politics as about economics,” said Agnes Szunomar, an expert on China at the Hungarian Academy of Sciences. “The aim is to show that if we’re outcasts in the EU we can always turn toward China.”

Huawei’s Launchpad

Huawei has made Hungary its main launchpad in Europe, according to a study by the European Council on Foreign Relations. It has invested $1.2 billion in the country, Rotating Chairman Guo Ping told the news website Emerging Europe.

While Poland’s security service has recommended that government officials stop using Chinese mobile devices, Huawei handles the Hungarian government’s mobile phone network and also manages the national emergency number, according to the ECFR.

Huawei is not the only Chinese company whose troubles have clouded relationships in the EU’s east. Last year, the Chinese oil baron Ye Jianming, the chairman of CEFC China Energy Co., fell under investigation, derailing the company’s rapid ascent in the Czech Republic where some politicians hoped it could help turn the country into a gateway for Chinese business.

CEFC’s purchases in the country included an airline, a soccer team, a brewery, a heavy machinery maker and a media company. President Milos Zeman appointed Ye as his personal adviser

Read more on China’s influence in Europe:
China Is Forced to Reconsider Its Route Into Eastern Europe
China Courts Friends in Low Places to Gain Influence in Europe
Europe Exposes Its Weakness to Russia and China in the Balkans
Russia and China Buy European Influence at Balkan Discount Price
China’s Reach and Europe’s Money Meet in Balkan Outpost
China’s New Silk Road Encroaches on U.S. Turf in East Europe

Hungary has among the deepest ties to China in Europe, but it’s far from alone. Countries, including many in the former Soviet bloc, take part in an annual leaders’ forum known as the 16+1 -- with the one being China -- that’s regarded with suspicion by the EU.

“Whether it’s a deliberate act or something that happens in the process of China getting out there promoting bilateral interests, the EU is weakened and it’s undermined ultimately,” said Jan Weidenfeld, head of European Affairs and business strategy at Berlin-based Mercator Institute for China Studies.

‘Peaceful, Stable’

China’s effort to woo the region took center stage at Euromoney’s Central and Eastern European Conference in Vienna, once a springboard for western companies looking to invest in the region. Jian Jianqing, the chairman of the government-backed fund focusing on investing in central and Eastern Europe -- SINO-CEEF Capital Management Co. -- painted a bright future of cooperation.

China isn’t looking to divide and conquer Europe, Jian said in a keynote speech to an audience of government officials, corporate executives and economists at one of the region’s marquee annual gatherings. The intention is to create “mutual trust” among potential partners and markets. An increase in cooperation will not only benefit China’s economy, he said, but central and eastern Europe’s, as well.

“The development potential for bilateral investment in both directions is very huge and the prospects are bright,” he said. “Stable EU-China relations and their long-term cooperation are very critical to a peaceful and stable development.”

Investment Gap

Chinese-backed infrastructure projects include a bridge to unite Croatia, a railway connecting Hungary and Serbia and a motorway in Montenegro. In the past year, Chinese companies also bought a copper mine and a steelmaker in Serbia and Slovenia’s largest appliance maker.

Even with the increased focus on the region, post-communist countries have a ways to catch up to the continent’s richer half in attracting Chinese cash, still dwarfed by EU funding and inflows from the West. Between 2000 and 2017, Chinese foreign direct investments in the east totaled $6.3 billion, compared with more than $140 billion in western Europe, according to a study by the Mercator Institute.

Still, the signs of China’s influence are clear. Zeman, an enthusiastic promoter of Chinese investment in Europe, has warned that scrutiny of Huawei may trigger retaliation. Orban opened the first 16+1 conference of central bankers in Budapest on Nov. 9, which was attended by the Chinese governor.

The 16+1 format carries other risks, including financing. Chinese investments are usually accomplished through loans, as opposed to the EU’s funding through grants, which also raises concerns over graft and compliance with the trading bloc’s rules.

“Loans are given without public procurement proceedings, without tenders, so in this way they are not transparent and it may definitely breed corruption,” said economist Amat Adarov, at the Vienna Institute for International Studies, who wrote a research paper on China and eastern Europe. “And that is not consistent with European values and regulations.”

The plan to build a $2 billion rail link between Budapest and Belgrade was twice rejected by EU authorities on grounds that the process violated rules and wasn’t transparent enough. Orban is undeterred by the regulatory hurdles and criticism of the cost.

The project, now at a standstill over the financing arrangement, may finally start up again next year after delays, Adarov said, showing the plan’s symbolic importance -- and the limits of the EU’s ability to corral the process.

“It’s not about the fundamental breaking up the European Union, but it’s about the erosion of its rules and standards and values,” said Weidenfeld at the Mercator Institute in Berlin.

--With assistance from Zoltan Simon, Alan Crawford and Peter Laca.

To contact the reporter on this story: James M. Gomez in Prague at jagomez@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Michael Winfrey

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