Is China buying up Eastern Europe on the cheap?

It was in May of this year that I wrote a post about Chinese plans for the reorganization of the global economy and Hungary’s role in this scheme. At that time, I outlined Chinese plans for the modernization of the Budapest-Belgrade-Skopje-Athens-Piraeus railroad line, announced in December 2014. The Hungarian section, which runs between Soroksár, just south of Budapest, and Kelebia, on the Serbian border, is 166 km. long and will cost 750 billion forints or $2.85 billion. It will be built with the help of a 20-year Chinese loan at 2.5% interest, which will cover 85% of the cost.

The contracting entity is the Chinese-Hungarian Railway Nonprofit Ltd., which was set up about a year ago. (I don’t know whether it chose nonprofit status to avoid paying taxes or to admit that the line would never turn a profit.) The state-owned China Railway International Corporation and China Railway International Group hold 85% of the Chinese-Hungarian Railway and the Hungarian State Railways (MÁV) holds 15%. The deal was structured as an EPC (“Engineering, Procurement, and Construction”), whereby the EPC contractor is made responsible for all activities–from design, procurement, and construction to the commissioning and handover of the project to the end-user or owner.

According to Hungarian economists, this deal is good only for China. The line is barely used for passenger trains and it touches only one small city, with a population of 27,000. Clearly, it was designed for freight trains that haul Chinese goods from the port city of Piraeus through the Balkans to Hungary. Since China isn’t sinking any money into the project, if the rail line is a flop, it is nothing off the skin of the Chinese. Hungary would be left holding the bag. According to some critics, the Belgrade-Budapest line will be the world’s most expensive, and if the project fails, Hungary will never be able to recoup its investment. HVG’s Benjámin Zelki figured that perhaps after 2,400 years the line might be profitable. I don’t think he meant it as a joke.

Viktor Orbán’s decision to get a loan from China when the European Union is quite willing to give money for the development of Pan-European corridors can be explained by the unprofitability of the project. It is unlikely that he would have gotten money from Brussels for such a financially hopeless project. The lure of the project, if it ever becomes reality, is that China might use Hungary as a distribution hub. For that  elusive prospect, the Orbán government is ready to get involved in this risky venture.

Of course, there is a good possibility that nothing will come of the whole project. The Chinese have offered Hungary many enticing deals, including a loan for a railroad line between the Ferenc Liszt Airport and downtown Budapest, but nothing came of it. Beijing also offered loans for building railroad lines in Greece, Macedonia, and Serbia, but none of these projects got off the ground.

The European Union is not all happy about Viktor Orbán’s close “strategic partnership” with China. First, just like with the Paks II Nuclear Power Plant, there were no competitive bids. Therefore, about a year ago the project was put on hold when infringement procedures were launched against Hungary. The latest news is that Hungary announced on Monday that it would publish a new procurement tender for its section of the line. As HVG put it, “there is no escape” from this monstrous project.

Another, more serious political consideration makes the European Union suspicious of Viktor Orbán, who hosted Li Keqiang for the sixth annual meeting of the Cooperation between China and Central and Eastern European Countries or “16+1.” Eleven of these countries are member states of the European Union. According to The Financial Times, Brussels is rattled as China reaches out to Eastern Europe because “some of the arrangements between China and these countries are touching on EU competences, or they are going into new areas where there are already initiatives between the EU and China.” They are worried about Chinese influence in the region. Diplomats fear that closer Chinese-East European relations could undermine Brussels’ effectiveness in dealing with China. According to Forbes, China is in the midst of buying “Eastern Europe on the cheap” while Viktor Orbán is using the occasion to “poke Western Europe in the eye.”

Boyko Borisov, Viktor Orbán, and Li Keqiang at the fifth summit of “16+1”

According to Süddeutsche Zeitung, China knows the weak spots and fault lines in Europe, and therefore in the last five years it has developed close relations with the “16+1” club. “There is mighty China with 16 dwarfs, receiving lucrative orders.” With investment they are buying influence. The European Union must recognize how the internal divisions and contradictions weaken it in the eyes of the outside world. The article specifically mentions Viktor Orbán and Miloš Zeman, whom it describes as the most vulnerable political leaders to the siren voices of the Far East because they are “representatives of secluded societies.” They believe that in China “they find not only sponsors but also allies in the fight against liberal democracy.”

Yes, Viktor Orbán has committed his country to another risky venture. But since work will begin on the rail line only after 2020, there is always the faint hope that the whole project will die, as so many other Chinese ventures did.

November 29, 2017
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1956
Guest

Benjámin Zelki for Prime Minister!

Party of 2400!

He should import some “Schwab” advisers to fix the Hungarian economy.

Istvan
Guest

Nice photo of Orban with Boyko Borisov, Karate expert, and front man for the Bulgarian Mafia.

Zoli
Guest
The project cannot be measured only in terms of how much Hungary can charge for the use of the line. In those terms, it might indeed be possible that it might be a money loser. It has to be measured in terms of all its economic benefits. It would open up trade between Hungary and the Balkan region and beyond, given that the infrastructure ends in a major port. Let us not forget that those trains will not only run from Greece to Hungary, but also from Hungary towards Greece, and I doubt that they will run back empty. And indeed, it would most likely place Hungary as an important piece in the Chinese global economic empire, which could benefit Hungary immensely. Among other things, there is now talk of BYD, China’s main electric vehicle producer setting up shop in Hungary. Fact is that China is now an emerging economic giant, and it is in Hungary’s interest to build close relations. I know that for those who hate Orban, nothing that he will ever do will be seen as a good thing, but have to say in this case, the negative argument is very blatantly biased, given that it focused… Read more »
LwiiH
Guest
Sorry but this is a typical Chinese deal that it has stuck quite a few African countries with. Angola as a perfect poster child. China loans money for development with the stipulation that China provides the engineering and work force to build it. So not only is the little risk to China, it’s a means to extract blood from a stone in that most of the money never leaves China. Why would a government to sign up to one of these deals? Again it’s a simple case of follow the money. Any government with real fiduciary controls wouldn’t engage which is why China targets the countries it does which is of course why you don’t see these deals in many countries outside of Africa (a.k.a. China has been organizing a 3rd world country club). Eva, any idea who was at this party? Did any other EU country show up? The pulled out all the (EU) banners for all the bridges while completely messing up traffic patterns in the city. There is already a shortage of bridges in the city so taking one out of service is a real PITA for the locals. It certainly wouldn’t be tolerated in any other… Read more »
Guest

Messing up traffic in Bp without thincing/caring for the inhabitants is typical Orbán method of operation.
I still remember the day when we wanted to visit our young ones who lived near the center then and ran into a “problem area” – the car standing still for a long time. The reason:
Tibetians tried to demonstrate against the visit of some Chinese honchos.
Everything included the streetcars came to a halt for a long time and we saw some unmarked police cars trying to somehow get through the “tohuwabohu” to reach that place where the Chinese dignitaries were confronting the Tibetian students – it was a big mess and cost us all afternoon …

Guest

What could be produced in Hungary that the Chines can’t produce themselves – at a much lower cost?
There aren’t too many qualified Hungarian workers available …

Istvan
Guest
Well Wolfi that is a great question and with the onslaught of AI, robotics, and the elimination of human labor it’s a question the Chinese are in fact asking themselves. Xi Jinping in his now famous 3 hour speech in October to the Communist Party of China actually touched on this issue. Xi Jinping in this passage discusses the future economy of China: “We will work faster to build China into a manufacturer of quality and develop advanced manufacturing, promote further integration of the internet, big data, and artificial intelligence with the real economy, and foster new growth areas and drivers of growth in medium-high end consumption, innovation-driven development, the green and low-carbon economy, the sharing economy, modern supply chains, and human capital services. We will support traditional industries in upgrading themselves and accelerate development of modern service industries to elevate them to international standards. We will move Chinese industries up to the medium-high end of the global value chain, and foster a number of world-class advanced manufacturing clusters. We will strengthen infrastructure networks for water conservancy, railways, highways, waterways, aviation, pipelines, power grids, information, and logistics. We will continue efforts to cut overcapacity, reduce excess inventory, deleverage, lower costs,… Read more »
Guest
Istvan, you nailed it! And having been to China on a business trip in 1992 (!) when they had started already on this journey I think they’ll make that journey to the 21st Century. While the proud “East Central Europeans” will do what ??? Rather OT: Today the nice lady from the post office was rather late – she was bringing all pensioners the Xmas present from Orbán! And how much do you think it was – my wife joked: It’s surely a million Forint! 🙂 So she had to sign for her 10 000 HUF in “Erzsebet vouchers” (these were also mentioned here lately) – which we’ll spend in the Tesco this afternoon, they also have a Xmas present for the locals: In their new weekly advertising brochure that was in our letter box yesterday we found a coupon for 1 500 HUF – but you have to spend at least 15 000 HUF. Of course that’s no problem for us, we’ll buy catfood and non perishable goods to get to that amount – but for a typical poor Hungarian family? PS: The post office lady also got her present A bar of Ritter Sport chocolate … We buy… Read more »
Member

As someone who rides the Budapest-Belgrade rail line several times a year, I would be thrilled if this project went through. It currently takes eight hours to ride a distance of 380 kilometers. Pitiful.

A railway could be a useful future investment. Fuel prices are not going to stay at their current levels forever. Oil is going to become a luxury commodity. A railway is an environmentally sensible method of transportation.

The price of traveling to Belgrade is sure to spike, though. A one-way ticket currently goes for €15. It’s €23 for a sleeper car. Drawbacks include cushions that smell like smoke from 1963 and new species of bacteria growing in the WC.

Marty
Guest

The problem (actually one of the many) is that it’s totally unclear why not the Röszke-Szeged-Kecsekmét-Budapest line is upgraded which would make much more sense and goes in the same direction?

The line to be upgraded for billions of euros (Kelebia-Ferencváros) does not cross any even mid-size towns. It really doesn’t make any sense.

Ferenc
Guest

Full agree, understand that some years ago the Kelebia-Ferencváros line was even reduced from 2 to 1 railline, and there isn’t one serious station along, only “stops”. So all talk about profitable development in passenger transport over this line can be considered bogus.
More good explanations and details in the following interview: https://hirtv.hu/video/195925

Member

It stops in Kiskunhalas. It may look like a dump today, but I believe the smart money is on Kiskunhalas becoming a thriving metropolis.

Jean P
Guest
It seems that critics of the Chinese-Hungarian railway project have concentrated on the financial arrangement and its severe danger to Hungary’s economy. I think that the project is fundamentally flawed for an additional reason. It is an investment in obsolete transport technology. High speed railway lines are nowadays built for passenger transportation where there is a high demand. The demand for passenger transportation by railway along the route from Budapest to Piraeus is minimal. The transportation of goods has moved away from railroads to super highways which are equally suitable for transportation of goods and people. Transportation of goods on trucks is flexible. No distribution hubs are needed. Transportation of persons by car is much more convenient than transportation by train. Europe may be defined as all territories which can be reached by driving solely on the European highway system. Any expansion of the European highway system expands Europe. A railway line in Europe controlled by the Chinese and of little use to Europeans, expands China. There are hundred thousands of Turks living in Germany who drive home to Turkey for vacations on bad roads. They would be very good customers on a super highway to Beograd. There are hundred… Read more »
wrfee
Guest

Well the ‘Silk Road’ is now being built towards the Orban lair which is becoming ‘home’ more and more to the greatest autocratic nations on the face of the earth. Pretty soon the word ‘colony’ will be quite evident when discussing what VO is setting in the games with China and Russia.

With China coming in now the EU might now have another headache to deal with when it comes to influence directed to its members. They may want to perhaps pay more attention to the economic juggernaut in what looks a three way race now for political and eco influence in Europe. And China is just starting. As for the US one day it just could find itself on the periphery of that grouping. What a turn it would be in the post war.

Guest

Am I right in this:
Like Paks the project is paid by Hungary but the work is mostly done by the partner country which also finances this with a loan – which has however to be paid back by Hungary from the money made on the project.
So if there’s not enough money made then Hungarian tax payers will pay …
Nice concept – no risk for the Chinese nor the Russians!

Marty
Guest

Yes, but the main point is that such a project has to be finished ho matter how the costs increase.

The price is currently 750bn foints (when the project was proposed it was 340bn) and it could be 1.250bn by the time it’s completed. Same with Pak2.

Or Sochi or Rio Olympics. You need big projects to steal big money legally.

Jean P
Guest

“You need big projects to steal big money legally.”
I would rather say:
You need big projects to steal big money illiberally.

Guest

OK, so I understood it correctly:
The risk like cost increase etc is totally on the Hungarian side …

Marty
Guest

Of course. The Chinese and the Russians are smart – they really have no downside or risk. They can only win. The Chinese or the Russians may not increase the size of the loan if there’s a budget overrun (which is an absolute certainty in such projects) but that’s a cash flow issue anyway. The railways project just like Paks 2 are entirely paid for by Hungarian taxpayers.

Guest

But of course there is a way out:
Hungary would just have to default/go bankrupt (maybe after leaving the EU first …).
It’s happened to other states before …

Marty
Guest

It seems Mike Pompeo might be the new secretary of state. He visited Hungary in early 2014 as part of a group of US politicians led by Sen. McCain and met with Orban too.

Observer
Guest

Today Minister Mihàly Vàrga attempted to explain the benefits of the fast railway, afaik the most ridiculous was that the Chinese goods will be cleared here and Hun will collect part of the duties.
The argument that infrastructure is good is just like telling a patient that healthcare is good in general.

The Orban regime has failed internationally or has been screwed on many occasions:
Azeri murderer repatriation (probably the Azeris bribed him)
Begging tour to SaudiA, Gulf etc.
Begging tours of Azerbajan, Kazahstan, mid Asian.
Opening to the East, to the South.
Trading Houses fiasco.
Shanghai and Milano trade fairs.
Strategic Agreements
Paks2
Subway cars from Russia.
Wrong political bets, incl. Trump.
Wasted lobbying money.
Hungarian soccer.

The half baked, deeply provincial characters are far out of their and believe they can outsmart even the big players. Whatever the end though, the Orban mafia collects their fat cut and the dupes swear out the money.

Observer
Guest

Sorry for the mistypes, iPad touchscreen + auto correct.

…out of their debt…
…sweat out the money…

Member

A rather tedious correction: Soroksár is not just south of Budapest, it is the 23rd district of Budapest (previously part of the 20th district), i.e. within it.
I am not an expert, but I have been on the train between Budapest and Belgrade many times and it is indeed rather slow. The route is basically entirely flat (from Budapest to Novi Sad/Újvidék, at least, and hardly that dramatic between Novi Sad and Belgrade) and it would surely be relatively trivial to upgrade the existing line to run at a decent speed without the need for some bizarre Chinese vanity project to do so instead. Presumably the existence of this weird long-term project only impedes any possibility of upgrading the current connection in the shorter term. And by the time it is completed – if ever – we might be travelling in Elon Musk tubes anyway.

vzir
Guest

Yes. And they have the necessary expertise from Africa.