This report does not constitute a rating action.
Central and Eastern European (CEE) countries' trade deficits with China result, to some extent, from European car manufacturers' reliance on Chinese suppliers. Since China is among the main export destinations for European carmakers, CEE countries that are part of the supply chain are exposed to trade frictions between the EU and China but could benefit from nearshoring.
What's Happening
Chinese President Xi Jinping's recent visit to Serbia and Hungary signals China's efforts to strengthen its ties with CEE countries. This occurs against the backdrop of:
- China's trade tensions with Western Europe and the U.S.; and
- Strengthening ties, notably in matters of security and energy, between Western European and CEE countries due to the Russia-Ukraine war.
Serbia's and Hungary's complex relations with Western European countries could make them China's preferred partners in the CEE region, even though other CEE countries have stronger trade links with China.
Why It Matters
All CEE countries have relatively high trade deficits with China. In some cases, however, CEE countries' imports from China reflect the country's position in the global supply chain. For example, the Czech Republic and Poland import intermediate goods from China for their own export-focused automotive and consumer goods sectors.
Most CEE countries' direct exports to China are not significant. Due to the geographic proximity, the absence of trade barriers among EU members, and competitive wage levels, CEE countries mainly export to Western Europe.
Despite China's Belt and Road initiative, Chinese foreign direct investment (FDI) only plays a marginal role in most CEE countries. Serbia is a notable exception. Approximately 30% of its stock of inward FDI comes from China and includes large investments in the Smederevo steel mill, the Bor copper mine, and the automotive industry. Hungary, which also maintains a strong relationship with China, has a lower share of Chinese FDI, which mainly focuses on the automotive sector, including the production of electric car batteries.
Give And Take
Under the Belt and Road Initiative, China financed Western Balkan countries' infrastructure projects over the past decade. Montenegro's debt to China peaked at over 16% of GDP over 2017-2018, primarily due to the financing of the Bar-Boljare highway. North Macedonia's debt to China reached about 4% of GDP after similar infrastructure investments, while Serbia's debt of about 3% of GDP mainly resulted from the modernization of the Belgrade-Budapest railway. These three countries use Chinese funding because it typically comes with fewer conditions, compared with EU funding. For example, the EU's investments in Serbia are contingent on normalizing relations with Kosovo, while China has provided investments without such stipulations.
What Comes Next
Risks
Trade and supply chain disruptions could materialize. The development of trade relations between the EU and China could have an effect on CEE countries, especially if they are part of the EU or rely heavily on strong domestic automotive industries. The EU recently imposed additional tariffs on electric car imports from China, with levies of up to 38%. In response, China stated that it will apply retaliatory measures across multiple sectors, including the automotive industry. China is the most important export destination for German car manufacturers. As a result, retaliatory trade measures could impair CEE countries' exports when they are part of Western European countries' supply chains.
Regulatory oversight could tighten. The EU's economic security strategy will enforce the mandatory screening of FDIs in strategic sectors, such as cloud computing and military equipment. In our view, this strategy aims to deter investments from certain countries in key sectors. CEE countries, such as Hungary, will have to comply with the screening regulations. Even though non-EU countries, such as Serbia, will not be subject to this law, we consider key projects will face increased pressure from the EU. Among these projects is Serbia's Jadar lithium mine, which can cover 17% of the European automotive sector's annual lithium needs.
Opportunities
CEE countries could benefit from nearshoring. The EU could attempt to bolster its resilience against trade disputes with China via nearshoring, especially in the battery production industry. CEE countries could become key beneficiaries of these efforts. However, some CEE countries face domestic challenges, such as tight labor markets and weak regulatory frameworks, which could impair their ability to capitalize fully on nearshoring opportunities.
China could relocate production facilities to CEE countries. Chinese companies have already made significant investments in CEE countries, such as Hungary and Serbia. For example, Samsung SDI is investing in a battery production plant in Hungary to supply BMW cars, while BYD is establishing production facilities in Hungary.
| Primary Credit Analyst: | Amr Abdullah, London 2071760857; amr.abdullah@spglobal.com |
| Secondary Contacts: | Christian Esters, CFA, Frankfurt + 49 693 399 9262; christian.esters@spglobal.com |
| Karen Vartapetov, PhD, Frankfurt + 49 693 399 9225; karen.vartapetov@spglobal.com |
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