Marketplace Can Czechs tap into Chinese market?
China, in the words of Napoleon, was a sleeping giant. But as the recent stock exchange crisis showed, the world’s second biggest economy can now make everyone wake up and take notice when it looks a bit off colour. The Czech Republic has recently changed its policy towards China and is both looking to boost exports to the massive market and win Chinese investment.
On Tuesday, president Miloš Zeman flew out to Beijing for his second visit in less than a year. Although the official event is celebrations of the end of WWII in Asia, it’s also clearly a flag waving exercise as well with Mr. Zeman seeing himself as his country’s highest powered and best economic ambassador.
At the start of the week president Zeman also hosted the official ceremony for the Czech launch of one of China’s biggest international banks, Bank of China. Last week though Czech company Koh-i-Noor announced that it was closing its Chinese plant after 11 years because of sharply rising wages costs in the country and problems getting the quality it needed for European markets. It was one of the few Czech companies to have invested there.
On the other hand, the country’s biggest car maker Škoda Auto is pushing ahead with plans to boost production at its three plants in China. China is Škoda’s single biggest market with around a quarter of its total worldwide sales. Czech investment groups like J&T and PPF also look like they are positioning themselves as channels for two way Czech-Chinese investment projects.
So where do Chinese-Czech trade relations stand at the moment? Like most of the rest of Europe, the Czech Republic runs a massive trade deficit with China. In 2014 the Czech deficit was almost 11.5 billion euros. And the trade gap appears to be expanding. While the Czech Republic boosted exports to China by just over 20 percent in the first quarter, Chinese exports to the Czech Republic rose by more than a third. While China is the second biggest exporter of goods to the Czech Republic, China at the moment is the moment only the 18th most important customer for Czech goods. Trade in services is at a relatively low level.
“I think this is perhaps the first sign and that perhaps in a few years we will see other Chinese companies coming into the Czech Republic and the Bank of China will open the door to them.”
The recent stock exchange turmoil coming out of China underlined the message that while the Czech Republic might not stand first in line to suffer from slower growth and economic turbulence there, it is at risk from the indirect impact of any trade downturn especially between China and Germany. The Czech Republic would surely feel the damage that could be done to Europe’s economic powerhouse and its biggest trading partner.
Jan Bureš is the head economist at Era Bank. He says the recent Chinese and world stock exchange wobble is likely to be one of many tremors as China faces up to slower growth and a transformation of its past export-led economic growth model.
“For now it looks like the stock market has stabilised but overall I think that the structural problems of the Chinese economy are still in place and China is going to face an ongoing slowdown in economic growth and it can have problems managing the economy, not getting into too sharp an economic downward spiral. For now at least the markets look stabilised but looking ahead one cannot be sure about the Chinese growth dynamics for the upcoming quarters.”
A slip in growth by one or two percentage points below China’s expected 7 percent growth for this year might not have dramatic consequences but a bigger slowdown could cause a bigger shock with the global economy still looking uncertain.
And the Bank of China’s opening of its Czech office in Prague. Will that be a catalyst for stronger economic ties between the two countries regardless of the recent economic tremors? Helena Horská is head of economic research at Raiffeisen Bank’s Czech operations.
“I think it is very interesting that the Bank of China is opening a subsidiary here in the Czech Republic since Bank of China already has subsidiaries in Hungary and Poland. And I think it’s because of the attractiveness of the Czech Republic because of its very good infrastructure and very close connection with the German market and other euro-zone markets. And I think that Bank of China sees big opportunities here on the market and I think that this is the first sign of deeper cooperation in the economic field between the Czech Republic and China. I think this is perhaps the first sign and that perhaps in a few years we will see other Chinese companies coming into the Czech Republic and the Bank of China will open the door to them.”
Bank of China will actually not be really up and running out of its Prague office until the end of the year. And it’s expected staff of around 20 will not give it the opportunity to make a really big impact from the start.
Traditionally, cash rich China has favoured big infrastructure projects and assets for its foreign investments and Helena Horská believes that mindset could hold good for the Czech Republic as well.
“As was the case in Southern Europe, we can see that the Chinese companies invest very much in transport infrastructure and other high demanding capital sectors, I would expect this also in the Czech Republic.”
“I would expect strong activity of Chinese companies especially in sectors where you need a huge amount of capital because Chinese companies are very well supported by capital and investment sources. As was the case in Southern Europe, we can see that the Chinese companies invest very much in transport infrastructure and other high demanding capital sectors, I would expect this also in the Czech Republic. I would expect Chinese companies would be more interested in owning companies not joint ventures. They can use the know-how that is generally shared by our well educated population and labour force.”
Jan Bureš though is a bit more cautious about how much Chinese investment and business the Czech Republic might eventually land.
“I strongly believe that we are going to be exposed to Western European countries. Our model of economic growth is still about exporting mainly to West European countries and I think that that is going to stay in placing in the coming years as emerging markets, and China especially, are slowing down. On the other hand, consumption in Western Europe is finally starting to recover. So, in the short term, I believe we are going to stay more or less the same economy in terms of regional exposure as we were during the past five or six years.”
And Bureš is also more downbeat on the incoming Chinese investment that the Czech Republic could be looking forward to.
“I personally don’t believe now in a huge inflow of Chinese investment here now. There are not so many investment opportunities for large scale projects here in the Czech Republic that the Chinese are maybe looking for. I believe rather in smaller Foreign Direct Investment (FDI) and slower for now.”
Some economists point out a fairly fundamental fact: the Czech Republic has been able to win a lot of South Korean investment in the last few years because Czech industrial wages are half or even a third lower than those in South Korea. In spite of Chinese wages having doubled in the last five years, Chinese labour costs are still comparatively cheap. So it makes little sense for the Chinese to invest in labour intensive production when this is still cheaper at home. On the other hand, investment in infrastructure like roads, rail and utilities look like they could give guaranteed returns in Europe over the long term.