Montenegro’s woes highlight dangers of Chinese lending in CEE

The dangers of the influx of Chinese lending into central and eastern Europe — primarily, the Balkans — are beginning to emerge, as Montenegro finds itself at the crux of a controversy around a failed infrastructure project.

The typical model of business includes the Chinese government or state-backed banks providing loans, which often come with strings attached. Untenable interest payments are a common component, while infrastructure funding contracts usually include clauses mandating Chinese companies to win tenders, experts say.

That is what happened with Montenegro, which borrowed $1bn from the Export-Import Bank of China (EIBC) in 2014 to build a controversial highway connecting it to neighbouring Serbia, having failed to find the funding among European lenders.

The highway has fallen victim to poor planning, critics say, and is incomplete. In June, Montenegro confirmed it had secured the help of a mysterious European lender, which was planning to help it repay the loan — the first repayment of which the EIBC had agreed to defer to late 2022. Experts say that could, contrary to expectation, result in even more reliance on Chinese funding.  

“This may serve as a warning to other European countries,” says Filip Šebok, research fellow at Prague-based think tank AMO. “However, if European institutions step in and save Montenegro, it may actually motivate other countries in the region to take Chinese loans. They will see that Europe can take the risk.”

Although Chinese capital is far from flooding the continent, it is the less-economically developed countries in emerging Europe, such as Montenegro and Macedonia, which are at the highest risk of falling vulnerable to Chinese state loans, said Šebok.

The issue highlights the dangers of emerging European countries borrowing from the Chinese state, according to experts. The ‘17+1’ relationship between central and eastern Europe and China has had a rocky few months — in May, Lithuania announced it was pulling out of the consortium, urging others to do so too.

According to the Central and Eastern European Center for Asian Studies, Chinese loans to Montenegro may constitute up to 18% of the Balkan country’s total GDP, while for Serbia that figure is 12% and Bosnia-Herzegovina, 10%.

Market participants say the cracks in China’s shiny image in emerging markets are appearing.

"I am starting to see more anti-China sentiment among EM countries,” says Ray Zucaro, chief investment officer at RVX Asset Management. “There are several examples of projects that are not very effective and the idea of China as this major bank roller of EM infrastructure is trending away."

But as long as vulnerable European countries fail to secure the financial support they need from other sources, the Chinese will always be happy to step in. “If there are no Western or European actors to fill the gap, China will,” says Šebok at AMO.

The EBRD declined to comment on specific issues raised in particular countries by China, which holds a 0.1% shareholding in the development bank. Spokesperson Axel Reiserer said: “We are a multinational organisation and we believe this is one of the core strengths of the EBRD. Mobilising funding is essential for our activities, where we operate we insist on highest standards in procurement, governance and environment.”