China's ambition, US retreat on show in Serbian factory town

By DUSAN STOJANOVIC Markets Associated Press

A giant Chinese red flag flutters on a pole where an American flag used to fly at a steel mill in this dusty industrial Serbian town. The company logos of U.S. Steel are faded on the huge chimneys stacks, replaced by those of a Chinese company.

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When U.S. Steel sold its loss-making smelter in Serbia to the government for the symbolic sum of $1 in 2012, few here thought the ailing communist-era factory would ever be revived. Then came along a state-owned Chinese company.

Hebei Iron & Steel's 46 million-euro ($52 million) purchase of the Steelworks Smederevo last year is part of China's broader effort to project influence and gain an access point to the European market as other traditional powers, particularly the U.S. under President Donald Trump, retreat from the world stage.

The dynamic was laid bare at a world summit over the weekend, where Trump showed little interest in promoting free trade and was at odds with other countries on issues like climate change. China, meanwhile, was keen to promote itself as a champion of commerce and openness — even though in practice it falls far short of being one.

The Serbian plant is economically irrelevant in the short term to China, which abounds with steel production at home. But the deal saved 5,200 local jobs and gained Serbia's political favor.

"It seems to me that everything China has been doing in the past several years in the field of its investments abroad also has a political background and connotation," said Mijat Lakicevic, a Serbian political and economy analyst.

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"China doesn't really need the Serbian plant that produces practically nothing compared to the steel production in China," he said. "So, I would describe this as placing a foot in the doorway in order to enter the market and the area where Russia and America are already present."

The longer-term strategy for China is to open markets for its businesses as its home economy slows. The most high-profile effort in this direction is the ambitious $900 billion Belt and Road project, often referred to as the New Silk Road — a transport and trade corridor running from China to Germany, via Greek ports, the Balkans and Central Europe.

Annual investment by Chinese companies in Europe reached an all-time high of $18 billion in 2014, with annual inflows averaging $10 billion over the past four years, according to the Rhodium Group, a China investment monitor.

Beijing is encouraging its industries to diversify abroad in hopes of reducing China's reliance on exports and its domestic market. That has also led to a string of acquisitions in chemicals, tourism, insurance, banking and other industries.

Steel producers have an extra incentive because Beijing is trying to shrink its bloated state-dominated industry at home. China's production glut has led to a flood of low-priced exports, which has depressed global markets and cost jobs in the U.S. and Europe, raising political tensions. As China negotiates the issue with the U.S. and EU, its acquisition of the Serbian plant gets it some rare good headlines in which it is credited with saving, not destroying, jobs.

Chinese companies are also starting to make inroads into Eastern European construction and engineering markets, including plans to build a $2 billion high-speed rail line from the Serbian capital, Belgrade, to Budapest in neighboring Hungary.

And while the EU remains the Western Balkans' largest trading partner, local governments have sometimes looked with favor to countries like China that are willing to invest large amounts without raising concerns about the region's patchy record on human rights or media freedoms.

"Serbia has an important role in China's global Belt and Road project and we want to capitalize on all its potential," Serbian Construction Minister Zorana Mihajlovic said. "This project cannot be realized without developed infrastructure in the countries where it passes."

She said that China has so far loaned some 5.5 billion euros ($6.3 billion) in Serbia for the construction of bridges, highways and railroads that it plans to use as transport routes for its goods into the heart of Europe.

Hungarian Prime Minister Viktor Orban, who has often been criticized by Western European leaders as being authoritarian, has often expressed his admiration for the economic achievements of countries like China. He wants to make Hungary the main hub for Chinese business and investments in Central and Eastern Europe.

"The old model for globalization has become obsolete," Orban said in May in Beijing while taking part in a Belt and Road conference. "The engine room of the global economy is no longer in the West, but in the East."

In Smederevo, the town of some 100,000 people where thousands make a living from the steel plant, there was praise for China.

Though salaries are about 25 percent below what they were under the U.S. company — roughly 750 euros ($855) compared with 1,000 euros ($1,140), mayor Jasna Avramovic said it was important that the jobs had returned in the first place.

"It's been one year since the Chinese came to our town and a calmer atmosphere is visible," Avramovic said. "There is no more uncertainty over what will happen with the plant. The salaries come on time."

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Joe McDonald in Beijing, Pablo Gorondi in Budapest, Hungary, and David McHugh in Frankfurt, Germany, contributed to this report.