Where will Prague's China policy go with the new president?

Screenshot from CNN Prima News YouTube channel showing the two second-tour presidential election candidates Andrej Babiš (left) and Petr Pavel.

The current Czech government is reassessing its relationship with China. At the same time, President Miloš Zeman, whose uncritical pro-Beijing stance has often resonated not only in the Czech media but also abroad, is approaching the end of his mandate. What can be expected from his successor and what are the prospects for economic ties between the two countries?”

Since assuming office in early 2013, President Zeman has heavily promoted economic diplomacy vis-a-vis China and advocated for the Belt and Road Initiative (BRI). According to the China Index measuring Beijing's presence across the world, China's influence in the Czech Republic is mostly felt in the areas of media, law enforcement, and indeed in domestic politics and foreign policy.

To pursue its rapprochement with Beijing, Prague hosted several Chinese investment forums, and Zeman even acquired a Chinese advisor, Ye Jianming, chairman of the energy and financial company CEFC. In the Czech Republic, CEFC's investments mostly focused on status symbols: the SK Slavia Prague football club, the Lobkowicz brewery, and prime real estate in Prague.

CEFC's most ambitious plan in the Czech Republic was to increase its 9.9 percent stake to acquire half of the company's ownership in the J&T Finance Group for CZK 26.3 billion (USD 1.24 billion). However, the Czech National Bank refused to green-light the investment in the Czech banking sector because of the dubious origin of CEFC's capital. The South China Morning Post reported that most of CEFC's acquisitions were financed by Chinese state-owned banks. It is thus not surprising that after the collapse of CEFC as a result of bribery scandals at the UN in 2018, all its Czech assets were acquired by the Chinese state giant CITIC.

The Czech management of CEFC Europe presents another piece of the Sino-Czech rapprochement puzzle. Its chairman, Jaroslav Tvrdík, is a former defence minister and chief lobbyist for the wealthiest Czech company, PPF, and its financial subsidiary Home Credit (HC). In PPF's executive director Jiří Šmejc's own words, the company was responsible for the “restart” and de facto pivot of Czech foreign policy towards China. It is not surprising that at the same time, HC China became the first foreign company in China to obtain a nationwide licence to provide consumer credit loans, and profited enormously from that.

After several years of success and promising outlook in the consumer loans domain, the regulatory environment began to change, motivated in part by efforts to deleverage the economy, including household indebtedness. Following the outbreak of the COVID-19 pandemic and PPF founder and majority owner Petr Kellner's tragic death in March 2021, its Chinese business has been facing a dim future. “The situation in the Chinese market is not favourable for consumer finance,” Šmejc stated in June last year, adding that the company “is trying to find a strategic partner in China to acquire a majority stake in Home Credit and then take full control of the company.”

Central bank as a new central theme?

Besides the infamous story of the CEFC, some Czech media highlighted other financial flows coming from China. In 2018, two Chinese state-owned banks — Bank of China (BOC) and Industrial and Commercial Bank of China (ICBC) — lent over 56 million EUR (45.4 million USD) to agricultural colossus Agrofert, ultimately owned by one of the wealthiest Czechs and, more importantly, the prime minister at the time. According to Forum24 commentators:

“The loan to Agrofert is one of the largest Chinese investments in the Czech Republic after virtually none of what President Miloš Zeman promised has materialized.”

In some cases, the allegations went so far as to accuse the prime minister of treason. Agrofert refuted these accusations, stating the deal was a standard one with a consortium of multinational banks backing the loan, BOC and ICBC not even being the largest of those.

Speaking of banks, another important and sometimes overlooked domain of financial integration revolves around central banks and their activities. During the tenure of Zeman-selected Jiří Rusnok as governor of the Czech National Bank, the institution massively increased its exposure to Chinese yuan-denominated bonds. The Czech National Bank bought nearly CZK 27.5 billion (USD 1.23 billion) worth of Chinese government bonds, an increase of more than 100 percent, during the second half of 2021. According to Sinopsis, these activities “exposed the Czech Republic to many risks associated with such an investment.”

Some observers speculated that the purchase might have to do with Vladimír Tomšík, formerly the CNB's deputy governor and, since May 2019, Czech ambassador to China. The current governor Aleš Michl previously said that the Asian Infrastructure Investment Bank (AIIB) could be “an interesting investment alternative.” The AIIB is also one of the principal investment drivers of the BRI, through which the CCP is massively expanding its influence through geoeconomic means.

Sino-Czech relations under review

President Zeman, with PPF's business interests in mind, has effectively run the country's China policy for eight long years by stretching the limits of his constitutional powers. However, with Petr Fiala's cabinet assuming office in late 2021, the new government made it clear that Czech relations with the Russian Federation and the PRC needed to be “reviewed.” So far, tangible results of this review outside the realm of rhetoric remain to be seen. But one thing is certain, President Zeman will leave office in March, and his successor will be selected on January 28 from the two candidates who made it to the second round of the direct presidential elections.

The two candidates have one thing in common besides their communist past: distrust towards China. In the case of Babiš, it stems from his massive investment in a joint-venture titanium dioxide factory, which his Chinese joint-venture counterpart gradually took over. “I really haven't met anyone who has succeeded there. The market is gigantic, but it's a different world, a different regime, it's very difficult. I will certainly never go to China to do business again,” he has commented years later.

The second contender, Petr Pavel, a former army general who served as chairman of the NATO Military Committee from 2015 to 2018, has long been critical of China. In Pavel's own words, regarding the severity of threats, the “biggest and longest-lasting one is China.” Rather than as a direct military threat, Pavel reflects on the country's growing involvement in the international order and technology acquisition, adding that “finance and economics have become another stream for influence,” with China “expanding economically and financially all over the world, in many places in a completely indiscriminate manner.”

In a nutshell, one of Babiš's media outlets has expressed the possible outcome in one of its headlines: “Babiš would be more open to Russia and China, Pavel to the West, economists say.” At the same time, however, it cannot be assumed that Babiš would want to repeat Zeman's overblown bet on unconditional rapprochement with authoritarian regimes. After all, even the outgoing president completely ignored his favorite topic of Chinese investments in his last New Year's speech to the nation.

Whatever the election outcome, there probably won't be as much room for China's behind-the-scenes involvement in Prague Castle. Gone are Zeman's praises about the BRI being “the most important project in our modern history.”

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