15 November 2019

ISSN: 2560-1628

2019 No. 9

WORKING PAPER

Development of Czech-Chinese diplomatic and economic relationships after 1949

Ing. Renata Čuhlová, Ph.D, BA (Hons)

Kiadó: Kína-KKE Intézet Nonprofit Kft.

Szerkesztésért felelős személy: Chen Xin

Kiadásért felelős személy: Huang Ping

1052 Budapest Petőfi Sándor utca 11. +36 1 5858 690 [email protected] china-cee.eu

Development of Czech-Chinese diplomatic and economic relationships after 1949

Abstract The cooperation between Czechia and PRC went through an extensive development, often in the context of contemporary political changes. The paper analyses the impact of bilateral diplomacy on the intensity of trade and investment exchange and it investigates the mutual attractiveness of the markets. Based on this analysis, the third part focuses on the existing problems, especially trade deficit, and it highlights the potential fields for further strengthening of partnership. The methodology framework is based on empirical approach and it presents a comprehensive case study mapping the evolution of Czech-Chinese dialogue in terms of diplomacy, economic exchange and existence of supporting organizations. Keywords: Czech-Chinese relationships, bilateral investment, diplomacy, economic and trade cooperation

Introduction Despite of the transcontinental geographic distance and intercultural differences including languages barrier, Czechia, a Central European country, formerly known as until 1993, and People´s Republic of China (PRC) have experienced a great deal of discontinuity during last decades starting from big expectations in 1950s based on past time investment trade tradition during 1920s-1930s through very cold estrangement till the current strong partnership. The approach of the Czechia towards PRC has rapidly evolved and changed through the history, mainly due to contemporary political forces. As an ex-communist country, Czechia´s hard-won democracy has affected the perspective of foreign policy, especially in terms of severe criticism on the human rights violations in many other countries including PRC. In previous years, the Czech foreign policy however took a new direction, on the ground of a significant change in the political discourse. This transformation together with PRC´s effort to strengthen its position in Europe by the regional format 1+16 and the Belt and Road Initiative, have greatly nourished cooperation in trade and investment, as well as in cultural and educational exchange. PRC has become a frequent subject of political conversations in Czechia and the topic receiving a deep review by the local press. The economic exchange have been a crucial interest but although PRC is trying to be more open to foreign trade, there are still remaining many obstacles for Czech businessman, both tariff and

1 non-tariff barriers. Moreover, insufficient experience at doing business in the culturally different environment persists on both sides. Both Czechia and China are export-oriented countries. Due to the country ́s size of PRC and the position as a global actor, the exports are distributed all over the world. Contrary, Czechia, a small country whose foreign policy is sustained by the European Union (EU) have primary export destinations in the EU member states, that relates to the regional proximity and the principles on which the EU functions. Despite these obvious asymmetries and existence of the intercultural differences, the partnership between the two countries have become stronger and with potential for further future development.

The main purpose of this paper is to consider and analyze the variations of Czechia and PRC, two very different countries with specific choices in terms of economic models and policies, and also with continuous existing commonalities in past seven decades. After the PRC was established, Czechoslovakia´s recognition gave an official foundation for the diplomatic relations, and simultaneously to assess the role of mutual economic interests.

The paper is organized as follows; the first part reviews the bilateral diplomacy and its consequences for economic exchange from 1949 till 2012. It provides highlights on the impact of governmental changes and political orientation of Czechia and the EU membership. Since then, the partnership experienced a significant transformation and unusual growth, also due to 16+1 regional cooperation program launched by China and the countries of the Visegrad group, including Czechia, got a privileged position in the region. It can be observed in numerous governmental visits on the highest level, elevated cultural exchange and enhanced intercultural awareness. Apparent effects are manifested by overall foreign trade and investment exchange, a crucial component of the Czech-Chinese relations over time, as presented in the next part. The third part then analyses the existing problems in Czech-Chinese bilateral relations and indicates potential fields for further cooperation. The final part proposes further recommendation and concludes the presented analysis.

The core sources for the analysis are governmental documents and Czech press releases depicting the diplomatic steps of the Czech-Chinese partnership and supplementing previous researches on the topic. Moreover, the methodology framework of the paper is also based on the official trade and investment statistics providing the data for deeper investigation of economic exchange.

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1. The evolution of Czech-Chinese relationships After the founding of the PRC on October 1, 1949, the Soviet Union was the first country officially recognizing its existence. After Poland, Czechoslovakia followed three days later as the third state in the world.1 Despite big expectations related to Czechoslovakia-China potentials of flourishing relation, the early bilateral relations were very similar to other small European countries. During the era of the Soviet Union, Czechoslovakia was tied with the Soviet foreign policy and therefore the relationship between Czechoslovakia and China was primary dependent on the current state between the Soviet Union and China.

Between the 1950s and 1970s, Czechoslovakia had a well-known status as a technological “West of the East”2 and held a key position as one of the top exporters to China, mainly supplying machineries. Due to the relation between Beijing and Moscow a lot of opportunities were being lost. This so-called Sino-Soviet schism started in the late 1950s and affected many countries of the Central and Eastern European region. The rising tension between China and the Soviet Union damaged Czechoslovakia´s booming economic relations with China of previous period and declined even more during the Cultural Revolution. Another crisis followed in the 1970s. Although the Beijing´s strategy towards the Eastern European countries softened, Czechoslovakia´s ties with Vietnam in both political and economical sphere and a support for the Soviet Union´s attitude towards China only estranged each other.3

The 1980s is marked as historically the best era for -Beijing relations as exchanges of governmental delegations culminated. Not only the Czechoslovakia but the whole communist block negotiated barter trade agreements, made investments in the food production and worked on new projects in the machinery and energy sectors.4

The close relations gradually decreased after the in Czechoslovakia in 1989 when the new government led by new president Václav Havel emphasized democratic

1 Lomová, O. The and the People’s Republic of China. „Good old“ relations restarted? Visegrad Revue, 2014. [online] Available from: http://visegradrevue.eu/the-czech- republic-and-the-peoples-republic-of-china-good-old-relations-restarted/ 2 Weiqing, S. China's Relations with Central and Eastern Europe: From "Old Comrades" to New Partners. Routledge, 2017. ISSN 1351850741. 3 Fürst, R. and Pleschová, G. Czech and Slovak Relations with China: Contenders for China´s Favour. Europe-Asia Studies, 2010, vol. 62, no. 8, pp. 1363-1381. 4 Fürst, R. Česko-čínské vztahy po roce 1989 [‘Czech-Chinese relations after 1989‘]. Karolinum, 2010. ISBN 9788024616537.

3 principles and based foreign policy on moral values. Moreover, many politicians were pointing out the violation of human rights and supporting Tibet and Taiwan. For instance, Havel invited the Pope and Dalai Lama to Prague as one of his first presidential steps. The memory of the communist regime in the Eastern Block remained still fresh and it enabled the attitudes express freely. On the other hand, the fall of the communist regime provided another opportunity to reestablish relations with foreign countries, including a huge Asian market. Czechia had become very active in the field of foreign direct investment (FDI). Since 1990s, it took place as one of the highest receivers in the whole post-communist Europe per capita, and a number one as a FDI receiver within the Visegrad group.

In 2000, China became a member of World Trade Organization and the Chinese government has launched a policy of “going global” (zou chu qu 走出 去)5 with its transformation towards internationalization of Chinese firms and their competitiveness on the world market as well.6 After Czechia´s accession to the EU in 2004, most of the previous Czech- Chinese bilateral agreements were replaced by common EU-Chinese treaties. The EU membership made Czechia more attractive location for Chinese investors, as the economic situation has been continuously one of the best among the Central Eastern European countries there. Czechia tried to form and accelerate special guanxi (关系，personal relations or patron- client relations) with China and the number of Czech visits in China on high political level increased, such as the presidential visit of Václav Klaus in 2004. During this time, Czech companies tried to be more active in investing in China, especially via joint-ventures. Intentions of Škoda Auto company, the oldest and biggest automobile producer in Czechia, to produce Octavia model cars in China were announced. At the same year, the largest Czech financial group PPF has expanded its activities on Chinese market under the Home Credit Group brand; and the Czech tradition stationery-oriented company KOH-I-NOOR constructed a production plant in Nanjing. All three companies have successfully established its long-lasting presence in China.7

5 Éltető, A. and Szunomár, A. Chinese investment and trade – strengthening ties with Central and Eastern Europe. International Journal of Business and Management, 2016, vol. IV, no. 1, pp. 24-48, doi 10.20472/BM.2016.4.1.002. [online] Available from: https://iises.net/international-journal-of-business-management/publication-detail-434 6 Holslag, J. (2011). the elusive axis: assessing the EU–china strategic partnership. Journal of Common Market Studies, 2011, vol. 49, no. 2, pp. 293-313. 7 Ministry of Foreign Affairs of the Czech Republic. Economic characteristic of the country: China. Ministry of Foreign Affairs of the Czech Republic, 2019. [online] Available from: https://www.mzv.cz/ekonomika/cz/servis_exporterum/teritorialni_informace/-mzv-publish- cz-encyklopedie_statu-asie-cina-ekonomika-ekonomicka_charakteristika_zeme.html

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In 2005, the Czech Prime minister visited Beijing and Chinese Prime Minister arrived in Prague for the first time after 18 years to sign a Czech-Chinese bilateral agreement on investment protection. The agreement was however criticized for its inequality terms seen as discriminatory to Czechia by majority of local media.8 Statistics on trade exchange manifest the positive trend and the benefits of the bilateral agreement. In 2005, China took with 5.1% share the second-place imports from non-EU countries and fourth place of total Czech imports following Germany (30.1%), Russia (5.7%) and Slovakia (5.5%). In terms of exports outside the EU member states, China accounted for the ninth position with a share of 2.7%.9 Czech- Chinese relations continued in similar pace without significant changes until the meeting of Czech Prime minister Jan Fišer and Dalai Lama in Prague in 2009 when diplomatic relations froze till 2012.

Since 2005 till 2012, foreign trade turnover with China increased more than 3 times, reaching the second highest value (higher only in 2011) since the establishment of the independent Czechia. China accounted for 5.8% of the Czechia´s most important trading partner from countries outside the EU (with exception of Russia in 2005). In the same period, the growth of Czech exports to China was recorded in all SITC groups. Above-the-average relative increase in Czech imports from China was recorded only by machinery and transport equipment, which was the most important in the import structure, thus determining the dynamics of total imports from China. In 2012, imports of machinery and transport equipment grew almost four times compare to 2005, and more than 80% of imports of machinery and transport products accounted for an increase in total imports from China. 10,11

8 Fürst, R. and Pleschová, G. (2010). Czech and Slovak relations with China: contenders for China's favour. Europe-Asia Studies, 2010, vol. 62, no. 8, pp. 1363-1381. 9 Czech Statistical Office. Zahraniční obchod České republiky s Čínou v roce 2005 až 2012. [‘Foreign trade of the Czech Republic with China from 2005 to 2012‘]. Czech Statistical Office, 2013. [online] Available from: https://www.czso.cz/documents/10180/20533758/e- 6013-13.pdf/71dabb02-ab3e-447c-a90c-130ab3e785db?version=1.0 10 Czech Statistical Office. Zahraniční obchod České republiky s Čínou v roce 2005 až 2012. [‘Foreign trade of the Czech Republic with China from 2005 to 2012‘]. Czech Statistical Office, 2013. [online] Available from: https://www.czso.cz/documents/10180/20533758/e-6013- 13.pdf/71dabb02-ab3e-447c-a90c-130ab3e785db?version=1.0 11 Fürst, R Česko-čínské vztahy po roce 1989. [‘Czech-Chinese relations after 1989‘]. Karolinum, 2010. ISBN 9788024616537.

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2. The current Czech-Chinese relations Despite Czech membership in certain regional cooperative frameworks as well as being a part of strategic partnership of EU and China, Czech-Chinese relations seem to be stronger on bilateral level. Currently, Czech-Chinese relations enjoy the strongest mutual friendship and strategic partnership in the history although some contradictions can be observed. The relation can be described in several aspects, such as (1) politics, (2) trade, (3) investment and (4) tourism and people-to-people exchange.

2.1 Political aspects The aim of China to expand influence in Europe via former communist countries has been obvious since 2011 when the China–CEE Countries Economic & Trade Forum was held in Budapest. The revived idea of deeper cooperation was followed by so-called “Warsaw initiative” in 2012, which was actually the first meeting of the 16+1 platform. These efforts together with the Belt and Road Initiative launched one year later have been significant components of new period of China-Czech bilateral trade and investment partnership. Simultaneously, China was listed by the Czech government as a key market for the export strategy for the period 2012-2020. In 2012, China accounted for 31.2% of total imports from non-EU countries in the lead.12,13

Secondly, the transformation of the Czech relations with China has come under the presidency of Miloš Zeman that expressed his positive opinion of China even earlier during his time as Prime Minister. President Zeman has abandoned the critical approach and positively encouraged Czech-Chinese relations and visited China as the first Czech president in past ten years in 2014. This step made a big change in the Czech-Chinese relations and unofficially “reset” mutual relations. Moreover, Zeman explicitly stated that Tibet and Taiwan are integral parts of China. About that time, China began to be proactive in foreign policy, re-establishing itself as a pro-reform and open country. Establishment of Chinese centers, think tanks and study and academic exchanges have enhanced cultural exchange with foreign countries and raised the world awareness of China.

12 Czech Statistical Office. Zahraniční obchod České republiky s Čínou v roce 2005 až 2012. [‘Foreign trade of the Czech Republic with China from 2005 to 2012‘]. Czech Statistical Office, 2013. [online] Available from: https://www.czso.cz/documents/10180/20533758/e-6013- 13.pdf/71dabb02-ab3e-447c-a90c-130ab3e785db?version=1.0 13 Lomová, O. The Czech Republic and the People’s Republic of China. „Good old“ relations restarted? Visegrad Revue, 2014. [online] Available from: http://visegradrevue.eu/the-czech- republic-and-the-peoples-republic-of-china-good-old-relations-restarted/

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Reflected by worldwide media, Zeman became the only EU president to participate in the celebration of the 70th anniversary of the victory in the Chinese-Japanese War in 2015 and this diplomatic act actually officially established Czechia as a Chinese ally. High-level governmental visits continued and the mutual cooperation in science and technology, education, health and energy sector was intensified. The first ever visit of a Chinese president in the history of Czech country occured in 2016 when president Xi Jinping visited the Czech capital Prague. Moreover, it was also the first visit of today’s Chinese president to the Central and Eastern European country since his inauguration. During this exceptional occasion, president Xi expressed China´s plans to launch investment to the Czechia of more than USD 13 billion by 2020.14

In 2018, the EU released a new strategy on “Connecting Europe with Asia” as a response to the Chinese-led Belt and Road Initiative and it is considered as the most comprehensive guideline so far in setting out the European approach in regard to Asia-Europe cooperation. In fact, majority of this new EU strategy seems to be targeted towards China as the EU becomes increasingly concerned about large scale incoming Chinese investment activities and contrary, more restrictions on foreign investment compared to other Asian countries. An increasing gap in trade and investment between the EU and China has gradually led Europe to introduce investment-screening mechanisms, and allow member states to address what they perceive as threatening investments concerning national security.15 Chart 1 displays grouped EU member states based on their attitudes towards managing China’s economic influence on the EU and managing China politically.

14 Radio Prague. Chinese investment in Czech Republic comes under the spotlight. Czech Radio Prague, 2016. [online] Available from: http://www.czech.cz/en/Business/Chinese-investment- in-Czech-Republic-comes-under-t 15 Chan, J. Europe’s Challenge to China. The Diplomat, 2018. [online] Available from: https://thediplomat.com/2018/10/europes-challenge-to-china/

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Chart 1: EU Member State attitudes towards China

Source: Szunomar et al.16

According to this illustration, Czechia together with Germany and Poland represents assertive EU member states towards China on both political and economic issues. It also distinguishes dissimilar position of Slovakia.17

In October 2019, Prague City Council has decided to cancel its sister-city relationship with Beijing that was established in 2016 over the wording relating to Beijing’s ”One China Policy” in the partnership agreement. Prague-Beijing relations have been strained since new municipal government was elected in 2018. Although city/region partner relationships have been developed for diplomatic, cultural and educational purposes, today’s economic climate often tends to leverage this kind of contracts for economic development. The current case

16 Szunomar, A. (ed.) Chinese investments and financial engagement in Hungary. Budapest: Institute of World Economics, Centre for Economic and Regional Studies of the Hungarian Academy of Sciences, 2014. ISBN 978-963-301-61. [online] Available from: https://www.researchgate.net/publication/323907173_Chinese_investments_and_financial_en gagement_in_Hungary 17 Szunomar, A. (ed.) Chinese investments and financial engagement in Hungary. Budapest: Institute of World Economics, Centre for Economic and Regional Studies of the Hungarian Academy of Sciences, 2014. ISBN 978-963-301-61. [online] Available from: https://www.researchgate.net/publication/323907173_Chinese_investments_and_financial_en gagement_in_Hungary

8 proves that the role of local government in economic development and trade promotion can be more significant than it has traditionally been.18

2.2 Trade cooperation During the period from 2012 to 2018, Czech-China trade turnover increased from 15 billion to 27 billion USD19, with an overall increase of 84%. Although the amount of Czech exports to China is still relatively low, in the same considered time framework, it experienced 71% growth. The main position of Czech exports to China has long been occupied by machinery and transport equipment, which makes up more than half of direct exports.

Currently, China has become the third largest trading partner of Czechia, as of 2018, imports from China accounted for 14,2% of total imports. Czechia has become the second largest trading partner of China in Central and Eastern Europe. Per the evidence, machinery and electrical products and transport equipments stands for the first two categories of Czech exports to Chinese market since 2010, accounting together for about 60%. In this regard, Škoda Auto, a Czech automobile manufacturer, also plays its role as it has continued to expand on Chinese market. The company sold more than 320 000 cars in 2018 which counted for Škoda´s biggest market.20 On the other side, the main imported commodities from China are also machinery and electrical products, accounting for about 75% in the long run, which is much higher than the proportion of Czech exports to China.

Czechia plays a prominent role in the European-Chinese trade while Chinese exports of intermediate products (such as mechanical, electrical, transportation, optical and medical equipment) are being exported to Czechia for further processing and assembling into the European market. 21

18 “Prague cuts sister-city ties with Beijing amid ‘tangible anger’ over pro-China policies.“ South China Morning Post, 2019 [online] Available from: https://www.scmp.com/news/china/diplomacy/article/3032045/prague-cuts-sister-city-ties- beijing-amid-tangible-anger-over 19 Czech Statistical Office. Foreign trade of the Czech Republic: december 2018. Czech Statistical Office, 2019. [online] Available from: https://www.czso.cz/csu/czso/zahranicni- obchod-cr-mesicni-udaje-prosinec-2018 20 ‘Škoda Auto plánuje v Číně rozvoj a další investice.‘ [Škoda Auto plans development and other investments in China’]. Ekonomika Idnes.cz, 2019. [online] Available from: https://www.novinky.cz/ekonomika/494223- skoda-auto-planuje-v-cine-rozvoj-a-dalsi-investice.html 2019 21 Businessinfo. Čína: Obchodní a ekonomická spolupráce s ČR. [‘China: Business and Economic Cooperation with the Czech Republic‘]. Businessinfo, 2019. [online] Available from:

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2.3 Investment activities In terms of investment, since opening its borders in 1989, Czechia has been recognized as very successful in attracting foreign capital among Central and Eastern European countries and become an investment hub in the region. The Czech competitiveness has been encouraged by the government investment incentive system, including corporate income tax relief, cash grants for job creation, training and also for purchase of fixed assets.22,23

Although Chinese investment was negligible in Czechia before 2012, after strengthening the Czech-Chinese ties, Czechia has been attracting increasing number of Chinese investors however not as much as expected, especially after the visit of the president Xi in Prague.24 By the end of 2016, president Zeman announced that investment from China were about to reach 2 billion USD which was unprecedented on the market of the size of Czechia.25 However, according to the Czech Central Bank the actual amount was only 750 million USD, and the year after was less than half of that figure.26 Moreover, Chinese investors (as the most prominent investor - the private-owned China Energy Company Limited (CEFC)) usually do not invest in greenfield projects or the technological development of acquired companies but rather concentrate on collecting assets. The CEFC conglomerate that established its European base in Prague in 2015 and it has been active in many fields, such as oil and gas trade, real estate, logistics, finance, tourism, infrastructure and others. The company gets a strong political support including the one from the president Zeman. The CEFC had acquired a share in Travel Service, the Czech biggest private airline, in the largest Czech online travel agency Invia.cz, Florentinum office buildings in Prague´s downtown area, in Lobkowicz Group brewery, five-

https://www.businessinfo.cz/cs/clanky/cina-obchodni-a-ekonomicka-spoluprace-s-cr- 19054.html 22 CzechInvest. Investment Incentives. CzechInvest, 2019. [online] Available from: https://www.czechinvest.org/en/Our-services/Investment-Incentives 23 Čuhlová, R. Cultural Distance of Foreign Investors in the Czech Republic based on Hofstede´s Dimension. Ad Alta: Journal of Interdisciplinary Research. Hradec Králové: MAGNANIMITAS, 2016, vol. 6, no 1, pp. 14 – 17. ISSN: 1804-7890. 24 Seaman, J. et al. Chinese Investment in Europe: A country-Level Approach. ETNC Report, 2017. ISSN 978-2- 36567-810-0. [online] Available from: https://www.ifri.org/en/publications/publications-ifri/ouvrages- ifri/chinese-investment-europe-country-level-approach 25 Czech News Agency. Zeman: Chinese invest CZK 50 billion in Czech Republic. Prague Monitor, 2016[online] Available from: http://www.praguemonitor.com/2016/10/21/zeman- chinese-invest-czk-50-billion-czech-republic 26 Klímová, J. Zemanovy vize o čínských investicích se nenaplnily. Údaje centrální banky ukazují na velký pokles. [‘Zeman's vision of Chinese investment has not come true. The central bank's data point to a large decline’]. iRozhlas, 2018. [online] Available from: https://www.irozhlas.cz/ekonomika/cinske-investice-v-cesku-pokles-cnb-milos- zeman_1803270700_jak

10 star hotels in Prague, a television channel Barrandov, the popular weekly Týden and took over Slavia Praha football club, the national league champion.27 These acquisitions had a strategic dimension and further implications for Czech-Chinese relations, as it allowed Chinese investors access to Czech media and gives them a discreet opportunity to influence public opinion. Recently, Chinese governmental conglomerate CITIC Group has been however gradually taking over CEFC`s assets that had large debts for about 6,7 billion yuans (almost a billion USD). Some of the Czech acquisition is expected to be left by CITIC to other Chinese companies.28

Table 1 displays data of selected Chinese investment in Czechia mediated by CzechInvest, the Business and Investment Development Agency established by the Ministry of the Economy of the Czechoslovak Republic in 1990 as part of the measures responding to the fall of the country’s communist regime. The increase in number of investment projects since 2005 after signing a Czech-Chinese bilateral agreement on investment is evident.

Table 1: Chinese Investments in Czechia from CzechInvest (2005-2017) Amount of Year Number of projects Number of new jobs investment (USD)

2005 1 9 385 430 300

2006 2 12 386 200 410

2008 1 44 200 10

2010 2 18 244 900 157

2011 1 8 619 000 100

2013 1 18 003 100 108

2014 1 44 200 26

2015 3 50 844 100 702

2016 4 139 061 000 940

2017 2 40 612 500 228

27 Dębiec, D. and Jakóbowski, J. Chinese investments in the Czech Republic: changing the expansion model. Poland: OSW, 2018. [online] Available from: https://www.osw.waw.pl/en/publikacje/analyses/2018-06-06/chinese-investments-czech- republic-changing-expansion-model-0 28 ‘CEFC se zbavuje tuzemského majetku, CITIC jej zřejmě získá s výraznou slevou.‘ [‘CEFC is getting rid of domestic assets, CITIC will probably get it with a significant discount‘]. Idnes.cz, Ekonomika, 2019. [online] Available from: https://www.idnes.cz/ekonomika/domaci/cefc-citic-cina-ceska-republika-jie-tien-ming- prodej.A180903_122630_ekonomika_mato

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2018 1 N/A 28

Total 19 297 249 000 3 009

Source: CzechInvest29

So far, the largest Chinese investor in Czechia is Changhong Electrics, one of the world's largest LCD TV manufacturers headquartered in Sichuan province. The company built its factory in Central Bohemia in 2005 and the investment amounted for 22 million USD.30 From the other side, the most important Czech investors in China include the Czechia’s richest man, Petr Kellner, who operates on the consumer credit market in China. At present, up to 55% of the loans from his company Home Credit Group, that received a unique license from the China Banking Regulatory Commission to establish a Consumer Finance Company in 2010, have been made on Chinese market.31

2.4 People-to-people exchange Apart from the political sector and economic diplomacy, cultural, scientific and touristic diplomacy has been growing. Direct flights between Czechia and China connecting Prague with several Chinese cities have had significantly contributed to increasing number of Chinese tourists every year. According to the statistics, 619 877 tourists from China visited Czechia in 2018. Dynamics of the number of arrivals from China is the highest among the TOP 10 countries (with increase +26.5% compared to 2017).32 Interestingly, the South Bohemia was the most visited region. Expenditures of Chinese tourists in Czechia are the highest among foreign tourists and account for 31% of total expenditures of foreign tourists from third

29 Volf, T. Čínské investice v Česku pokulhávají za Zemanovými sliby. [Chinese investment in the Czech Republic lags behind Zeman's promises]. Novinky.cz, 2019. [online] Available from: https://www.novinky.cz/ekonomika/494668-cinske-investice-v-cesku-pokulhavaji-za- zemanovymi-sliby.html 30 Castro, T. De and Hnát, P. Czech FDI Performance: Between Global Value Chains and Domestic Reforms. In: Foreign Direct Investment in Central and Eastern Europe [online]. Palgrave Macmillan, Cham, Studies in Economic Transition, pp. 51–75. ISBN 978-3-319- 40495-0. Doi:10.1007/978-3-319-40496-7_3. 31 Dębiec, D. and Jakóbowski, J. Chinese investments in the Czech Republic: changing the expansion model. Poland: OSW, 2018. [online] Available from: https://www.osw.waw.pl/en/publikacje/analyses/2018-06-06/chinese-investments-czech- republic-changing-expansion-model-0 32 Czech Statistical Office. Tourism 2018. Czech Statistical Office, 2019. [online] Available from: https://www.czso.cz/csu/czso/ari/tourism-4-quarter-of-2018

12 countries.33 Thanks to the scholarships and study opportunities provided by both Czech and Chinese governments, more young people are getting interested in the other country and often maintain the contact even after finishing studies via work or personal matters.

3. Challenges of Czech-Chinese bilateral exchange As it has been described, Czech-Chinese partnership has been blooming during last years and many expectations from both sides have been hold. Still, not all of those hopes have been fulfilled and several challenges persist to cope with. Following paragraphs explicate the main issues, especially in terms of (1) trade deficit and market challenges, (2) investment stock, (3) technology cooperation and (4) educational exchange.

3.1 Trade deficit and market challenges Compared to the role of foreign trade of Czechia with China in the total foreign trade relations of Czechia (especially on the import side), China's foreign trade position with Czechia in China's total foreign trade relations is negligible. Despite the rapid growth of Czech-Chinese bilateral trade volume, the main issues and biggest challenge in their bilateral exchange remains expanding Czech trade deficit with highly centralized commodity structure. In spite of increasing Czech exports to China year on year, the trade deficit remains one of the highest and still rising. First experience of Czech trade deficit with China has origins in 1978 and reappeared again in 1994. In 2018, China made the seventeenth biggest destination country for Czech export (2.49 billion USD) in contrast to imports from China (25.23 billion USD). China became the second largest supplier of goods and Czech trade deficit with China reached 22.74 billion USD.34 The chart 2 below displays the data of Czech-Chinese trade exchange from the view of Czechia in last 15 years. It clearly demonstrates the increasing trend of the turnover as well as significant gaps between Czech imports and exports related to China.

Chart 2: Czech-Chinese trade exchange (in billions USD)

33 Česká televize. Česko-čínský obchod se prohlubuje, ukazuje Čínské investiční forum. [The Chinese-Chinese trade is deepening, shows China Investment Forum] Česká televize, 2018. [online] Available from: https://ct24.ceskatelevize.cz/ekonomika/2624597-cesko-cinsky-obchod-se-prohlubuje- ukazuje-cinske-investicni-forum-podle-novakove 34 Czech Statistical Office. Foreign trade of the Czech Republic: december 2018. Czech Statistical Office, 2019. [online] Available from: https://www.czso.cz/csu/czso/zahranicni- obchod-cr-mesicni-udaje-prosinec-2018

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30 25 20 15 10 5 0 -5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -10 -15 -20 -25 -30

Import from China Export to China Turnover Trade Balance

Source: Czech Statistical Office35,36

The trade deficit happens to be a common phenomenon not only for Czech-Chinese trade but generally for bilateral trade between China and the Central Eastern European countries reflecting the structural problems. Composition of the bilateral trade displays the trend of industrial agglomerations manifesting high concentration of trade commodities and effects of inter-industry trade and global value chain on multilateral economic cooperation mode. Reducing Czech continuous trade deficit with China in such an extent is also a concern of Chinese government as its persistence could launch trade tariffs, subsidies, and other barriers that would have negative impact on mutual partnership.

Only a small number of Czech companies have managed to enter the Chinese market, and some of them have been experiencing a range of problems there. There are several barriers complicating the Chinese market entry with the regulatory environment as a primary disadvantage. High tariffs, import licenses and inspection certificates but also many non-tariff barriers such as market access difficulties, bureaucracy, various jurisdictions in Chinese provinces and therefore discretionary enforcement of regulations, intellectual property rights protection, ownership restrictions, restrictions on access to financing, registration processes for

35 Czech Statistical Office. Zahraniční obchod České republiky s Čínou v roce 2005 až 2012. [Foreign trade of Czech Republic with China from 2005 to 2012]. Czech Statistical Office, 2013. [online] Available from: https://www.czso.cz/documents/10180/20533758/e-6013- 13.pdf/71dabb02-ab3e-447c-a90c-130ab3e785db?version=1.0 36 Czech Statistical Office. Foreign trade of the Czech Republic: december 2018. Czech Statistical Office, 2019. [online] Available from: https://www.czso.cz/csu/czso/zahranicni- obchod-cr-mesicni-udaje-prosinec-2018.

14 companies or products are among the top regulatory obstacles.37 Additionally, both European and Czech companies also experience slower economic growth and increased competition on Chinese market.38

Consumers’ lack of awareness of products of Czech origin results in disinterest. This is unfortunately in contradiction with the growing demand of Chinese consumers for imported goods as they consider them as more authentic and of good quality ingredients. In this context, Chinese consumers often prefer brands from USA, Australia or Germany.39 Enhancement of market education and increase of attractiveness have been a concern of the first China International Import Export Shanghai conference in 2018. Czech delegation was represented by more than 80 enterprises, mostly with Czech traditional high-quality products, and lead by the president Zeman. Moreover, improvement of trade imbalance in a longer term may also occur due to recent logistic efforts, such as opening of two China-Europe railways from Yiwu and Chengdu to Prague in 2017.

3.1 Investment stock The reasons behind Chinese investment in Europe are mainly of economical character; access to technologies and ease the penetration of Chinese products into the European market and to third markets (Latin American and African markets) through the European corporate networks. Furthermore, improved marketability of Chinese products and integrated value chains demonstrate other interests.40Central Europe is well positioned to bring opportunities for growth and return on investment and it also has a stable EU regulatory framework. Czechia benefits from its geographical location, industrial tradition and good production network with other EU countries. China's investments were predominantly in the form of capital inputs and acquisitions, which for the most part do not participate in building greenfield sites and job creation. The structure of FDI is however gradually changing and deviating from investing in

37 European Chamber. European Business in China. Business Confidence Survey. European Chamber, 2013. [online] Available from: http://www.europeanchamber.com.cn/en/publications-business-confidence-survey. 38 Fürst, R. Česko-čínské vztahy po roce 1989 [‘Czech-Chinese relations after 1989‘]. Prague: Karolinum, 2010. ISBN 978-80-246-1653-7. 39 Ecommerce China Agency. Chinese Consumers are willing to buy more Imported Products. Ecommerce China Agency, Shanghai, 2019. [online] Available from: http://ecommercechinaagency.com/popular-imported-products-china/ 40 Holslag, J. The elusive axis: assessing the EU–China strategic partnership. Journal of Common Market Studies, 2011, vol. 49, no. 2, pp. 293-313.

15 natural resources in investing in higher-value technical goods.41 The amount of investment has not reached the expected volumes as announced by politics and the question is why. According to some critics, the “promises” happened while signing non-binding memoranda on the investment, most of which might never be fulfilled, as they serve only as proof of the success of economic diplomacy with Beijing.42

In terms of foreign investors coming to China, the situation might improve due to new foreign investment law approved in the beginning of 2019 and effective since 2020. The intention of Chinese government is to establish more equal conditions for business of domestic and foreign companies. The new rules for example abolish the obligation of foreign companies to transfer technology know-how to Chinese partners and the state has committed to protect copyright. In 2018, China attracted a record high amount of FDI of 138.3 billion USD and new measures are expected to attract even more investors. 43 In spite of efforts to promote mutual investment opportunities in both Czechia and China, there is still insufficient knowledge of the foreign market and the specific market-entry channels that discourage potential investors.

3.3 Technology cooperation Technology cooperation reflects another challenging field. There are still very few joint innovative programs, as for example cooperation established by the Technology Agency of the Czech Republic and Chinese counterparts from Jiangsu, Sichuan and Zhejiang provinces.44 The problem of establishing the partnership is not a matter of lack of interest, rather contrary. There is quite a hunger for international research programs but again, the companies, research centers and universities do not know how to find suitable foreign partners. Although there is simultaneously a growing number of Czech-China Research Centers, including Centers in

41 Castro, T. De and Hnát, P. Czech FDI Performance: Between Global Value Chains and Domestic Reforms. In: Foreign Direct Investment in Central and Eastern Europe [online]. Palgrave Macmillan, Cham, Studies in Economic Transition, pp. 51–75. ISBN 978-3-319- 40495-0. Doi:10.1007/978-3-319-40496-7_3 42 ‘Čínské investice: politický kapitál za prázdné sliby, zisk jen pro vyvolené’ [Chinese investment: political capital for empty promises, profit only for elected’]. [online] Available from: https://forum24.cz/cinske-investice-politicky-kapital-za-prazdne-sliby-zisk-jen-pro- vyvolene/ 43 ‘Čína zmírňuje pravidla pro zahraniční investory. Nový zákon neřeší vážné problémy, tvrdí kritici‘ [‘China eases the rules for foreign investors. The new law does not solve serious problems, critics say’]. E15, 2019. [online] Available from: https://www.e15.cz/zahranicni/cina-zmirnuje-pravidla-pro-zahranicni-investory-novy-zakon- neresi-vazne-problemy-tvrdi-kritici-1357164 44TACR. Proposals of the delta programme. Prague: TACR, 2018 [online] Available from: https://www.tacr.cz/index.php/en/programmes/delta-programme/sixth-call/1335-6th-call-for- proposals-of-the-delta-programme-partner-countries-in-the-6th-call-for-proposals-of-the- delta-programme.html

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Zhejiang, Hebei and Xian45, they do not serve as a mediator to match various public and private Czech and Chinese institutions with this kind of interest. Moreover, science and technology research and development cooperation in innovative industries and start-ups opens gates to other key areas of service industry, such as communication and information technology, consulting and finances.

3.4 Educational exchange Student exchange of last years has got intensified as in forms of short or long-term study stays and granted scholarships provided by governments. The effort is demonstrated in international educational fairs, for example a multi-year campaign in China “Study in Czech Republic” and the activity of the Czech China Educational Exchange Association as well as Education Policy Dialogues between China and Central and Eastern European countries. Although the number of memorandums increases, the challenge of establishing joint programs between Czechia and China remains.

The interest in double and combined degree programs between EU member nations has spread in the Europe and these joint programs have become quite a common phenomenon as within European universities or those between European and American universities. Although there are already first attempts; as for example the bachelor program of launched in the Shanghai International Studies University in 2018 as a joint program with Charles University, this trend still lacks in bilateral cooperation with Chinese universities.

Conclusion Czechia´s location in the center of Europe, strong manufacturing and technological base and favorable economic situation makes an attractive partner and an important transit hub for Chinese economic interests on the European market. Despite the asymmetry of the countries in terms of size of the economics and obvious differences of characteristics, both China and Czechia have a strong industrial foundation, highly matched superior industries jointly integrated into the China-Europe industrial chain, active intra-industry trade and increasing industrial dependence. Expanding already a broad cooperation space and supporting mutual

45 Embassy of the Czech Republic in Bejing. Czech and Chinese University launch Cooperation Research Center for Science, Technology and Education in Xian. Ministry of Foreign Affairs, Embassy of the Czech Republic in Bejing, 2018. [online] A vailable from: https://www.mzv.cz/beijing/en/political_affairs/education_science_sports/czech_and_chinese_university_launch. html

17 benefits via promoting bilateral trade development and industrial cooperation is conducive not only to promoting the transformation and upgrading of China's open economy, but also to the development of Czech export-oriented economy.

At first glance, the Czech-Chinese story does not differ too much from other European countries, especially those from the 16+1 initiative and the Belt and Road Initiative project but it is the quick and radical overall approach of Czech foreign policy towards China that makes this case different. From the other side, China experienced a change in the perception of Czechia especially after 2004 when it became a member of the EU. In fact, fostering relations with Czechia has become part of the overall strategy of building closer strategic partnership between China and the EU. After 2010, the Czech foreign policy took a new direction due to the change in the political discourse. Especially with Zeman wining the presidential election in 2013 and related shift in the government, Czech diplomacy experienced its turning point towards China. It is important to point out that although the statut of the Czech president does not state for the sole leadership of the country and the state is administered by the whole government, a clear distinction in the Czech-Chinese bilateral relations under the presidency of Havel and his successors can be observed. Certain admiration to the success of Chinese economy led towards active support of this partnership. The transformation significantly nourished cooperation in trade and investment, cultural exchange and promoted China for its culture and innovative business environment.

The analysis of Czech-Chinese bilateral relationships displays the obvious effect of contemporary political situation in both countries on economic cooperation and their intensity. Despite persisting critics of human rights issues, it is important to realize that they do not influence business as much as it is sometimes thought. Czechia, with the exception of occasional protests, relies primarily on the EU, which has more resources and leverage to negotiate on this issue. The main framework for dialogue with China is, in addition to bilateral relations, a strategic partnership between the EU and China. The opportunity for the development of mutual economic relations is also seen by Czechia in the negotiation of the EU- China investment agreement.

Taking into account the mutual proportions and capacities of both countries, direct contacts between regions and provinces and between cities are a promising direction of Czech- Chinese cooperation. In this context, especially after defining the relevant policy framework in top-level visits in recent years, Czechia and China have been enjoying a stronger relationship

18 with the focus on the economic cooperation. For instance, there are several trade offices of Czechia in China as well as centers providing a various services for businessmen, students and tourists. In comparison with other Asian countries such as Korea, Japan or Taiwan, Chinese investment in Czechia remains despite recent significant growth relatively low and the biggest investors still come from the EU member states. The trade balance, remains to the detriment of the Czechia, not least thanks to bureaucratic obstacles and other technical characteristics of the Chinese territory. Czech exports to China are lacking especially in terms of consumer goods due to other foreign competitors and still relatively poor Chinese knowledge of Czech products.

For the long-term industrial cooperation, the global perspective needs to be considered while combining the industrial demands of China and Czechia. Besides, promotion and more regulatory support for the small and medium-sized enterprises are required as these businesses outnumber large companies. While tackling technology development, trends of digitalization, internet of things, smart cities and other advanced technologies have a great potential as these are key areas of expertise in both countries. In order to strengthen the mutual partnership and maximize the benefits deriving from opportunities, better understanding and recognition of each other's market based on the research of related regulations and policies is needed. An excellent knowledge of Chinese environment and Chinese market specifics could be delivered from the cooperation between educational and business sector and from consulting services. Comprehensive understanding might help to eliminate the possible concerns of every subject and stimulate the cooperation.

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