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When Chinese influence fails

How the rise and fall of a Chinese corporate giant turned the Czech Republic against Beijing. 

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In 2015, Chinese president Xi Jinping invited his Czech counterpart, the ostentatiously pro-China Milos Zeman, to a military parade in Beijing commemorating the end of the Second World War. Both leaders watched as thousands of troops from the elite units of the People’s Liberation Army and Second World War veterans marched to commemorate the defeat of fascism. 

The visit symbolised the growing closeness between the Czech Republic and China. Zeman, the only European leader present at the parade, had been making overtures to China since his election two years earlier. It was accompanied by the announcement of a series of Chinese investments in the Czech Republic, including the buyouts of the country’s leading football club, an airline, and a brewer.

The deals were meant to herald a new era of Chinese influence in central Europe. A year after his trip to Beijing, Zeman reciprocated, inviting Xi to Prague. During the visit, the Czech president lavished praise on his counterpart, and announced that his country would become “an unsinkable aircraft carrier of Chinese investment expansion” in Europe, though formally foreign policy was the responsibility of the prime minister, not the president. Further deals were announced.

Four years later, Zeman’s promise lies in tatters, even as he remains in office. Czech politicians from across the political spectrum have lined up to criticise China and side with self-ruled Taiwan, which China regards as a breakaway province. Prague’s mayor, Zdenek Hrib, flies Tibetan flags from City Hall and lost a sister-city agreement with Beijing after rejecting a clause on the One-China Policy he considered unacceptable. Milos Vystrcil, the president of the Czech Senate, visited Taipei this month, and declared “I am Taiwanese,” echoing John F. Kennedy’s Cold War-era “Ich bin ein Berliner” speech. A livid Chinese foreign minister spluttered that Vystrcil would “pay a high price for his short-sighted behaviour”, though he does not appear to have followed up on his threat.

How could relations between the Czech Republic and China have soured so rapidly? The answer lies, in part, in promises of lavish Chinese investment which never materialised and clumsy attempts to build influence in national politics, which ended up backfiring. The saga sheds light on the chummy relationship between the Chinese state and favoured businesses – and demonstrates the limits of outsourcing foreign policy to private companies.

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It was initially intended that the investments in the Czech Republic announced by Xi would go via CEFC, an energy conglomerate that had grown to become one of China’s biggest companies. The firm was founded in 2002 by Ye Jianming, a businessman from Fujian province. In a 2016 interview, Ye told Fortune magazine his original pitch. He envisaged a private oil company that would operate in the gaps in the market left by China’s state-owned enterprises (SOEs), which dominate the domestic energy market. The SOEs found it difficult to close deals with foreign governments, which were often uneasy at dealing with companies controlled directly by the Chinese state. CEFC would fill that gap, offering access to the Chinese market without the political costs of dealing with SOEs.

CEFC’s rise was stratospheric. As recently as 2017 it was ranked 222nd in the Fortune 500 with declared revenues of more than $43bn. Despite the company’s original purpose being to offer some distance from the Chinese government, it was never shy about functioning as a de facto arm of the People’s Republic. “CEFC is good at binding itself to state activities,” CEFC party secretary Jiang Chunyu told the Chinese website Caixin in an exposé later scrubbed from the Chinese internet.

As Xi Jinping began wooing central and eastern European countries as part of China’s Belt and Road Initiative – its giant project to build new economic networks across the Eurasian landmass –  CEFC’s investments often seemed to align with China’s foreign policy. In 2017, it announced a plan to buy a 14 per cent stake in Rosneft, the Russian oil giant, for about $9bn, as China cosied up to Russia in the wake of Western sanctions imposed after the annexation of Crimea. But perhaps the most notable example of CEFC’s business appearing to support Chinese statecraft was a series of investments promised by Xi during his visit to Prague, many of which were to go via CEFC.

Among other investments, CEFC would buy stakes in Slavia Praha, the country’s top football club and J&T Group, a financial services company that would become the first Chinese-owned bank in Europe. The company also acquired several publications and a TV channel. Ivana Karaskova, a researcher at Mapinfluence, a group tracking Chinese influence in central Europe, found that coverage of China in two media outlets purchased by CEFC turned universally positive in tone after the acquisition. In total, CEFC was a key player in Czech deals worth €7.5bn, according to a paper published by Jeremy Garlick, an assistant professor at the University of Economics Prague.

The conglomerate did not shy away from the reality that its investments were tethered to foreign policy shifts. “If one day the Czech Republic goes against China, we need to pull back our investments to rethink our strategies there,” Ye told Fortune, which described the businessman as “a rare powerful private player aligned with the Chinese government”.

J&T Bank was key to this alignment of business objectives with foreign policy interests. Together with China’s state-owned Industrial and Commercial Bank of China, J&T had grand ambitions to create a Central and Eastern European Investment Fund, modelled on China’s Asian Infrastructure Investment Bank, according to Caixin. The bank would fund projects in some 16 countries, 11 in the EU, linking them in to Xi’s flagship Belt and Road Initiative.

Meanwhile, the line between CEFC and Czech politics blurred. In 2015, Jaroslav Tvrdik, a former defence minister under Zeman when he was prime minister, was appointed vice-chairman of CEFC’s board of directors (he still serves as chairman of the board of directors of Slavia Praha today). That same year, Ye himself was named adviser to Zeman, by then the country’s president, in an under-the-radar appointment made public only months later.

As for Ye, Fortune ranked the youthful chairman second in its 40 Under 40 list in 2016, two spots ahead of the French president Emmanuel Macron.

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Things would soon go south for the company. In 2017, Czech journalists began asking why only a small fraction of investment promised from China in the previous few years had materialised. The year before, The year before, Zeman had promised that nearly 100 billion crowns (€3.6bn) of Chinese investment in the Czech Republic. The actual figure received for 2016 was only 12 billion crowns, according to recent data from the Czech National Bank. Out of nine deals CEFC signed that year, only one, the purchase of a machinery manufacturer, went through.

Miriam Lexmann, a Christian Democrat Slovak MEP and a co-chair of the Inter-Parliamentary Alliance on China, told the New Statesman that some small central European countries bought into extravagant promises about lavish acquisitions before becoming disillusioned. “The way these investments are reported in the local media is not necessarily in proportion with their actual extent. We have seen waves of misinformation.”

Then, in November 2017, Patrick Ho, a former Hong Kong secretary of home affairs who headed the China Energy Fund Committee, an NGO funded by CEFC, was arrested in New York. The federal indictment charged Ho with conspiring to bribe top officials of Chad and Uganda, charges for which he was convicted a year later. Ho led a 2014 CEFC delegation to Chad to investigate the accquisition of lucrative oil rights, travelling by private jet to meet president Idriss Déby and offering him $2m in cash concealed within gift boxes. The president declined, leaving the company scrambling. Ho then wrote a letter to Deby claiming the money had been intended as a donation to the Chadian people. Ho also arranged for $500,000 to be wired to a Ugandan cabinet minister and for good measure later tried to bribe the president, too.

Ho’s arrest shook the company. The final straw came in early 2018, when Caixin published an investigation into CEFC, which found that the company’s finances were shaky, backed by loans on top of loans. Ye was detained by Chinese authorities, reportedly acting on direct orders from Xi. He has not been seen since.

The house of cards quickly tumbled. CEFC’s Rosneft deal fell through, forcing the company to pay more than $250m in compensation. CITIC, a Chinese state-owned investment company, acquired the few Czech assets CEFC had actually gone through and bought. It paid $500m for most of the company's Czech assets, far short of the billions CEFC had originally promised to invest in the Czech Republic. 

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Prague’s disastrous dalliance with CEFC was a significant factor in the Czech Republic’s dramatic falling out with China this year, according to politicians and experts. “Much of the Czech-China relationship hinged on CEFC in its heyday. Its spectacular demise in 2018 shook the relationship deeply, and put the proponents of pro-Beijing policies on the back foot,” said Martin Hala, a researcher at Charles University in Prague. “The fiasco exposed pro-Beijing Czech policy as naive at best.” He added that the pro-China wing of Czech politics has only begun to regain confidence during the pandemic, as China sent thousands of face masks to Prague in an attempt to create some popular goodwill.

Although Czech politics has a strong liberal tradition going back to Václav Havel, the communist-era dissident who became the country’s first president after independence, some leaders were willing to park their concerns about Chinese governance while the promise of a massive injection of Chinese cash was being dangled. Dalibor Rohac, a resident scholar at the American Enterprise Institute, describes the attitude of politicians such as Zeman as: “Who are we to lecture the Chinese on human rights if we can do business with them?”

But the business never materialised, so the lectures on human rights did instead. As Zeman’s lofty promises of billions of crowns disappeared, other vocal critics of China began to make their case more forcefully than ever. It is no coincidence that Zdenek Hrib, the mayor of Prague, took office at the head of a Pirate Party-led coalition in 2018, just months after the CEFC debacle, as public opinion of China cooled. Were these events connected? “For sure. At the time, it was obvious that the promises were not fulfilled,” Hrib told the New Statesman. An aide to Hrib said the Pirate Party’s opposition to a “sister cities” agreement signed with Beijing, which Hrib subsequently dropped, helped his party’s fortunes in the elections, though he added that that more issues were at stake during the election. 

In office, Hrib has pursued policies that have consistently rankled China. He hosted the leader of the Tibetan government-in-exile and reinstated the Havel-era tradition of flying the flag of the unrecognised state over city hall. “The Czech people understand what it is like to live next to a superpower which declares that you are within its zone of influence. So we feel empathy with the people of Tibet,” Hrib said.

A visit by the president of the senate to Taipei earlier this year, meanwhile, epitomised the very public tiff between the Czech Republic and the People’s Republic, which considers Taiwan a province of China. Members of most opposition parties joined this year’s visit, illustrating the depth of discontent with China that has permeated all wings of Czech politics. (A few politicians hold out hope that relations can be salvaged: Radek Vondracek, the speaker of the parliament, in an optimistic statement sent to the New Statesman, said that “relations with the People's Republic of China have improved over the last ten years”, though he admitted that “the cancellation of partnership agreements between Prague and Chinese cities has not contributed to a good atmosphere”.)

Where did it all go wrong for China? In part, Beijng’s mistake was in aligning its foreign policy to a private company that proved as effective in ingratiating itself with the Beijing as it was an untrustworthy partner for the Czech Republic. But its missteps were far greater than that. China tied its fortunes to the small faction of the Social Democratic Party (CSSD) to which Zeman belongs. When the CSSD fell out of favour with the public, China’s influence also waned. The Social Democratic vote collapsed by two-thirds in the 2017 election, leading to the marginalisation of many pro-China politicians in the top echelons of Czech politics.

Clumsy acquisitions of media outlets and subsequent unsubtle shifts in editorial lines on China led to a backlash in a country that still remembers fawning communist party mouthpieces. “China, like Russia, does not understand the multi-layered democracy that we have in Europe,” Hrib said. Most of all, those billions in promised investment never arrived. The debacle was one factor in the EU’s decision to rein in takeovers of strategic industries by Chinese or American companies, Lexmann said.

As public opinion in other European nations turns against China, the Czech experience is a useful corrective to the idea that statecraft in a one-party state is ruthlessly effective and can be used to bend small countries to its will. Czechs long bristled against influence from one communist superpower, rising up against the Soviet Union during the Prague Spring in 1968. “If there is one thing Czechs hate, it’s being told what to do,” Hrib said.

With additional reporting by Sebastian Shehadi.

Ido Vock is international correspondent at the New Statesman.