Capital as Leverage
When Russian tanks crossed from Belarus into Ukraine in the early hours of February 24, 2022, they flattened the argument, fashionable among Western intellectuals and governments, that economic engagement could substitute for military deterrence. The West had to relearn an important lesson: deterrence still rests on hard power.
But if hard power is necessary to deter Russia, it may not prevail in Europe’s geoeconomic contest with China. The West risks building a defensive shield against Russia, behind which China can safely expand its influence.
The world today consists of three—and only three—major economic poles: East Asia, Europe, and North America. Given the stakes, the transatlantic response should go beyond military power and encourage European de-risking from—or, where necessary, decoupling from—China. Whoever controls Europe’s banks, telecommunications networks, and data infrastructure—and whoever finances the region’s industrial future—will shape its trajectory for years.
Europe has started building bulwarks against Chinese economic power. The European Union screens foreign takeovers, investigates distortive foreign subsidies, provides a common framework for controlling sensitive technology exports, and is seeking to reduce excessive dependencies in critical supply chains. The continent therefore monitors who owns its assets. It does not adequately screen who may fund them.
How China Builds Economic Influence in Europe
Chinese money is not waiting at the door—it is already inside. China’s foreign direct investment in Europe rose 67 percent to €16.8 billion in 2025, its highest level since 2018.[1] In aggregate, these sums are relatively modest compared to the size of the European economy. Chinese capital, however, has increasingly targeted sectors and assets of outsized strategic importance relative to the headline numbers, particularly in Central and Eastern Europe, one of the most pro-American regions in the world.
Increasingly, Beijing is choosing to fund greenfield investments on the ground. Chinese firms have directed billions of euros into the electric vehicle sector, particularly in battery plants, in Hungary and, to a lesser extent, Slovakia. By locating production within the EU, Chinese companies are embedding more of their EV supply chain within the single market. And if they move beyond assembly to genuine vehicle production, they can avoid quotas or the EU tariffs on EVs imported from China. As part of this economic strategy, Hungary has become China’s beachhead inside the EU.
China’s equity and greenfield investments illustrate how the country uses capital, infrastructure, procurement, technology, and long-term commercial relationships to establish itself in foreign markets. However, credit is a less visible component of the same toolkit.
Across the Western Balkans, Chinese banks, firms, and other state-backed institutions are involved in dozens of major infrastructure projects, particularly in Serbia. The financing model varies, and Chinese capital does not wholly underwrite every Chinese-linked project. But quite often Chinese policy-bank lending goes to host governments or state entities, and Chinese companies receive contracts to carry out the work. China’s Export–Import Bank, for example, has provided buyer’s credits associated with infrastructure projects involving Chinese contractors, including sections of the Belgrade–Budapest railway and major motorway projects in North Macedonia.
Chinese policy banks can also support Chinese state-owned enterprises operating abroad. In one case, China Development Bank financed China Ocean Shipping Company as it expanded its position at Greece’s largest seaport, the Port of Piraeus, where the company acquired a controlling stake in the port authority. Piraeus is principally an equity story rather than an example of creditor control. More broadly, though, the case shows how Chinese state-backed finance can help Chinese companies establish and expand positions in strategically important European infrastructure.
Worryingly, Chinese firms are also supplying equipment for critical infrastructure without necessarily owning the underlying operators or assets. Even Poland, a model ally of the United States, allows Huawei to have a significant presence in its telecommunications infrastructure, just as Hungary and Bulgaria do. Although these arrangements are not equity investments, they create major vulnerabilities by fostering technological dependence and imposing prohibitive switching costs. They also raise national security concerns about potential kill switches and data leaks.
This study therefore focuses on a narrower subset of Chinese investment in Europe. It examines credit as a backdoor to control: buyer’s credit from a policy bank, state-backed export insurance, vendor and supplier finance, concessional lending against a sovereign guarantee, and engineering, procurement, and construction contracts that bundle a loan and a builder into a single package. While Europe’s defensive toolkit can address ownership, subsidies, procurement, and trade, it does not adequately assess the strategic consequences of the financing terms themselves.
There is a second cost that no European government has yet priced. Excluding a vendor from a network does not remove it; someone still has to fund the replacement. Rip-and-replace in telecommunications, rail signaling, port cranes, and grid equipment runs into the billions, falls on operators rather than treasuries, and competes directly with the capital those same operators need for fiber optics and the fifth and sixth generations of cellular network technology. A ban without a financing plan is an unfunded mandate, and unfunded mandates are quietly not implemented.
At the same time, China’s widening goods trade surplus with Europe, which reached roughly €360 billion in 2025, has intensified European concerns about industrial competitiveness. Germany’s industrial sector has faced mounting job losses, while its automobile industry confronts increasingly formidable Chinese competition. The imbalance reflects deeper features of China’s economic model, including weak household consumption relative to production and heavy reliance on investment and manufacturing.
These challenges make the financing question more urgent. European governments are asking companies to retool supply chains, diversify suppliers, replace equipment, and compete against heavily capitalized Chinese firms at precisely the moment when many face pressure on margins and investment budgets. De-risking is therefore a question of who pays for the transition.
The American Turn to Defense
America has seen this story before.
In recent decades, the competition between the US and China has intensified in the diplomatic and military realm. The trend accelerated after the 2001 Hainan Island accident and grew due to tensions over commercial espionage, which featured prominently at the 2013 Sunnylands summit. Then China breached an Office of Personnel Management database containing information about security clearances, which the US discovered in 2015, and later that decade Beijing militarized the South China Sea.
But the US did not shift from engagement to competition in its economic relationship with China until President Donald Trump’s first term. He swept into office while criticizing the liberalizing spirit of post–Cold War America, including the decision, pursued across multiple administrations, to facilitate China’s entry into the World Trade Organization and the global trading system. On the campaign trail, Trump touched a chord with those Americans who had lost their jobs during the China shock of the preceding two decades.
Once in office, Trump levied massive new tariffs on China in a major break from the past. The types and rates of those tariffs changed during President Joe Biden’s term and Trump’s second term, but the basic policy—substantial US tariffs on Chinese imports—has remained in place. The US, long a champion of unfettered globalization, has begun to pull up the drawbridge.
This attitude extended from trade to investment. The first Trump administration put in place new rules to screen Chinese investments into the US and, in a first, prohibited Americans from purchasing securities in military-connected Chinese companies. The White House also placed Huawei on the Commerce Department’s Entity List, sharply restricting the company’s access to US technology. And together with Japan and Australia, it launched the Blue Dot Network in 2019 to vet and certify global infrastructure projects. At times criticized as cautious, incremental, and insufficient, these measures nonetheless broke the mold of US engagement with China.
The American sequence is instructive for what it left out as much as for what it achieved. Washington restricted trade, screened inbound equity, and constrained outbound portfolio flows. It did not build a financing alternative at home because it already had one. In addition to having the deepest and most liquid capital market in the world, its private credit industry was large enough to underwrite whatever banks declined. Abroad, Washington created the US International Development Finance Corporation (DFC) in 2019, giving the US government another instrument for mobilizing private capital to support strategically important projects in foreign markets.
Europe, however, is attempting to defend itself from China without having any of those assets at the same scale, depth, nimbleness, or integration.
Europe’s De-Risking Gap
Europe’s leadership is now considering how to implement its own defenses. In May 2026, the European Commission declared that its trade and investment relationship with China was “not sustainable” and reaffirmed its commitment to de-risking.[2] In June, Commission President Ursula von der Leyen announced plans for a new diversification law requiring EU firms to shift their sources of key supplies rather than depending on a single country.
Whether Europe will move quickly enough to protect its market and society is unclear. But Brussels, Berlin, and Paris are developing a mix of subsidies, tariffs, defensive instruments, and safeguards while engaging in talks with Beijing.
What Europe has not answered sufficiently is the financing question.
Western Europe has plenty of access to capital, but the capital markets of Central and Eastern Europe still “punch below their weight,” as the International Monetary Fund put it.[3] Therefore, firms in the region cannot easily retool, reshore, or de-risk away from China.
European leaders are considering instruments that are primarily defensive and would not provide a systematic source of financing for de-risking. Tariffs raise the cost of importing from China; subsidies reach a handful of flagship projects; screening blocks transactions after they are proposed. None of these policies tells a mid-sized supplier in Polish Silesia, Czech Moravia, or eastern Slovakia how it is supposed to pay for requalifying a supply chain, replacing tooling, or absorbing two or three years of thinner margins. De-risking is, at the level of the individual firm, a capital expenditure problem. Europe is legislating the obligation while leaving the balance sheet mostly blank.
Capital Security: The Missing Pillar
Europe screens who owns its assets. It does not adequately screen who may fund them.
A capital security doctrine would close that gap by treating the origin and terms of financing as a security variable that is subject to the same scrutiny now applied to equity control. It does not require a new treaty or a new agency. It requires businesses to answer four questions on the record about any significant financing that touches a critical asset.
- Origin. Who is the ultimate provider of funds, and is that provider a state, a policy bank, or an entity acting on state instruction?
Beneficial ownership disclosures already exist for equity, but a security-oriented review regime does not exist for credit. - Terms. Is the pricing concessional relative to market, and is the money tied to procurement from suppliers of the same jurisdiction?
Below-market credit bundled with a national contractor is an industrial policy instrument, not merely a loan. - Embedded control. What rights travel with the money: covenants, security over strategic assets, offtake and operating agreements, exclusive maintenance and software dependencies, or choice of governing law and arbitral forum?
Control acquired through a credit agreement is control all the same, and it is invisible to a screening regime that counts shares. - Substitutability. Could the facility be refinanced on commercial terms without the political consent of the original lender?
Where the answer is no, the host state has granted a veto it never voted on.
The EU should extend its screening framework so that credit and quasi-credit exposures above a threshold, where the underlying asset is critical infrastructure, require a review. Moreover, the EU should add vendor finance, leasing, and bundled engineering, procurement, and construction packages to the framework’s definition. This is a narrow, technical, enforceable change, and it is the only one that addresses how Beijing enters Europe financially.
Who Will Finance Europe’s Transformation?
European officials might say that the banks, institutional investors, the state, or private credit will provide the necessary financing. But these conventional answers fail to address the problem for the following reasons:
- Not the banks, at least not alone. Retooling is long-duration and capital-intensive, and its cash flows are uncertain. Economically, it behaves more like equity than like a corporate loan. Prudential capital requirements and forward-looking provisioning rules penalize precisely that risk profile, and rationally so. Europe finances its companies predominantly through bank balance sheets, whereas the US finances them predominantly through markets. The transformation Europe is asking of its industrial base is the type of risk that its dominant funding channel is least equipped to hold.
- Not institutional investors, under current rules. Prudential rules and investment mandates have historically pushed institutional investors toward more liquid and highly rated assets, although recent reforms are designed to reduce some of these barriers. The mismatch is partly regulatory and partly structural—which also means it can be addressed through credit enhancement and better-designed investment vehicles.
- Not the state, at the required scale. Europe does not lack public financial institutions. The European Investment Bank has substantial financing capacity but remains constrained by its mandate, risk framework, and the need to preserve its credit standing. National promotional banks bring additional balance-sheet capacity and local expertise, but their mandates and institutional structures remain primarily national even as the supply chains they should support increasingly run across borders. Export credit agencies such as the Export Guarantee and Insurance Corporation in the Czech Republic and KUKE in Poland likewise operate through separate national systems. Finally, the European Bank for Reconstruction and Development’s (EBRD) geographic limitations, development-oriented mandate, and risk framework constrain its ability to serve as the sole implementing institution for a broader capital-security mission.
Europe therefore needs more than just financial instruments; it needs a mechanism to deploy them coherently and strategically across the continent. The US offers one partial model in the DFC, which can assume selected risks alongside private capital and structure investments to mobilize additional financing. On September 16, for example, the DFC approved up to $350 million in financing for Vodafone Ukraine, refinancing existing debt to free up resources to modernize telecommunications infrastructure with equipment from vetted suppliers. Public capital is therefore most valuable when it absorbs selected risks.
- Not private capital by itself. Private-credit funds, infrastructure investors, insurers, private-equity firms, and long-horizon private owners can carry duration and uncertainty that regulated banks often cannot. They can structure transactions flexibly, move across borders, and invest in assets that sit awkwardly between conventional debt and equity. But private investors still require a return commensurate with risk. Where a project carries substantial political, regulatory, construction, or technology uncertainty, the price of purely private capital may simply be too high to make the investment economic. This matters more in Central and Eastern Europe than anywhere else on the continent, because the region combines exposure to Chinese industrial competition with the shallower domestic capital markets and less public fiscal space.
The financing challenge therefore has two dimensions: (1) paying for industrial adjustment and (2) ensuring that strategically important assets can find trusted, long-term owners. Moreover, some European assets have no natural public buyer at all. Telecommunications towers and fiber optic cables, data centers, payment rails, consumer credit books, and port and logistics assets are the arteries of the single market. They require patient equity rather than grants, and when Western capital declines to hold them, the bid does not disappear. It changes passport.
Capital is infrastructure. Treating credit availability and infrastructure ownership as commercial questions, separate from security policy, is how the last two decades of European strategic assets ended up where they are.
Building the Capital Pillar
Europe wants a strong transatlantic alliance, and it should combine this ambition with its private capital and use public risk capital to move private money rather than to substitute for it.
- A transatlantic strategic capital facility, structured in tranches. EU budget guarantees and contributions from member states should provide the bulk of the first-loss protection, while the European Investment Bank, EBRD, and national promotional banks provide additional credit enhancement through guarantees, subordinated financing, and co-investment. The US, rather than contributing proportionately to the first-loss pool, should participate in projects of shared strategic importance through DFC direct financing, political risk insurance, and, where appropriate, financial guarantees. Private investors would provide the bulk of the senior capital.
- Eligibility as policy. Access is conditioned on the four capital-security tests set out above: acceptable origin of funds; financing terms that do not create strategic dependence or foreclose competitive alternatives; no contractual rights that confer strategic control over the asset; and a credible path to refinancing on commercial terms.
- A replacement window for excluded infrastructure. A dedicated line to finance the removal and substitution of high-risk vendor equipment in networks, with tenors matched to the asset life. Exclusion decisions become executable rather than aspirational.
- A European guarantee counterpart. Consolidate, or at minimum interoperate, national export credit and political risk insurance so that a supplier in one member state can be covered on a project in another without assembling multiple agencies. This avoids having to rely on a single state insurer.
- Currency discipline. Financing under the facility should be denominated in euros or, where appropriate, in the local currency in which the underlying project earns its revenues. Any resulting currency exposure would be hedged by the institutions best equipped to manage it, and the cost of that hedge would be incorporated into the financing.
- Mobilize the private counterparties that already exist. Europe does not need to invent a new class of investor. Large infrastructure funds, private-equity firms, private-credit managers, insurers, banks, pension investors, and long-horizon investment groups already possess much of the capital and expertise the strategy requires. What they lack is the proper incentive. Eligible investors should demonstrate the ability to commit or mobilize meaningful capital, originate and manage investments across borders, hold assets over long periods, operate under transparent governance, and finance themselves without creating the same kind of strategic dependence the facility is intended to prevent. Central European investment groups represent one part of this potential capital base. PPF Group, where one of the report’s authors serves, is an example of a regional group with extensive cross-border operating and investment capabilities. Others across Central and Western Europe bring different combinations of capital, sectoral expertise, origination capacity, and long-term ownership. Collectively, such groups control vast assets and combine substantial proprietary capital with the ability to mobilize outside investors, making them plausible anchor investors and project sponsors rather than merely advisers to a public financing program. Transatlantic policy discussions too often treat such groups as commercial actors. They should instead be considered potential strategic partners so long as their financing structures do not create strategic dependence on state-directed foreign capital.
Conclusion
Europe’s economic security debate has understandably concentrated on what governments should screen, restrict, tariff, exclude, or remove. But every defensive measure carries a financing consequence. Every diversified supply chain needs to be paid for. Every piece of equipment that is removed should be replaced. Every strategic asset Europe wishes to keep in trusted hands requires a trusted source of capital willing to own or finance it.
That is the missing half of de-risking.
The military pillar of the transatlantic alliance exists to ensure that Europe cannot be coerced by force. A capital pillar should help ensure that it cannot be coerced for lack of alternatives. Europe needs to be able to reject financing, suppliers, or commercial relationships that create unacceptable dependencies without discovering that doing so is economically impossible.
Endnotes
- “Chinese Investment Rises to Seven-Year High—Chinese FDI in Europe: 2025 Update,” Rhodium Group and Merics, May 20, 2026, https://merics.org/en/report/chinese-investment-rises-7-year-high-chinese-fdi-europe-2025-update ↑
- European Commission, “Readout of the College Orientation Debate on EU-China Relations,” news release, May 29, 2026, https://ec.europa.eu/commission/presscorner/api/files/document/print/en/read_26_1201/READ_26_1201_EN.pdf. ↑
- “Keynote Speech by Alfred Kammer, Director, IMF European Department, at the Joint Bank of Slovenia–IMF Conference, Portorož,” International Monetary Fund, May 17, 2024, https://www.imf.org/en/news/articles/2024/05/16/sp051724-alfred-kammer-at-the-joint-bank-of-slovenia-imf-conference. ↑