(Updates to Loan Conditions from the Ministry of Finance)

BUDAPEST, April 24 (Reuters) – Hungary and China have signed a loan agreement to finance the construction of a rail link between Budapest and Belgrade, Finance Minister Mihaly Varga said on Friday, launching a stalled project since years.

The company, which is part of Beijing’s One Belt, One Road initiative to open new foreign trade relationships for Chinese companies, is said to be the first major Chinese infrastructure project within the European Union.

Its goal is to help ship Chinese goods from Greece to Western Europe, but key sections in the Balkans are missing. Some observers have expressed concerns about China’s buying political influence through major infrastructure projects around the world.

Varga told Reuters on Friday that the $ 1.855 billion 20-year loan carried an annual interest rate of 2.5% and a prepayment option. He also said there was a five-year grace period on principal repayment.

He said 85% of the funding comes from China in the form of a loan while 15% is provided by Hungary.

Earlier this month, Hungary submitted legislation to categorize all data included in contracts for the 10-year, $ 2.1 billion taxpayer-funded rail project.

The project, the second most expensive project in Hungary after the Paks nuclear power plant to be built by Russia’s Rosatom, gets the green light just as Hungary’s economy enters recession amid the coronavirus pandemic.

Varga said the new rail link, which is expected to be completed by 2025, would allow Hungary to be a hub for European logistics networks as Chinese goods travel from Greece to Western Europe.

The 150 km Hungarian section of the railway will be built by CRE Consortium which includes the holding company Opus Global, controlled by Lorinc Meszaros, an associate of Prime Minister Viktor Orban.

The project suffered significant delays. China, Serbia and Hungary signed a memorandum on the railway in 2014. Construction in Serbia began in 2018 after borrowing $ 297.6 million from China.

“We should see how the construction goes further south, because this project only makes sense when the whole railway is built up to the port of Piraeus,” said a Hungarian expert on Chinese relations who said desired remain unidentified.

“China has a political motivation” in pursuing the project, although financially it is not a major trade project for China, he said.

After more than 10 years of a cooperation initiative between China and Eastern European countries known as 17 + 1, this would be the initiative’s first major infrastructure project in the region and within the EU, said the expert. (Reporting by Krisztina Than and Anita Komuves; Editing by Alison Williams, William Maclean and Catherine Evans)

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