German firms keep investing in China despite moves to ‘de-risk’

BERLIN, Germany – German companies are increasing investment in China, even as the German government, the European Union, and the G7 want to “de-risk” their relationships with Beijing.

Preliminary data provided to Reuters by the German Economic Institute IW show German direct investment in China is still rising.

“Direct investment flows to China are estimated to have increased by 11% in 2022, similar to the increase in 2021, but much stronger than in previous years between 2016 and 2020,” Juergen Matthes of the IW told Reuters.

He declined to give absolute figures for total investment as the 2022 estimate was still preliminary.

According to Matthes, German companies in China are increasingly relying on local suppliers and local research. This is partly due to subsidies offered by the Chinese government, but also to protect themselves from the impact of a potential trade war or a conflict in Taiwan, he said.

In a significant speech in March, European Commission President Ursula Von der Leyen said it was not viable to decouple from China entirely, but Europe should focus on reducing the risks such economic ties posed.

China, she said, was becoming more repressive at home and more assertive abroad. In response, the EU needed to “rebalance” the economic relationship and reduce its reliance on China for key inputs, such as lithium and other critical minerals.

It also, she said, should look at the technology it shared with China.

However, the investment figures show that there is no significant diversification away from China, Matthes said, with Germany continuing to invest heavily in the Asian giant.

Industry leaders, such as the chief executive of luxury carmaker Mercedes-Benz Ola Kaellenius, also argue that cutting economic ties with China would have massive repercussions over the next decade.

China will be the elephant in the room at this week’s G7 finance ministers’ meeting starting on Thursday, May 11. Host Japan wants the gathering to produce an ambitious statement on diversifying G7 supply chains “away from countries like China.”

“De-risking is the new favorite word in politics,” said Genia Kostka, professor at Freie Universitaet Berlin. “But then you should de-risk not only against China, but against all states on which you are too dependent in case of crisis.”

Chinese Foreign Minister Qin Gang warned German counterpart Annalena Baerbock against de-risking during a visit to Berlin. “If one gets rid of China in the name of de-risking, it will become de-opportunity, de-cooperation, destabilizing, and de-development.”

Germany’s BDI industry body sees the increased investment in China as a transitional phase. Many companies are currently strengthening their value chains in certain regions, not only in China, but also in the US and South America. This initially leads to higher investments, according to Wolfgang Niedermark, a member of the BDI’s Executive Board.

Trade between the two countries is also going strong. China remained Germany’s most important trading partner in 2022 for the seventh year in a row, despite coronavirus lockdowns.

Goods worth around 298 billion euros ($328 billion) were traded between the two countries, up around 21% from 2021.

Volker Treier, head of foreign trade at the German Chamber of Industry and Commerce (DIHK), sees no real alternative to China. Both the planned energy transition to renewable energies and the mobility transition away from combustion engines would not progress if there was a decoupling from China, he said.

According to Treier, German companies are currently analyzing how strong their dependencies on certain markets are and looking at alternatives. But that comes at a price, he said.

“Alternatives for many companies are often found in the Asia-Pacific region,” Treier said. Free trade agreements with countries such as India and Indonesia would help the German economy a lot, he added. Alternatives might otherwise be found in South or North America.

According to the DIHK, it is smaller companies that are looking for alternatives to China. “About 15% of German companies in China are planning investments outside the country, but in the region,” Treier said. But that doesn’t happen overnight, he added.

China is the world’s second largest market behind the US and even ahead of the EU’s domestic market.

“The fact that the Chinese market will continue to play an important role in the future is undisputed and a consensus between the German government and German industry,” the BDI’s Niedermark said. – Rappler.com

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