“Dependence of the German economy on China: full steam ahead in the wrong direction” – such an unambiguous title from the Institute of German Economics in Cologne (IW) gave a study published on August 19 on its website. It contains an urgent appeal to German political circles to take urgent action against the PRC’s growing influence on foreign trade and Germany’s business life in general.

The German economy is more dependent on China than vice versa

“The German economy is much more dependent on China than the other way around,” says study author Jürgen Matthes, responsible for international economic order at the influential think tank. He does not draw direct parallels with Germany’s energy dependence on Russia, which has now become a major domestic political issue in Germany, but such a comparison suggests itself.

The PRC’s dependence, the scientist points out, is becoming a political problem “due to China’s attitude towards Russia’s war against Ukraine and Beijing’s growing threats against Taiwan”. After all, if, after a possible attack by China on Taiwan, extensive Western sanctions are introduced against China, companies in Germany will face an acute shortage of all types of Chinese-made components.

“And for those German companies that have a particularly strong presence in China, the very likely collapse of their business in the Chinese market in this case could lead to such a sharp collapse in sales that they would be on the verge of bankruptcy.” Jürgen Mattes warns. And then, he continues, the state will have to bail out big faltering companies to avoid massive job losses.

German company stubbornly ignores geopolitical risks in China

Above all, the scientist is surprised and concerned that in the first half of 2022, when the geopolitical risks of cooperation with China, it seems, should have become obvious to everyone, German business not only did not slow down cooperation with the China. China, but on the contrary, expanded it to a new record scale. In fact, this was the main topic of the study.

The building of the Institute of German Economics in Cologne on the banks of the Rhine

The scientist, based on foreign economic statistics from the German Federal Bank (Bundesbank), the Federal Statistical Office of Germany (Destatis) and data from the IW Institute, found that in the first half of the year, direct investment by German companies in the Chinese economy reached approximately 10 billion euros. This is not just the biggest capital investment by German companies in the Chinese market since the turn of the century in the first six months of the year. German companies have never invested such amounts in China in the last two decades, even for an entire year.

“It seems that many companies are responding to geopolitical risks, the US-China trade war, and the trend towards isolation: more China is better than less. increasing the location of production. The Chinese market and the short-term profits expected there are obviously attractive”, says Jürgen Matthes.

Germany increasingly imports Chinese products and components

The author also considers the trends in bilateral trade to be very problematic. He points to “extreme growth” in German imports of Chinese goods in the 1st half of 2022 compared to the same period last year, totaling 45.7%. It is true that purchases of foreign products by Germany during this period in general grew strongly (by 26.5%), which is largely due to high inflation and, in particular, a sharp rise in the cost of energy and imported raw materials.

However, the advance provided China with a record 12.4% share of Germany’s total imports. The study provides data from previous years for comparison. So in 2019, before the pandemic, that share was 10%, and in 2000 it was just 3.4%. At the same time, China’s share of German exports has stopped growing in recent years, reaching around 7.5%.

Assembly of the Audi A6 at the factory of Volkswagen and its Chinese partner FAW in Changchun, northeast China

Jürgen Matthes fears that this is a structural trend, which is leading German companies to increasingly serve the Chinese market from their Chinese companies and to export less and less Made in Germany products there. “In this case, the benefits for Germany from the activity of German companies in China will decrease”, concludes the scientist.

He also points to Germany’s foreign trade deficit in relations with China in the first half of 2022, which reached almost 41 billion euros – this is yet another negative record in economic cooperation between the two countries. “The imbalance in trade with China is getting worse and worse,” says the study’s author.

German companies responded to the annexation of Crimea with an investment boom in Russia

It is noteworthy that all the negative trends listed there – a sharp increase in imports while exports fell and, consequently, a growing external trade deficit – were also observed in the first half of the year in Germany’s business with Russia.

But the main similarity lies elsewhere. The rapid activity that German companies demonstrated in China in the first half of 2022, despite the sharp rise in geopolitical risks, is very reminiscent of the similar rapid activity of German companies in the Russian market after the annexation of Crimea in 2014.

The Nord Stream 2 gas pipeline project from Russia to Germany was launched in 2015

The German investment boom that followed this forced change of borders was recalled on August 22 by the economic newspaper Handelsblatt in the article “Ten billion scratched out: worries nullify Russia”, dedicated to the accounting and real losses of German business in Russia after its current large-scale attack on Ukraine. German companies, the newspaper writes, feared neither the sanctions nor the decline in bilateral trade. “In the crisis year 2015, they launched 36 new projects and became Russia’s biggest investors.” The location of the business in the Russian market has allowed concerns to circumvent Western sanctions, the paper notes.

We also recall that in 2018, direct investments by German companies in Russia reached a record level of 3.4 billion euros. And in the first quarter of 2021 – after the redefinition of the presidential terms of Vladimir Putin, changes in the Constitution of the Russian Federation and in the context of the arrest of Alexei Navalny, who had just returned from Germany to Russia – German companies invested 1.1 billion euros in Russia in just three months. By early 2022, Germany had taken its dependence on imported Russian energy sources – gas, coal and oil – to an all-time high.

None of this is found in the IW Institute study, which is entirely devoted to economic ties between Germany and China. However, its author, judging by the text, clearly took into account the experience of German business in Russia and trade with it.

IW Institute demands change in Germany’s China policy

“There is a lot of evidence that, without state intervention, the desire of German companies to increase profits will lead to China’s role in direct investment and imports not decreasing, but increasing. German economy in China as a sales and supplier market However, due to growing geopolitical tensions, exactly the opposite is necessary”, emphasizes Jurgen Matthes and calls for urgent changes in Germany’s economic policy.

In December 2020, EU and Chinese leaders reached an investment agreement

At the same time, according to him, we are not talking about a complete shutdown of China, but only a reduction of its “disproportionately high relative importance”. For this, the scientist proposes the targeted development of trade relations with other countries with fast-growing economies, especially in Asia, the reduction of programs to encourage German-Chinese economic cooperation, the termination of investment guarantees, the final refusal to ratify the frozen investment agreement between the EU and China.

And companies that are particularly active in the Chinese market should be required to strengthen risk management, including tightening requirements for their financial reporting. The aim of all these measures, points out the scholar from the IW Institute, is to “avoid systemic risks to the German economy” and, in the case of losses for a particular company, eliminate the need to save it at the expense of taxpayers.

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