Despite the rise of tension, German investments in China increased
Germany's direct investments in China have increased rapidly this year, as a sign that companies in Europe' largest economy are not taking into account the calls of their governments to turn to other markets that are less geopolitically risky.
Figures from the Financial Times by Germany's central bank, the Bundesbank, show that German direct investments in China rose to 2.48 billion euros in the first three months of 2024, rising to 4.8 billion euros in the second quarter.
This figure reached a total of 7.3 billion euros in the first half of 2024, from 6.5 billion euros in the whole of 2023. Investments, mostly made by major German automakers, are taking place despite the Olaf Scholz government's warnings about the growing geopolitical risks associated with the Chinese market.
European Commission President Ursula von der Leyen called on businesses across the EU to 'reduce their risks' from Asia's largest economy.
Some observers fear that the escalation of geopolitical tension in the Taiwan Strait could be a disaster for a large number of German companies with extensive and deepening ties to China.
It can also cause Germany to be deprived of many of the critical inputs and raw materials needed in the production of everything from chemicals to solar cells and batteries for electric cars. Germany's dependence on imports from China is very high, especially when it comes to rare earth metals such as scandium and yttrium.
Investments come from profits earned in China
Speaking to the FT, experts say most of the investments are reinvestment of profits earned in China.
The research by the Cologne Institute for Economic Research (IW Cologne) showed that more than half of the 19 billion euros of profits made by German companies in China last year were reinvested in China.
The increase in German direct investment reflects a new 'in China, for China' strategy aimed at shifting more production to one of the largest markets of companies like Volkswagen, the researchers said.
Friedolin Strack, a Chinese expert at BDI, Germany's main business lobby, said, “Companies saw many bottlenecks during the pandemic and the blockade of the Suez Canal. They are committed to reducing all risks in supply chains by reorganizing them on a regional basis through localization. This situation is very frequent, especially in China,” he said.
But Jürgen Matthes, an expert in German-Chinese trade at IW Cologne, claimed that this strategy would harm the German domestic economy.
“This is a measure against possible geopolitical risks, such as an escalation in the Taiwan Strait, but to the detriment of the German economy and the German labor market. We will export less to China and more production will be made in China by Chinese workers,” he said.
The German government 'can't free the risk'
The latest figures come just a year after the Scholz government adopted Germany's first Chinese strategy, a plan based on the need to 'de-risk' Europe's largest economy's relations with China.
While Scholz insisted that Germany is against the idea of 'decoupling' from China and the complete rupture of ties, Scholz warned companies not to 'put all their eggs in a single basket'.
The strategy calls on German companies to diversify their supply chains and export markets by moving them away from China, thereby reducing the country's vulnerability to external shocks.
German companies do not heed the government
But so far, there is little evidence that companies, especially major automakers, have heed the government's warnings.
Danielle Goh, an analyst at the US-based research group Rhodium Group, said that the 'strong momentum' of German investments in China will continue for the rest of the year.
Goh has cited a series of large-scale announcements in recent months, such as a plan to invest 2.5 billion euros to expand its production and innovation center in Volkswagen's Hefei, Anhui province, and BMW's planned 2.5 billion euros for Shenyang Manufacturing Base.
'In the last five years, German investments have accounted for more than 50 percent of EU27 investments in China, mainly with the contributions of German automakers,' Goh said.
Some business leaders have specifically expressed concern about the deepening participation of the German automotive industry in China. In particular, Volkswagen was criticized for its activities in Xinjiang, where Chinese officials were accused of applying large-scale pressure on the Uyghur population.
One of these business leaders told the FT, “Some have relied a lot on the profit they made in China. They are stuck in some kind of golden cage,” he says.