German FDI Targeting China on New Heights
Germany's financial engagement with China has soared in recent years, reaching a record of approx. €12 billion in Foreign Direct Investment (FDI) from Germany to China last year, as a recent study form the German Economic Institute shows. This investment trend underscores the complexity of the relationship between the two economies, as German companies seek to capitalize on China's vast market despite government calls to reduce dependence.
Investment in China has raised concerns in Germany and across the European Union. The German government has urged large companies to reduce their reliance on China, citing the risks associated with FDI. Similarly, the European Union has been working on policies to tighten oversight of FDI, mirroring U.S. efforts to control investment in and from China. However, contrary to expectations of diversification away from China, Bundesbank data also show an increase in the share of China (including Hong Kong) in German FDI. For the first time since 2014, this share surpassed the 10% mark, reaching 10.3% last year. This increase comes despite an overall decline in German outbound investment from nearly €170 billion to €116 billion, highlighting a continued high level of investment in China against the overall declining trend.
Moreover, there has been no shift away from China relative to the rest of Asia. For such diversification to be evident, the share of investment in the rest of Asia would have to increase more than that in China. While the investment rate in the rest of Asia remains relatively high at 8%, it has stagnated over the past year.
Investment dynamics are complex, with a mix of greenfield investment and purchases of financial assets. Notably, German FDI in China over the past four years has been entirely financed by reinvested profits, suggesting a strategic shift towards reinvesting made-in-China profits back into the country. This strategy aims to reduce costs and mitigate risks.
That German companies continue to view China as a critical and expanding market, was also evidenced by a survey from the German Chamber of Commerce in Greater China earlier this year—the study found that 91% of responding German companies negated to have any plans of leaving China over the next two years, as also mentioned in an earlier EAC Executive Briefing. These decisions are driven by the opportunities emerging when tapping into China's immense consumer base.
The German government faces internal divisions on how aggressively to cut exposure to China. Chancellor Olaf Scholz's upcoming visit to China on April 15-16 with a business delegation underscores the economic importance of both countries’ economic relationship.
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