As Concerns About China Grow, Germany Loosens Its Embrace

On Thursday, Germany released its first-ever “China strategy," an attempt to balance the relationship’s huge economic benefits with the need to manage risks posed by Beijing’s increasing authoritarianism at home and assertiveness abroad.

The 64-page document says China should no longer be considered just an economic partner but also a competitor and systemic rival. Its main prescriptions aim to reduce the risks posed by German businesses’ vast exposure to the Chinese market.

“In recent years, the systemic rivalry aspect has moved more to the foreground… China has changed, and therefore our China policy must change too." Foreign Minister Annalena Baerbock said as she presented the paper. “We do not want to decouple from China but to reduce risks as much as we can."

Working with European Union partners, Germany will beef up its scrutiny of Chinese investments and consider mechanisms to review German investments in China, according to the document. It will seek to increase incentives for companies to diversify away from China.

Baerbock said Germany and its EU partner would respond together if China targets individual EU members with hostile measures, saying the region would use its vast internal market “as its most powerful instrument."

This is a new approach for a country that has been the most China-friendly large economy in Europe. But it isn’t a U-turn. The strategy doesn’t recommend stopping China from accessing specific technologies—as the U.S. has done with semiconductors—and it insists on the need to maintain good economic relations with the country and to work together on fighting climate change.

Analysts said the strategy was toned down compared with a draft leaked in November that included obligations on companies to disclose their exposure to China and undergo stress tests to gauge their resilience in case of a geopolitical crisis.

“It’s clear that the government didn’t want to burden companies with additional requirements," said Noah Barkin, Europe-China expert at Rhodium Group. “We will see if companies that are heavily dependent on China will react."

Gyde Jensen, a lawmaker for the ruling Free Democratic Party, said the government had taken too long to publish the paper and would have to work hard to translate it into practical legislation next year before it becomes distracted by the next general election in 2025.

“We need to show our partners in the world, the alliance of democracies, that we mean what we say," she said. “Next year is key."

Officials and analysts said the finely calibrated paper reflected a compromise between conflicting views in the ruling coalition, with some members backing a tougher stance while Chancellor Olaf Scholz and others insisted on a more business-friendly tone.

Berlin has been reappraising its foreign-policy goals and tools since Scholz’s election in late 2021. Last month, the government published its first security strategy since the end of World War II in response to mounting global threats.

Those efforts started before Russia’s attack on Ukraine. But the China strategy also draws lessons from the war, which sent Germany scrambling to escape its reliance on Russian energy. With the strategy, Berlin is trying to mitigate the potential fallout should a similar crisis erupt involving China.

“Russia has just a fraction of the significance for the German economy compared with China," said Titus von dem Bongart, Partner at Ernst & Young China. “China is the largest car market, the largest market for chemicals, there is just no comparison."

German companies were among the first in the West to treat China not just as a cheap manufacturing base but as a market, starting in the 1980s. They went on to make the machines that equipped Chinese factories and built China’s infrastructure, and they offered the cars that China’s new middle class wanted and could increasingly afford.

In recent years, Chinese companies have begun encroaching on their German rivals’ turfs. The country now exports more cars than Germany, according to the China Association of Automobile Manufacturers. Still, China was Germany’s largest trade partner in 2022 for the seventh consecutive year, with 298.9 billion euros in goods exchanged, equivalent to $332.66 billion, according to Germany’s federal statistics agency.

While some German companies have been revamping their supply chains to protect their global operations in case of disruptions in China, many are doubling down on their investments there.

“Risk management is already being put in practice at Volkswagen," Ralf Brandstätter, Volkswagen’s China chief executive, said after Berlin unveiled its strategy. “Worldwide, we are striving to achieve a balanced sales position. To this end, we are investing billions in the U.S.A. and South America, for example."

But VW would continue to invest in China, he added, with the goal of developing a more self-sufficient supply chain there.

So far this year, China accounted for about 37% of VW’s worldwide new-vehicle sales, according to the company. Speaking to investors in June, CEO Oliver Blume said VW had sold 3.2 million new cars in China last year, almost as many as in Europe.

German chemicals giant BASF plans to invest €10 billion by 2030 in an integrated chemicals facility in Zhanjiang, in southern China. When completed, the site would be BASF’s third-largest worldwide. Speaking to shareholders in April, CEO Martin Brudermüller said China now accounts for about 15% of BASF’s annual sales.

German business lobbies and their allies in politics have warned Berlin not to follow the U.S. in its growing confrontation with China, saying companies should be trusted to manage their Chinese exposure themselves.

Beijing has echoed those appeals and sought to persuade Europe not to join Washington’s more confrontational approach, calling on governments to exercise “strategic autonomy."

On Tuesday, China’s Minister of Commerce Wang Wentao met the CEO of SAP and the president of Germany’s Mechanical Engineering Industry Association, saying China would improve the domestic business environment for all international enterprises.

Because of earlier leaks, Beijing had been aware of the tenor of the strategy, said Cui Hongjian, director of the Department for European Studies at the China Institute of International Studies, a think tank affiliated with China’s Foreign Ministry.

“China knows by now what Germany’s principles are. But what will the implementation of such principles look like?"

Cui said Beijing would consider some passages about China’s political system or development as “mischaracterizations." Nevertheless, China would want to continue working and trading with Germany, he said, adding that both sides would have to do more to manage their differences and strengthen cooperation in the future.

Germany’s Green Party, which is hawkish on China and holds both the foreign affairs and the economic portfolios in Scholz’s government, has led the push to rein in companies’ China exposure.

Last November, new legislation tightened the conditions and introduced caps for businesses seeking state guarantees for investments abroad. Officials said this was designed to discourage the “clumping" of corporate risks in China and encourage investments elsewhere.

Economy Minister Robert Habeck has also sharpened his ministry’s scrutiny of Chinese investments. Late last year, it blocked the sale of a chip factory to the Swedish subsidiary of a Chinese company. In May, he publicly backed outbound investment screening as a way to stop China from siphoning off proprietary technology.

The Greens have been helped in their hawkish campaign by the Chinese economy, whose post-Covid recovery has petered out as its exports and imports have softened, sending some German companies looking for alternatives. While China remained Germany’s largest trade partner in the first quarter, trade between the two was down more than 10% from the same period last year while U.S.-German trade shot up.

Yet the government as a whole never fully endorsed the Greens’ hawkish stance. The pro-business FDP, whose leader is finance minister, has taken a more China-friendly line, as has Scholz.

While hosting Chinese Premier Li Qiang in Berlin last month, the chancellor didn’t allow questions at their press conference and stood by as the Chinese press pool greeted the premier with applause—a breach of journalistic etiquette in the West.