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German direct investment into China has risen sharply this year, in a sign that companies in Europe’s largest economy are ignoring pleas from their government to diversify into other, less geopolitically risky markets.
Figures provided to the Financial Times by the Bundesbank, Germany’s central bank, show that German direct investments in China stood at €2.48bn in the first three months of 2024, rising to €4.8bn in the second quarter.
That brings the total for the first half of 2024 to €7.3bn, compared with €6.5bn for the whole of 2023.
The investment, much of it driven by big German carmakers, comes despite warnings from Olaf Scholz’s government about the growing geopolitical risks associated with the Chinese market.
Ursula von der Leyen, European Commission president, has called on businesses across the EU to “de-risk” from Asia’s largest economy.
Many in Europe worry that Germany’s business leaders have not learnt the lessons of the Ukraine war, which exposed its dangerous entanglement with Russia and its over-reliance on Russian gas.
The fear is that an escalation of geopolitical tensions in the Taiwan Strait could prove disastrous for the many German companies with extensive — and deepening — ties to China.
It could also cut Germany off from 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 reliance on Chinese imports is particularly high in the case of rare earth metals such as scandium and yttrium.
Experts say much of the investment dollars are reinvested profits earned in China. Research by the Cologne Institute for Economic Research (IW Köln) has shown that more than half of the €19bn in profits made by German companies in China last year was reinvested there.
They said the uptick in German direct investment reflected a new “In China, for China” strategy pursued by companies such as Volkswagen aimed at shifting more production to one of their biggest markets.
“Companies saw a lot of bottlenecks forming during the pandemic and the blockade of the Suez Canal,” said Friedolin Strack, a China expert at the BDI, Germany’s main business lobby. “They are determined to reduce all risks in their supply chains by reorganising them on a regional basis, through localisation. That is happening a lot in China, especially.”
But Jürgen Matthes, an expert on German-China trade at IW Köln, warned the strategy would end up harming the German domestic economy.
“It’s a safeguard against possible geopolitical risks, like an escalation in the Taiwan Strait, but it’s to the detriment of the German economy and the German labour market,” he said. “We will be exporting less to China, and more will be manufactured in China by Chinese workers.”
The latest figures come just over a year after Scholz’s government adopted Germany’s first ever China strategy, a plan that was predicated on the need for Europe’s largest economy to “de-risk” its relations with China.
While insisting he opposed the idea of “decoupling” Germany from China, and completely severing ties, Scholz warned companies “not to put all their eggs in one basket”. The strategy called on German companies to diversify their supply chains and export markets away from China and so reduce the country’s vulnerability to external shocks.
But there has so far been little evidence that companies — especially the big carmakers — are heeding the government’s admonitions.
Danielle Goh, an analyst at US-based research group Rhodium Group, said the “strong momentum’ of German investment in China would continue through the rest of the year.
She cited a number of big-ticket announcements in recent months, such as Volkswagen’s plan to invest €2.5bn in expanding its production and innovation hub in the city of Hefei, in Anhui province, and BMW’s planned €2.5bn in its Shenyang Production Base.
“Over the past five years, German investments have consistently accounted for more than 50 per cent of EU27 investments in China, predominantly due to contributions from German carmakers,” she said.
Some business leaders privately express concern about the German automotive industry’s deepening involvement in China. Volkswagen in particular has come under massive criticism over its operations in Xinjiang, where the Chinese authorities stand accused of widescale repression of the Uyghur population.
“Some of them are just too reliant on the profits they make in China,” said one. “They are stuck in a kind of golden cage.”