China – a partner and competitor

© Fotolia / beltsazar

For many German companies, China is one of the most important markets worldwide. Conversely, Germany is the rising Asian superpower’s biggest trading partner in Europe. Relations between the two countries with their very different economic systems are marked by the push-and-pull of partnership and competition.

China is surging to the top. Since 2010, it has been the second largest economy in the world after the United States. Chinese foreign trade volume has risen more than tenfold in the last 20 years, with economic output now doubling that of 2010. According to World Bank figures, China is now in the upper middle field in terms of income levels, with GDP per capita at around 7,800 euros (2017). The economic structure of the People’s Republic of China has changed rapidly and fundamentally since economic reforms first began around 40 years ago.  While China’s agricultural sector still accounted for almost 70 percent of jobs in 1980, the country is now penetrating emerging fields including artificial intelligence, electromobility and automated driving.

Today, global economic growth is as dependent on China’s state-controlled economic system with its mix of public capital and free market elements as it is on the major Western market economies. At the same time, China is claiming a say in shaping the global order, as is shown by mega projects such as the Belt and Road Initiative.

Germany’s largest trading partner

After years of collaboration, the two economic regions have become closely intertwined. Along with end products, Germany also imports many of its commodities, intermediates and tools from China. These imports help German industry to produce at low cost. However, China is not only an import market but also an export market for German companies. High demand from China was certainly a key factor in Germany’s swift recovery from the global financial and economic crisis.

That said, in the last few years China’s economic growth has levelled out to a comparatively moderate rate. Double-digit growth has long become a thing of the past. In 2018, China’s GDP grew by 6.6 percent. Signs are increasingly pointing towards an economic slowdown. But China’s demand for innovative and high-quality products and services from Germany remains high. New market potential is opening up in areas such as environmental protection, mobility and consumption.

A look at the imports and exports shows the degree of interdependence between the two countries. Since 2016, China has been Germany’s most important trading partner worldwide. The trading volume between the two countries in 2018 amounted to almost 200 billion euros. And Germany, in turn, is China’s most important European market. Last year, Germany imported products and goods worth over 106 billion euros from China.

China’s quest for global market leadership

At present, there are around 2,500 Chinese companies operating in Germany and around 5,200 German companies operating in China. In 2017, the stock of German direct investment in the country amounted to 76 billion euros. In recent years, the majority of Chinese investment in Germany has taken the form of participations and takeovers. Between 2016 and the end of 2018, Chinese public and private companies, state funds, private equity and venture capital funds invested a total of around 33 billion euros in German companies.

A spectacular example of Chinese takeover activities was the acquisition of the Augsburg-based robotic specialist KUKA by Midea, the South Chinese domestic appliances producer, in 2016. This move triggered public controversy regarding takeovers of German technology companies by Chinese investors in general. The People’s Republic is quite open about the fact that it is striving to achieve global market leadership in a range of emerging technologies. To this end it provides extensive subsidies, above all to state-owned companies, along with other measures not in line with a fair and open market order. Germany and Europe also have security concerns regarding investment in various fields of critical infrastructure. In 2018, the German Ministry of Economics prevented the acquisition of a stake in the German power grid operator 50Hertz by the Chinese state-owned State Grid Corporation of China SGCC.

Between partnership and systemic competition

The BDI outlined the major challenges presented by the rise of China as a new economic power to Germany and Europe in its policy paper on China in early 2019. Expectations that the Chinese economic system would gradually and increasingly align itself with the free market system of Western countries in due course will not be met in the foreseeable future. On the contrary, the Chinese government is ever more boldly presenting its own model of a state-controlled economy, not only within its domestic borders but also across the world.

While remaining one of Germany’s most important trading partners, it is becoming increasingly clear that China is also a systemic competitor. German industry must prepare itself for this new reality. The market economy system in Germany and Europe must be made more resilient. The focus must be on creating fair and equal terms of competition and establishing the principle of reciprocity. The BDI is working to achieve this both in Berlin and Brussels.

Looking ahead

China is set to remain a driving force of the global economy and a key import and export market for German industry. German industry wants to cooperate with China on a level playing field. German companies want to advance economic growth and technological development in both countries within a framework of fair competition. In cooperation with the German government, the BDI is striving to improve the business environment for German companies operating in China. Key topics are dismantling market access restrictions and protecting intellectual property. The BDI calls for fair competition and voluntary technology transfer – in China, the EU and other markets.

In provincial China in particular, foreign companies often still face high barriers when it comes to public tenders. China’s rigid exchange rate policy is a further challenge for German enterprises, as is digital communication with the parent companies. German companies would benefit greatly from harmonised data and connective technology standards.

Together with the Asia-Pacific Committee of German Industry (APA), the BDI assists German companies with their projects in China. The main focus here is on offers by German industry to Chinese partners in the areas of sustainable production, environmental technologies and energy efficiency. Through the APA, the BDI participates in organising high-level economic delegations to accompany the trips of government representatives to China. This helps ensure that the main concerns of German industry are included in talks on economic policy.