German direct investment in China has risen sharply this year, in a sign that companies in Europe’s largest economy are ignoring calls from their governments to turn to other less geopolitically risky markets.
Figures provided to the Financial Times by Germany’s central bank, the Bundesbank, show that German direct investment in China totalled €2.48bn in the first three months of 2024, rising to €4.8bn in the second quarter.
In the first half of 2024, it totalled 7.3 billion aro, compared with 6.5 billion aro in the whole of 2023. The investments, mostly by major German carmakers, come despite warnings from Olaf Scholz’s government about the growing geopolitical risks associated with the Chinese market.
European Commission President Ursula von der Leyen had called on companies across the EU to “de-risks” from Asia’s largest economy.
Some observers fear that an escalation of geopolitical tensions across the Taiwan Strait could be disastrous for many German companies with extensive and deepening ties to China.
It could also deprive Germany of many of the critical inputs and raw materials needed to produce everything from chemicals to solar cells and batteries for electric cars. Germany’s dependence on imports from China is particularly high for rare earth metals such as scandium and yttrium.
Investments come from profits made in China
Most of the investment is reinvestment of profits made in China, experts told the FT.
Research by the Cologne Institute for Economic Research (IW Köln) found that more than half of the €19bn in profits German companies made in China last year were reinvested in the country.
The rise in German direct investment reflects a new “in China, for China” strategy by companies such as Volkswagen, which is looking to shift more production to one of its biggest markets, the researchers said.
Friedolin Strack, a China expert at the BDI, Germany’s main business lobby, said: “Companies have seen that many bottlenecks were created during the pandemic and the blockade of the Suez Canal. They are determined to reduce all risks in their supply chains by reorganising them on a regional basis through localisation. This happens a lot, especially in China,” he says.
But Jürgen Matthes, an expert on German-Chinese trade at the Cologne Institute for Economic Research, argued that the strategy would hurt Germany’s 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 labour market. We will export less to China and more production will be done in China by Chinese workers,” Matthes said.
German government ‘cannot de-risk’
The latest figures come just a year after the Scholz government adopted Germany’s first China strategy, a plan based on the need for Europe’s largest economy to “de-risk” its relationship with China.
While Scholz insisted he was against the idea of “decoupling” Germany from China and severing ties altogether, he warned companies not to “put all their eggs in one basket”.
The strategy calls on German companies to diversify their supply chains and export markets away from China, reducing the country’s vulnerability to external shocks.
German companies not listening to government
But so far there is little evidence that companies, especially big carmakers, are heeding the government’s warnings.
Danielle Goh, an analyst at US research group Rhodium Group, said the “strong momentum” of German investment in China would continue for the rest of the year.
Goh cited a number of major announcements in recent months, such as Volkswagen’s plan to invest €2.5 billion to expand its production and innovation centre in the city of Hefei in Anhui province, and BMW’s planned €2.5 billion for its Shenyang production base.
“Over the past five years, German investment has accounted for more than 50 per cent of EU27 investment in China, mainly with contributions from German carmakers,” Goh said.
Some business leaders are particularly concerned about the German car industry’s deepening involvement in China. Volkswagen in particular has been heavily criticised for its activities in Xinjiang, where Chinese authorities have been accused of widespread repression of the Uighur population.
One business leader told the FT: “Some of them are too dependent on profits in China. They are trapped in a kind of gilded cage,” one business leader told the FT.
