Germany has enjoyed an amicable relationship with China. But China’s economic crisis is putting Germany on pins and needles. Voices are growing in Germany that the country needs to decouple from China to reduce risks from internal issues such as a Chinese real estate slump and the US-China conflict.
“Twenty-nine percent of German companies import essential materials and components from China,” Bundesbank, Germany’s central bank, said in its monthly report on Aug. 18, adding that disruptions to trade due to rising geopolitical tensions could cause significant damage to German companies’ business operations. Germany imports a wide range of products and raw materials from China, from intermediate goods such as batteries and electronic components to data processing, telecommunications equipment, consumer electronics and key minerals.
China’s slumping economy is a shock to the German economy. Despite the lifting of the COVID-19 lockdown at the end of last year, China’s economy has remained stagnant, with sluggish consumption, a contraction in employment, and a collapsing real estate market. This has spilled over into the German economy, with the country’s gross domestic product (GDP) failing to post positive quarter-on-quarter growth (0 percent) in the second quarter, following two consecutive months of a drop of 0.4 percent in the fourth quarter of 2022 and a drop of 0.1 percent in the first quarter of this year. The International Monetary Fund (IMF) forecasts that the German economy will grow by just 0.3 percent this year.
However, it is a big challenge for German companies to reduce their dependence on China. According to Bundesbank, 40 percent of the German companies that rely on Chinese imports have reduced their reliance on China and 16 percent are considering it due to the US-China conflict. However, the remaining 40 percent have yet to take any action.
“A sudden separation from China can cause a widespread disruption to German supply chains and production in the short term,” Bundesbank said, “But in light of rising geopolitical tensions and risks, German companies and politicians should reconsider evolving their supply chain structures and further increasing direct investment in China.”
Germany has been deepening its coupling with the Chinese economy under former Chancellor Angela Merkel’s pro-China, mercantilist pragmatism during her 16-year tenure from 2005 to 2021.
German companies that import key materials and components from China account for a quarter of total sales in the country’s manufacturing sector, according to a Bundesbank survey. German companies have also been ramping up their investment in China as a key export market. China stands third in Germany’s FDI rankings in 2022, accounting for 6 percent of the total investment. The United States and Luxembourg are the top two. The share of Germany’s investment in China is 29 percent, especially in automobile manufacturing, the main area of the German industry.
The German economy has a structure similar to that of Korea. Korea has a high share of manufacturing and heavy export dependence on China. Coincidentally, both factors have been blamed for a recent economic downturn in Germany. The German economic crisis is a good lesson for Korea, some experts say.