Gloomy prospects for German China business

Poor market prospects in China and geopolitical tensions mean that German companies in China are pessimistic about the future.

After the end of the zero-Covid policy in the People’s Republic, the mood has not improved as hoped, according to a survey by the German Chamber of Commerce in China (AHK), which was presented in Beijing on Thursday. More than half of the companies expect the industry to develop “unchanged or worse” this year. Almost every third fears a drop in profits. When it comes to investments, there is a clear reluctance.

“The sluggish development of the market as well as the ongoing geopolitical tensions have put into perspective hopes for a rapid improvement in the business environment,” said Jens Hildebrandt, executive board member of the Beijing Chamber of Commerce. “Local companies continue to localize and diversify to reflect the changing geopolitical framework and minimize your risk.”

Relations between China and Germany are particularly strained by the Chinese backing for Russia in the Ukraine war, its threats against democratic Taiwan and German considerations to reduce dependence on China business. The economic prospects for the second largest economy are also darkening. China’s foreign trade has declined 6.2 percent since the beginning of the year. Exports fell an unexpectedly sharp 7.5 percent in May, raising new concerns about growth.

“Constructive-Critical Dialogue” with China

The depressed business climate is also likely to be discussed at the German-Chinese government consultations on June 20 in Berlin. For the new head of government, Li Qiang, it will be the first trip abroad since he took office in March. Before the political talks, a delegation of top representatives of the German Chamber of Industry and Commerce (DIHK), headed by DIHK President Peter Adrian, started a “constructive-critical dialogue” with the Chinese side in Beijing in order to address the current problems.

More than a third (35 percent) of German companies expect the situation for their industry to deteriorate further this year. Profit expectations are also falling: 32 percent of companies expect a decline of more than five percent. In the August 2022 survey, it was only 22 percent.

Nevertheless, more than half (55 percent) intend to continue investing in China in the coming years. However, the number is significantly lower than during the 2020 and 2021 pandemic, when it was more than 70 percent. And if companies invest today despite all this, they do it predominantly (62 percent) to remain competitive in the Chinese market. However, 17.7 percent want to reduce their investments, which is significantly more than in 2020 and 2021.

Many companies expect the market development to deteriorate

57.8 percent of the companies name poor expectations for market development as the biggest problem. 42.2 percent fear the growing geopolitical tensions with sanctions, export controls, the Ukraine war and the conflict over Taiwan. Chinese efforts to become more independent from other countries are also cited by 28.4 percent as a reason for cautious investment.

In order to reduce their dependence on China because of the risks, German companies are increasingly pursuing localization (27.4 percent), but also diversifying their supply chains away from China (20.5 percent). Almost a fifth (18.8 percent) suspended planned investments. Another 18.4 percent are diversifying their investments into countries other than China. 16.3 percent are also planning for the “worst case” in order to be able to withdraw completely from China if necessary. (dpa)