Economic honeymoon between China and Germany fades

Once close trading partners, China and Germany are now rethinking their business relationship and shifting their focus to other markets

PUBLISHED : Saturday, 29 March, 2014, 1:13am
UPDATED : Saturday, 29 March, 2014, 2:07am

As Xi Jinping prepares to make the first trip to Germany by a Chinese president in eight years, lofty goals to boost trade between the world's top exporters look out of reach, and German firms are beginning to rethink their aggressive push into China.

In 2012, when then premier Wen Jiabao paid a visit, he announced an aim to raise bi- lateral trade to US$280 billion by 2015, a target that seemed ambitious but realistic at the time, given a 54 per cent surge to US$180 billion in the previous two years.

Business ties were flourishing, exemplified by Chinese construction group Sany's record-setting purchase of Mittelstand firm Putzmeister months before Wen flew in. And Berlin, grappling with the euro-zone debt crisis, was keen to cultivate closer economic and political ties to Beijing.

But two years on, the rapid rise in trade has stalled - slipping back in euro terms - and German companies are diversifying into other emerging markets, spooked by China's rising wages, slowing growth and official pressure to expand into its restive western regions.

Suddenly, alongside China, countries like Ghana and Colombia are being talked about as priority targets for German business.

"We had our pivot to Asia. Now a lot of companies are asking whether they shouldn't be swinging in another direction," said Stefan Mair, executive board member at the Federation of German Industries. "Those companies that have invested heavily in China are beginning to view their presence more critically."

Germany's economic ties to China dwarf those of its European counterparts. Led by the big carmakers, German firms moved into China faster and more aggressively than many of their rivals. Volkswagen was the first foreign carmaker to set up shop there more than 30 years ago. Last year, China accounted for a fifth of BMW's sales, well above the 13 per cent it makes in Germany.

China's annual trade flows with Germany exceed those with France, Britain and Italy combined.

But the lofty expectations of a few years ago, when Chancellor Dr Angela Merkel's dominant role in the euro-zone debt crisis made her the go-to European leader for Beijing, have given way to a more realistic sense of what the relationship can deliver.

Berlin and other Western capitals welcomed China's decision this month to break from Russia and abstain in a United Nations vote condemning Crimea's referendum to secede from Ukraine. Yet there is little optimism that Beijing can be pried away from its strategic partnership with Moscow on other issues of global importance.

There is also concern in Berlin about the country's increasingly confrontational stance towards Japan. German officials pushed back against Chinese suggestions that Xi go to the Holocaust memorial during his visit, aware that the event could be used to send a message to Tokyo about contrition over the second world war.

In political as well as corporate circles, there is also nervousness that Germany's close economic ties to China could create an unhealthy dependence.

Last year, a decision by the European Union to impose punitive duties on Chinese solar panels prompted threats of retaliation from Beijing that deeply unsettled carmakers and other German firms with a big presence in China.

They lobbied Merkel to prevent a full-blown confrontation, eventually getting their way, but also raising questions about China's ability to influence political decisions in Berlin.

For Beijing, the solar dispute underlined the importance of cultivating ties beyond Berlin.

In May last year, Germany was the only EU country that Premier Li Keqiang chose to visit. Xi, by contrast, has passed through the Netherlands and France, and after Germany he will visit EU institutions in Brussels, a first for a Chinese president, and give a speech on EU-China relations at the College of Europe in Bruges.

"By visiting Brussels, Xi is sending a clear signal that he has the EU in sight," said Eberhard Sandschneider, a China expert who heads the German Council on Foreign Relations.