Warning to China: reforms are taking too long and Germany may be about to get tough

China will face “a very difficult year” with its major trading partner Germany as the European powerhouse is losing patience over Beijing’s slow-paced reform, the head of the German Chamber of Commerce in China (AHK) has warned.

With bilateral trade exceeding US$200 billion a year – double Britain’s number and triple that of France – China and Germany have built a strong economic relationship amid turmoil in the global economy.

As China and the United States are locked in what is described as the biggest trade war in history, Berlin has so far largely remained neutral.

But Jens Hildebrandt, head of the AHK, said that Beijing would face stauncher demands from Berlin and Brussels this year. German companies, which employ more than 1 million people in China, were growing increasingly impatient with the lack of systemic reforms and were fearful of the country’s economic outlook, he said.

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They were particularly concerned by the slow progress in tackling persistent problems like intellectual property protection and market access restrictions, he said.

The annual business confidence survey, conducted by the chamber at the end of last year, showed positive sentiment among the 5,200 German companies in China dropping, while pessimism was on the rise.

Germans are traditionally more upbeat than other foreign investors when it comes to doing business in China. But the latest figures show even they are losing heart.

About 30 per cent of German businesses responding to the survey expected the Chinese economy to worsen in 2019, up 10 per cent compared with the previous year.

“That says a lot about the development of the Chinese economy, and the psychological impact of the trade war. German companies feel that this year will be much more difficult than in the past,” Hildebrandt said.

“The Chinese government might introduce some reforms, but we need to take a closer look at what they really mean, and take action.”

He acknowledged that Beijing had made some efforts but said the Chinese government needed to do more to convince European investors that they were serious about their concerns.

“There were positive signals, but we are all asking ourselves when will these individual cases become systematic. Now it seems like the government is singling out specific companies, bigger ones, where they can show that they are really trying to change something,” Hildebrandt said.

“Most German companies recognise the reform effort of the Chinese government, but in terms of really getting things done, there is a ‘reform deficit’ – and things don’t really get done at a proper speed.”

Germany was a rare bright spot for China in 2018. Instead of allying itself with Washington to pressure Beijing, the European nation signed several landmark deals with China.

In July, German chemical giant BASF announced a US$10 billion investment in China’s first wholly owned foreign chemical facility in the southern province of Guangdong.

Allianz Group established the first wholly foreign-owned insurance holding company in China in November.

And BMW said in October it would be taking a majority share in its joint venture in China, after Beijing announced the removal of a cap on foreign vehicle production at 50 per cent.

But in recent weeks calls have grown in Berlin for a sharper line on China. This month, the Federation of German Industries (BDI) issued a paper to Brussels and Berlin listing 54 demands for greater pressure on Beijing to create “a level playing field” for German businesses.

China’s aggressive industrial policies, particularly “Made in China 2025”, also worry German companies whose core competency is built on their technology. Some argue that European governments need to take steps to ensure Europe can compete with the US and China in the future.

“There needs to be an industrial policy in certain future industries at least, in Germany but also in Europe. Europe should, and will, work more on industrial policies in certain sectors,” Hildebrandt said.

He said he also expected to see more scrutiny and screening of Chinese investments in Germany.

Last month, German authorities moved to increase vetting of foreign investment from non-European firms in critical infrastructure – a step largely seen as targeting China.

“There will be a higher awareness on all levels of what China is doing and how it is doing it, for example on investment [by China in Germany]. To create trust regarding Chinese investments in Germany, we would need transparency,” Hildebrandt said.

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Germany was also taking a page from US President Donald Trump’s playbook, he said. His tough strategy with Beijing had “pushed open the window of opportunity for negotiations” with the Chinese government.

“German and European businesses should try to use the momentum, and really tell the Chinese side that you’ve shown that you’re willing to be open, but we need structural and systemic reforms.”

Jan Weidenfeld, head of the European China Policy Unit at the Mercator Institute for China Studies, said: “We have been seeing a landslide change in Germany’s China policy.”

Germany, and the EU as a whole, would also take a closer position with Washington towards China on other issues such as the arbitrary detention of foreign citizens and cybersecurity, Weidenfeld said.

The country was “waking up” to persistent problems experienced with China that had seen little progress, he said.

“The changes are brought on by long-term concerns coming together with recent developments,” he said. “The Kovrig episode is not helpful for how China is perceived in Berlin.”

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Canadians Michael Kovrig and Michael Spavor have been in detention since December 10 on charges of endangering China’s national security, in a move widely seen as retaliation for Canada’s arrest of Huawei executive Sabrina Meng Wanzhou, who faces extradition to the United States.

Garima Mohan, a research fellow at the Global Public Policy Institute in Berlin, said changes in German attitudes were the result of a gradual build-up rather than a sudden “tectonic shift”.

“Those who have been more sympathetic towards China, who had hoped for more change and openness, are now sort of backed into a corner,” she said.

“They don’t have any option but to take a more critical look, because the concessions they were hoping for from the Chinese have not materialised.”

The German government would, nonetheless, remain pragmatic, Mohan said, despite the stronger calls from the private sector.

“EU foreign policymaking is gradual, and needs consensus of all the member states, and German foreign policy has not necessarily been combative,” she said.

Cui Hongjian, a European affairs expert at the China Institute of International Studies in Beijing, said Berlin was now under greater influence from Washington when it came to its China policy.

“Some in the German political sphere have been following the trend of the US, though they don’t act as directly as Americans, but they are being influenced,” he said.

“For a long time, the German business community, because of its large interests in China, has not wanted to be influenced by political issues, but over the past two years, there has been a change.

“So the sudden calls for a tougher position on China, in reality, represent the politicisation among the German business community.”

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Cui said China “must pay adequate attention to this development” and address German investors’ concerns. At the same time, he also called on the German business community “not to be influenced by politics”.

“Germany is the first winner of China’s recent policies to increase openness, from manufacturing to finance, so the question remains – what is the purpose of these calls for a tougher policy?”

Hildebrandt said there were limits to how far Berlin could follow Washington, with Trump also accusing Germany of unfair trade practices.

China and Germany should work together with the US to reform international trade institutions like the World Trade Organisation to resolve their disputes, he said.