Sino-German business in the age of de-risking: Chancellor Scholz in Beijing

German Chancellor Olaf Scholz, 3 cabinet ministers and a top level economic delegation visit China April 14-16.

It is a balancing act of domestic and foreign political and economic interests, and comes directly after a visit to US President Biden this week.

The aim for a global transformation towards a sustainable, green economy clearly is the solid common ground between China and Germany that the dialogue over various more contested topics will be built upon. 

On Sunday 14. April Scholz will visit a German hydrogen propulsion company in Chongqing, and a German green tech polymer manufacturer in Shanghai on 15th.

Already during the 7th China-Germany inter-governmental consultation in Berlin in June 2023, Scholz and Li Qiang had agreed on a climate and transformation dialogue around electrical and hydrogen mobility.

No wonder, Scholz (Social Democrats) will be accompanied by Environment Minister Steffi Lemke, Agriculture Minister Cem Özdemir (both of the Green Party) and Transport Minister Volker Wissing (Liberal Democrats), representing all 3 coalition government partners.

The German coalition is in significant internal turmoil over many issues, including foreign policy. Foreign Minister Annalena Baerbock, as well as Robert Habeck, Minister for Economic Affairs and Climate Action (both Green Party), representing a historically tough political and economic stance on China in Germany, are both absent. Scholz is more moderate, China friendly and economy-oriented, e.g. overruling resistance in his government against Chinese shipping giant Cosco to buy 24.99% of a Hamburg port terminal.

In July 2023, for the first time ever, the German government had published a China strategy after 1.5 years of heated internal debate. Germany said no to de-coupling and a renewed formation of political blocks. At the same time, it aimed at reducing singular dependencies on China, freshly marked by the painful substitution of natural gas imports from Russia.

Russia is also the biggest political and public grievance: Steffen Hebestreit, head of the press and information office of the government, said on Monday April 8., the chancellor "wants to explore to what extent Beijing can influence Russia and its conduct of the war in Ukraine”. Tuesday, Scholz will talk with president Xi Jinping and prime minister Li Qiang. From the outset, unequivocal condemnation of Russia’s aggression was the demand. But the prolonged bloody conflict now could in the mid-term open up a true mediator and peace broker role for China with its enormous global influence and weight. Not only German industry would certainly sigh in relief, while calling for peace today in public is still very sensitive in Germany. 

Politics aside, the delegation will include top corporate leaders, such as the CEO Siemens who is also president of the Asia-Pacific Committee of German Business, the CEOs of Mercedes-Benz, BMW, , Bayer, ThyssenKrupp, Merck and others.

Scholz and Li will also participate in the German-Chinese Joint Committee of Industry and Trade.

In fact, German foreign direct investment in China climbed by 4.3% and hit a record high of €11.9bn in 2023 official Bundesbank data shows, mainly driven by few very large projects such as by BASF, while the small and medium enterprises SME backbone of German industry is rather scaling back: GlobalData’s FDI Database shows 112 projects pre-Covid in 2019, 60 in 2020 and 50 in 2023.

As the German statistics office reported on February 14, with a foreign trade volume of 253.1 billion €, China was Germany's most important trading partner in 2023 for the eighth year in a row, but trade declined by 15.5%, for economic and not political reasons.

Sebastian Heilmann, China-professor at Trier University and co-founder of China Think-Tank MERICS which also consulted to the German government for its China strategy, said that large listed companies will simply ignore the official China policy as long as there is no mandatory regulation. SMEs on the other hand try to make their China operations more independent, producing “in China for China”, while reducing the risks of interrupted intercontinental supply chains, including in the case of potential sanctions.

On April 9, Reuters reported that a study by the German Economic Institute showed German economy remains highly dependent on China for a number of products and raw materials despite efforts to diversify to other markets. The share of product groups for which Germany relies on China for more than half of its imports fell overall only from 213 to 200, with 73 groups removed, but 60 new added.  Examples are chemicals, computers and solar cells, and in some areas such as pharmaceuticals and rare earths, Germany's dependence has even increased.

An ironic comment in EU circles is that “the German industry is de-coupling from its government” when it comes to China. In reality, businesses simply have a better sense for the pragmatic collaboration for the common good than ideological hardliners. Scholz’ delegation’s visit will likely give them a boost.