More German Businesses Becoming Disenchanted With China

The container ships COSCO Pride (L) and Xin Lian Yun Gang of China COSCO Shipping Corp. are unloaded at the HHLA Tollerort Container Terminal in Hamburg, Germany, on Oct. 26, 2022. (Axel Heimken/AFP via Getty Images)

German–Chinese ties have been increasingly complex in recent years. But with Beijing facing growing pushback for using China’s economic dominance to expand its global influence and Europe declaring China a “systemic rival” in 2023, German companies that once saw China as a partner are becoming disillusioned.

An increasing number of German companies are exiting the Chinese market or considering an exit, according to a survey conducted by the German Chamber of Commerce in China. The Business Confidence Survey for 2023/24 revealed that about 9 percent of its 566 member companies in China to participate in the survey—the chamber estimates that there are roughly 2,100 member companies operating in China—are disenchanted with the second-largest economy as a market.

German companies confront a number of challenges, the survey found, while “last year was a reality check for German companies operating in China,” Ulf Reinhardt, chairperson of the chamber, said in a statement.

The barriers that German companies face include rising rivalry from local businesses, uneven market access, geopolitical threats, and economic headwinds.

Geopolitical uncertainties have also prompted German businesses to reassess their China operations and take steps to boost supply chain diversity and localization. Compared to 2022, a higher number of respondents—65 percent—in all major industries said they expected a “worsening” condition in 2023 than said they expected an “improving” one.

Worse, China’s attractiveness as an investment destination has decreased for 54 percent of the respondents, while 44 percent said they were disappointed with China “in general,” given that China is struggling with tepid market growth and a faltering economy.

According to the chamber, after the zero-COVID-19 policy was withdrawn in December 2022, and travel restrictions, mass testing, and other measures that had hampered economic development in 2022 were removed, the economy displayed brief signs of revival.

Yet despite expectations that China’s economy would recover following its zero-COVID-19 policy, it has grown only modestly, failing to satisfy global investors.

The official numbers released last week show China’s gross domestic product (GDP) grew by 5.2 percent in the fourth quarter (October 2023 to December 2023) in 2023 from a year earlier, which was above Beijing’s target of about 5 percent. But analysts believe that the country’s economy actually contracted in 2023, while GDP growth is slated to slide to about 4 percent and could even go below 3 percent in the medium term.

“The risks associated with the Chinese market have continued to deter investors, and low consumer confidence is a particular concern for German companies,” the chamber stated, noting that China’s export-oriented economy—largely dependent on foreign direct investment—was also hampered by domestic issues, weak global demand, and geopolitical uncertainty.

According to a report by the Financial Times, foreign investors pulled out $29 billion from Chinese stocks in 2023. Another report by the Financial Times states that more than 75 percent of foreign money invested in Chinese stocks in 2023 has left, suggesting that foreign investors have been losing faith in China’s financial markets.

Consequently, limited growth expectations are emerging as the primary concern among companies when it comes to investment, with the majority (56 percent) of those who have decided to reduce or not invest citing slow market expansion in China as the reason, followed by 40 percent citing increased domestic competition, according to the chamber. Likewise, 30 percent of enterprises cited China’s economic policies focused on achieving self-sufficiency as a barrier to future investments.

Geopolitical Tension

On the ground, German businesses operating in China are feeling the pinch of geopolitical tensions between the United States, China, and the European Union.

For example, the United States is encouraging its allies to take a harder line against China because it sees China as a systemic rival and strategic competitor. The European Union Commission also used the term “rival” to describe China in 2019 while describing it as a partner.

In trying to strike a balance between its commercial interests with China and its geopolitical relationship with the United States, Germany, an EU member, and the country’s businesses have been put in a difficult position by these developments.

“German companies have reassessed their engagement in the Chinese market over the past years. They are now facing an environment where the relationship between opportunities and risks is more difficult to determine,” the chamber stated.

As a result, German companies are taking steps to protect their operations from external shocks, even as they face increasing pressure to speed up operations because of Chinese enterprises developing capabilities in terms of innovation and speed, according to the chamber.

Need to De-Risk

German businesses are also being urged by the German government to become less reliant on Beijing as part of Germany’s new China strategy.

In Germany’s economic and common interests, the country must prioritize economic security, which means reducing concentration risks that harm not only German residents but also the entire economy, Foreign Minister Annalena Baerbock said in a warning in July 2023, noting that German enterprises that rely heavily on the Chinese market may face more financial risk in the future.

She also emphasized the need for Germany to “de-risk” by diversifying its supply chains and export markets outside of the country to lessen its exposure to external shocks.

“Our survey from 2022–2023 found that German companies already took steps to mitigate risks by diversifying outside of China and localizing inside China,“ the chamber stated, noting that during 2023, “de-risking has been moved even higher on the agenda of Germany and the EU.”