Growing Number of German Businesses Losing Faith in China

German-Chinese ties have been increasingly complex in recent years. But with Beijing facing growing pushbacks for using China’s economic dominance to expand its global influence and Europe declaring China a “systemic rival” last year, German companies that once saw China as a partner are getting 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 (GCC) in China. The Business Confidence Survey for 2023/24 revealed that about 9 percent—more than double in the past four years—of the 566 of the 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,” said Ulf Reinhardt, chairperson of the GCC, in a press release.

The barriers 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, and compared to 2022, a higher number of respondents -65 percent- in all major industries expected a “worsening” condition in 2023 than 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 from tepid market growth and a faltering economy,

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According to the GCC, after the “zero-COVID” policy was withdrawn in December 2022, travel restrictions, mass testing, and other measures that had hampered economic development in 2022 were removed, the economy displayed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 zero COVID, it has only grown modestly, failing to satisfy global investors.

“The risks associated with the Chinese market have continued to deter investors, and low consumer confidence is a particular concern for German companies,” said GCC, adding 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 over 75 percent of foreign money invested into 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 who cited increased domestic competition, according to GCC. Likewise, 30 percent of enterprises cited China’s economic policies focused on achieving self-sufficiency as a barrier to future investments.

Geopolitical Tensions

On the ground, German businesses operating in China are feeling the pinch of geopolitical tensions among 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, these developments have put Germany, an EU member, and the country’s businesses in a difficult position.

“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,” said the GCC.

The chamber adds that, 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 due to Chinese enterprises developing capabilities in terms of innovation and speed.

Need to De-Risk

German businesses are also being urged by the German government to become less reliant on Beijing as part of its 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, said foreign minister Annalena Baerbock, in a warning last July, adding 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. During 2023, “de-risking has been moved even higher on the agenda of Germany and the EU,” the GCC said.