Germany’s dependence on Russian gas has shown how critical economic dependencies can be weaponized in the event of conflict. The billions invested by German companies in China therefore also cause concern. According to our new study, however, the profits from these investments and resulting dependencies are smaller than assumed. The EU is much more important for Germany here.

China has become an important investment location for German companies in the last decade. According to Deutsche Bundesbank, German foreign direct investment (FDI) stocks in China have more than tripled from 29 billion euros in 2010 to almost 90 billion euros in 2020. This is about 7 percent of Germany’s FDI stocks.

chart: german fdi stock in china | germany dependence on china

German FDI in China generated annual profits of 11 to 15 billion euros between 2017 and 2021. Of these, 7 to 11 billion euros flowed back to Germany. That is 12 to 16 percent of all profits flowing to Germany from German FDI stock abroad. Compared internationally, China has thus reached a relevant size and is roughly on a par with the USA. However, the EU’s share in profits from FDI flowing back to Germany is significantly higher, averaging 56 per cent in the same period.

This is a key finding of our new study, prepared in cooperation with the German economic Institute (IW), the Mercator Institute for China Studies (MERICS) and the German Federation of Industries (BDI), which examined the profit situation of German companies in China with special analyses of Bundesbank data.

We conclude that China continues to play a subordinate role for the German economy compared to the EU, when it comes to FDI and resulting profits. As in the case of trade, Germany’s integration with the EU Common Market is most important in this regard.

chart: primary income from dividends and other distributed profits | germany dependence on china

According to our analysis, the profit returns from China also do not create a critical dependency from a macroeconomic perspective. This is known to be different for individual large companies. It is important to point out that information about such company-specific geopolitical cluster risks is too thin to draw conclusions at the company level.

Also, it should be mentioned that FDI by German companies in China and the resulting profits represent only one aspect of the complex and close economic ties between Germany and China. Other important components, such as trade in goods and services, exchange in research and development, are not the subject of this study.

The results of a non-representative survey of around three dozen large German companies with relevant business activity in China conducted for our study by IW and BDI also suggest that more transparency in business with China would be desirable. A clear majority of the companies surveyed want to replace exports from Germany with local production by 2030. China is also to be increasingly used as a research location and for exports to neighbouring countries.

chart: export strategies of selected German companies with regards to China | germany dependence on china

This could result in deteriorating export prospects for the German economy. If German companies localize more in China, there is a risk that this will negatively impact German exports to China. German exports to the People’s Republic and other Asian countries could significantly decrease, if the Chinese market was increasingly served by local production and Asian markets were increasingly served by exports from China.

Important conclusions can therefore be drawn for the German government’s China strategy, which currently is in the making: The new German China policy should be formulated independent of individual company and sectoral interests. The focus should be on securing the welfare of the overall economy.

Moreover, Germany’s China policy should be embedded in a comprehensive EU China policy to strive for a concerted and coordinated EU-wide approach among the member states vis-à-vis China.

Only if all member states pull together so that the EU can bring its entire economic weight to bear can it also meet China on equal footing, demand reciprocity and position itself as an actor capable of acting, e.g. to preserve an open, rules-based world trade system.

The study (German only with Executive Summary in English) is available for Download here.

About the author

Cora Jungbluth is a senior expert in the Europe’s Future Program at the Bertelsmann Stiftung. Her research focus is foreign direct investment and international trade (especially the role of emerging economies). Her research focus is on China, foreign direct investment and international trade (especially the role of emerging economies).

Read posts by Dr. Jungbluth on the evolving role of China

Online Event: Europe’s Future Team at the China-Strategy 2023 Conference

Asia Pacific: The Test Case for a Geopolitical EU Trade Strategy

A Gloomy Outlook for EU-China Relations: Divergence, Distancing, Decoupling

The war against Ukraine – 5 take-aways for China and their implications for the EU – Takeaways 4 and 5

Also, see our new Trade Graphic: Asia Pacific – Key Region for Global Trade.