German business leaders clash with Berlin over China policy

BERLIN, Oct 13 (Reuters) – When German business leaders learned last month of an economy ministry proposal to screen all business investment in China as part of a series of new measures , there was an outcry.

The investment proposal was quickly dropped, a ministry source and a business executive told Reuters.

Annoyed at not being consulted enough on proposals to make doing business with China less attractive that could have big repercussions for German companies, business leaders then pushed back in a meeting with the Minister of Health. Economics Robert Habeck.

Although no conclusions were reached during the September 21 video call, the meeting, narrated by two of the participants, highlights the anguish of German boards over the government’s efforts to recalibrate its relations. with China.

Executives who attended the meeting included chief executives of chemicals giant BASF (BASFn.DE), Deutsche Bank (DBKGn.DE) and industry group Siemens (SIEGn.DE), the two sources said. The companies declined to comment.

The economy ministry declined to comment when asked about the meeting. The Green Party, which leads the ministry, has long advocated taking a tougher line on China and Habeck said last month that Germany would take a tougher approach to trade.

The investment screening proposal launched by the ministry was motivated by a desire to limit transfers of certain technologies and avoid growing dependencies in certain sectors, said one of those present at the meeting and a government source.

“We can only warn that Germany is turning away from China,” said Markus Jerger, head of the Mittelstand association, which is part of an alliance representing more than 900,000 small and medium-sized businesses. companies that form the backbone of Europe’s largest economy.

“Pausing the activities of the German economy in China, as the economy ministry wants or tries to do, is not the right way,” said Jerger, who also attended the meeting. with Habeck.

German politicians and leaders largely agree that the country needs to reduce its economic dependence on China, given their concerns about industrial espionage, unfair competition or rights violations. rights – concerns that Beijing has firmly dismissed as unfounded.

Russia’s invasion of Ukraine also dealt a blow to the long-held German maxim that economic interdependence would help open up authoritarian states and sharpened Berlin’s attention to how it should weigh the profit versus risk in dealing with them.

But when it comes to China, the companies say the sticking point is how Germany can reduce its reliance without inflicting more damage on an economy already facing recession next year – and without causing reaction from Beijing.

“LOCAL FOR LOCAL”

Cracks are also appearing in the three-party coalition government that took office in December and is due to publish Germany’s first strategy paper for China next year.

The junior parties, the Greens and the Free Democrats, are more hawkish than Chancellor Olaf Scholz’s Social Democrats (SPD), who want to avoid starting a US-style cold war with China.

“Decoupling is the wrong answer. We don’t have to decouple from certain countries,” Scholz, who plans to visit China later this year, said on Tuesday. “I say categorically that we must continue to do business with China.”

German investment and trade in China hit record highs in the first half of 2022 and big business says there is no talk of pulling out of the world’s second-largest economy.

Instead, giants such as BASF and automakers BMW (BMWG.DE), Mercedes-Benz (MBGn.DE) and Volkswagen (VOWG_p.DE) are pumping more money into China to build supply chains independent locals, partly to protect themselves. their operations from geopolitical disputes and trade wars.

“With the ‘local for local’ strategy, we are stabilizing our regional portfolio against external influences in the best possible way,” a BASF spokesperson said.

Mercedes-Benz, Volkswagen, BMW and BASF together were responsible for a third of all European investment in China in 2018-2021, according to a study by Rhodium Group, a New York-based research firm.

“It’s impossible to completely disentangle China and Europe,” said Tobias Just, a spokesman for Mercedes-Benz, which sells three times as many cars in China as in the United States and has two Chinese entities as its major shareholders.

“Our strategy is local for local, not only for geopolitical reasons, but also for natural coverage, proximity to major markets and cost advantages,” Just said.

BMW and Volkswagen also told Reuters they were considering investing more in their long-running Chinese operations.

Rhodium’s research, however, indicates that smaller European companies are increasingly reluctant to accept the increasing risks of investing in China.

A spokesman for the economy ministry said it was closely monitoring the investment behavior of German companies as part of its strategic considerations on how to deal with China.

“HIGH LEARNING CURVE”

In their meeting with Habeck, top business leaders tried to convey that they weren’t naïve about China and were looking to diversify, while doubling down on existing operations, the two participants said. declined to be named.

Habeck promised to continue the dialogue with the business community and another meeting has been organized for the first quarter of next year, the two people said.

“He has a steep learning curve, he’s very open,” said one. “The problem is that it starts at the very bottom.”

The economy ministry declined to comment when asked about a meeting next year or remarks about Habeck.

Some of the steps Berlin has said it wants to pursue to reduce its reliance on China are uncontroversial, such as finding new sources of some key commodities such as rare earth metals.

But other proposals have raised alarm bells in the business community as it fears the measures could put them at a competitive disadvantage in what is still the world’s fastest growing major economy, despite an expected slowdown. next year.

Reuters reported last month that the Economy Ministry is considering limiting export and investment guarantees as part of its new China strategy.

Germany’s Mittelstand companies warn it would hit them hard – and much harder than corporate giants with more financial firepower.

“If the government support for exports were to be canceled, then I estimate that 50% to 70% of our members would probably no longer be bold enough to enter the market,” said Jerger of the Mittelstand association.

Business leaders said Berlin should liaise more closely with them on any steps China takes and they were relieved to finally be able to discuss the matter in person with Habeck.

Some leaders said they were pressuring Berlin to encourage companies to find new markets, for example through new free trade agreements, rather than seeking to curb their business in China.

“Instead of punishing companies for doing business with China, the right approach would be to encourage business with other countries,” said Ulrich Ackermann, head of the business department at German engineering association VDMA. .

REPUTATIONAL RISK

Business leaders told Reuters they fear even the debate over possible policy changes could already affect their relationship with China, which has urged Berlin not to politicize the trade.

Rhodium’s Agatha Kratz said German companies may also be underestimating the reputational risk of doubling down in China, particularly in terms of the perception of their actions in the United States, which is now the world’s biggest export market. ‘Germany.

“They still have a little too much hope that they can withstand Chinese pressure, but also American pressure in terms of trade barriers,” Kratz said.

China became Germany’s biggest trading partner in 2016 and accounted for almost 10% of the country’s 2.6 trillion euros in trade last year.

But even under former Chancellor Angela Merkel, who took large business delegations on her many trips to China, the honeymoon was fading as the ruling Communist Party tightened its grip on society and government. economy under President Xi Jinping.

Rising US-China tensions over Taiwan have been another wake-up call for Berlin this year.

While government officials say Germany’s economic ties with Russia haven’t stopped Berlin from pushing for sanctions against Ukraine, some lawmakers fear it may be more difficult to get tough on Beijing in the event. conflict over Taiwan.

“If the unthinkable were to happen, at this time we would not be able to impose sanctions, we could only lift a finger and say ‘you can’t do this,'” the MP said. of the SPD Markus Toens.

($1 = 1.0245 euros)

Reporting by Andreas Rinke, Victoria Waldersee and Sarah Marsh in Berlin; Additional reporting by Ludwig Burger in Frankfurt, Alexander Huebner in Munich and Eduardo Baptista in Beijing; Editing by David Clarke

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