German reliance on China is growing ‘at a breakneck pace’, study finds

A China Shipping container is loaded at a loading terminal at the Port of Hamburg in Germany July 27, 2018. REUTERS/Fabian Bimmer/File Photo

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BERLIN, Aug 19 (Reuters) – Germany’s economy grew more dependent on China in the first half of 2022, with direct investment and its trade deficit hitting new highs, despite political pressure on Berlin to walk away of Beijing, according to a study consulted by Reuters.

At the same time, German export growth to China has weakened significantly, the German Economic Institute (IW) said in its study, citing economists pointing to a trend of more local production in the Chinese market.

“The German economy is much more dependent on China than the other way around,” said Juergen Matthes, author of the study.

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He warned that this reliance posed a political problem, as Beijing’s stance on the war in Ukraine and its military posture towards Taiwan put German affairs with the world’s second-largest economy under scrutiny.

“Yet, despite these dangers and problems, economic interdependencies with China moved in the wrong direction at a breakneck pace in the first half of 2022,” the economist said.

The study found that German investment in China amounted to around 10 billion euros ($10 billion) between January and June, far exceeding the previous semi-annual peak recorded since the start of the millennium of 6.2 billion. euros.

“The Chinese sales market and the earnings expected there in the short term just look too attractive,” Matthes said.

China’s share of German imports rose to 12.4% in the first half of 2022 from 3.4% in 2000, while German imports of Chinese goods increased in value by 45.7% year-on-year in during that six-month period, the IW found.

Germany’s trade deficit with the country had jumped to nearly 41 billion euros by mid-2022, the institute said, adding that the gap is expected to widen further.

The IW called for a policy shift, calling for reduced incentives to do business with China and a move towards more trade with other emerging markets, particularly in Asia.

Matthes also called on German companies to reduce their dependence on China, warning that any Western sanctions against Beijing, for example if it invaded Taiwan, would threaten particularly exposed companies with bankruptcy.

“Otherwise we risk ending up in a ‘too big too fail’ situation like we’ve seen with the banks,” he said.

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Reporting by Klaus Lauer; Written by Rachel More; Editing by Paul Carrel and David Holmes

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James R. Rhodes