German leaders and CEOs are flying to Beijing. They need China more than ever

Hong Kong/London
CNN business

German Chancellor Olaf Scholz will arrive in China on Friday with a delegation top executives and a clear message: business in the world’s second largest economy must continue.

In a whirlwind one-day visit, Scholz is expected to meet with Chinese leader Xi Jinping and Premier Li Keqiang in Beijing.

Scholz is joined by a delegation of 12 titans of German industry, including the CEOs of Volkswagen ( VLKAF ), Deutsche Bank ( DB ), Siemens ( SIEGY ) and chemical giant BASF ( BASFY ), according to a person familiar with the matter. They will meet behind closed doors with Chinese companies.

The visit — the first by a G7 leader to China in nearly three years — comes as Germany heads into recession. But it has raised concerns that the economic interests of Europe’s biggest economy are too closely tied to Beijing.

Since the invasion of Ukraine this year, Germany has been forced to abandon its long dependence on Russian energy. Now, some in Scholz’s governing coalition are fretting over the country’s deepening ties with China. Beijing has declared that friendship with Russia “has no limits”. China’s relations with the United States are deteriorating.

The tension was highlighted recently by heated debate over Chinese shipping giant Cosco’s bid to buy a 35% stake in the operator of one of Hamburg’s four port terminals. Due to pressure from some members of the government, the size of the investment was limited to 24.9%.

The potential deal has raised concerns in Germany Closer ties with China will leave critical infrastructure vulnerable to political pressure from Beijing, and will disproportionately benefit Chinese companies.

But Germany is hardly rocking the boat with Beijing as it faces the challenge of reviving its struggling economy. Local consumers and businesses have suffered from the European energy crisis, and there is a deep recession.

A decoupling of the European Union and Germany from China would lead to “huge GDP losses” for the German economy, Lisandra Flach, director of the ifo Center for International Economics, told CNN Business.

According to estimates by the Kiel Institute for the World Economy A major trade cut between the European Union and China would take 1% off Germany’s GDP.

Germany needs to strengthen its export markets with Russia, once a major supplier of natural gas, as relations continue to unravel.

As for China, Germany “doesn’t want to lose even this market, this economic partner,” said Rafal Ulatowski, assistant professor of political science and international studies at the University of Warsaw.

“They [will] try to maintain those relationships as long as possible.’

As Western countries have imposed heavy economic sanctions on Russia, China has publicly maintained its “neutrality” in the war while increasing trade with Moscow.

This has caused it a Backlash in Europe, where some companies are already wary of doing business in China because of strict “zero Covid” restrictions.

Pressure on Berlin is also mounting over China’s human rights record. In an open letter Wednesday, a coalition of 70 civil rights groups urged Scholz to “rethink” his trip to Beijing.

“The invitation of the German trade delegation to join your visit shows that Germany is ready to deepen trade and economic ties at the expense of human rights and international law,” they wrote in a statement published by World. Uighur Congress Based in Germany, the Uyghur-led organization reports on allegations of genocide in China’s Xinjiang region.

He suggested that Berlin was “loosing economic dependence on one authoritarian power in order to deepen economic dependence on another.”

In comments published in a German newspaper on Wednesday, Scholz said he would use his visit to “address difficult issues”, including “respect for civil and political liberties and the rights of ethnic minorities in Xinjiang province”.

A German government spokesman addressed wider criticism last week, telling a news conference that it had no intention of “decoupling” itself from its most important trading partner.

“[The chancellor] basically, he has repeatedly said that he is not a friend of decoupling, or moving away from China. But it also says: diversify and minimize the risk”, said the spokesperson.

Last year, China was Germany’s largest trading partner for the sixth consecutive year, with the value of trade rising by more than 15% from 2020, according to official statistics. Together, China’s imports and exports to Germany were worth 245 billion euros ($242 billion) in 2021.

However, the uproar over the Hamburg port deal is a reminder of the trade-offs Germany must face if it wants to maintain close ties with this vital export market and supplier.

A spokeswoman for Hamburger Hafen und Logistik (HHLA), the company that operates the port’s terminal, told CNN Business on Thursday that it was still negotiating a deal with Cosco.

Flach, of the Ifo Center for International Economics, said the deal was worth looking into because “there is no reciprocity: Germany cannot invest in Chinese ports, for example.”

A Cosco Shipping container docked at the HHLA-owned Tollerort container terminal in the Port of Hamburg, Germany, on October 26.

However, it is easy to overstate the impact of the potential deal, said Alexander-Nikolai Sandkamp, ​​an assistant professor of economics at the Kiel Institute of World Economics.

“We are not talking about a 25% stake in the port of Hamburg, or even a port operator, but a 25% stake in a terminal operator,” he told CNN Business.

Jürgen Matthes, head of global and regional markets at the German Economic Institute, told CNN Business that critics are no longer only measuring the business benefits of Chinese investment in the country.

“Politics and economics must be looked at together and can no longer be considered separately,” he said. “When geopolitics comes into play, the view of China has gone down a lot and become much more negative.”

China’s recent treatment of Lithuania has also deepened he is concerned that Beijing “doesn’t hesitate to simply break trade rules,” Matthes added. The small eastern European nation claimed last year That Beijing put up trade barriers in retaliation for its aid to Taiwan.

China has advocated reducing ties with Lithuania, saying the European nation is acting in response by undermining its “sovereignty and territorial integrity”. This year, after a Lithuanian official visited Taiwan, Beijing also announced sanctions against him and vowed to “suspend all forms of exchanges” with his ministry.

As the German delegation touches down on Friday, they will face another problem that has become the biggest headache for companies across China.

“The biggest challenge for German companies remains China’s zero-Covid policy,” said Maximilian But of the German Chamber of Commerce in China.

“The restrictions are stifling economic growth and severely affecting China’s attractiveness as a destination for foreign direct investment,” he told CNN Business.

Aerial view of Shanghai cityscape on September 25.  The city underwent a month-long Covid lockdown earlier this year.

He said the wider restrictions were so stifling that some companies moved their regional headquarters to other places, such as Singapore. “Managing the entire region without being able to travel freely is almost impossible,” he added.

In a brief statement, Volkswagen told CNN Business that its CEO was going on the trip because “there hasn’t been a direct meeting in almost three years” due to the coronavirus pandemic.

“As the global geopolitical and economic situation has completely changed, the trip to Beijing offers an opportunity to exchange views,” the automaker said.

Despite Beijing’s Covid restrictions and geopolitical tensions, Germany has every economic incentive to stay close to China.

Its dependence on China can be seen in every industry. About 12 percent of all imports came from China last year, with the country responsible for 80 percent of imported laptops and 70 percent of mobile phones, Sandkamp said.

The automotive, chemical and electrical industries are also dependent on Chinese trade.

“If we stopped negotiating with China, we would have problems,” added Sandkamp.

China accounted for 40% of Volkswagen’s worldwide shipments in the first three quarters of this year, and is also a major market for other automakers such as Mercedes.

Among some German officials, the country’s closeness to China could see a shift to a more restrictive trade policy, although economic cooperation is still in the interests of both sides.

Last week, German Economy Minister Robert Habeck told Reuters that the government was working on a new trade policy with China to reduce dependence on Chinese raw materials, batteries and semiconductors.

Unidentified sources also told the news agency that the ministry was considering new rules that would make doing business with China less attractive. The ministry did not respond to CNN Business’ request for comment.

But “despite all the prospects and challenges, China remains unmatched for many German companies in terms of market size and market growth opportunities,” said Bute of the German Chamber.

He predicted that “the vast majority will remain committed to the Chinese market and hope to expand their business.”

Companies seem to be following suit. Last week, BASF CEO Martin Brudermüller told Chinese state media that Germans “need to distance ourselves from China’s attacks and look at ourselves a little self-critically.”

“We benefit from China’s policies to expand market access,” he said at a company event, according to state news agency Xinhua, referring to the construction of a BASF chemical engineering site in southern China.

– CNN’s Simone McCarthy, Chris Stern, Lauren Kent, Claudia Otto and Arnaud Siad contributed to this report.