German firms ‘will invest more in China’ despite trade war and scepticism over its opening up

For German firms, the trade war and slow reform are not sufficient reasons to slow investment in the world’s biggest consumer market.

Most German companies will ratchet up their investment in China, despite the ongoing economic uncertainty created by the US-China trade war, according to a new survey.

Two-thirds of German firms doing business in China said they planned to up their spending within the next two years, even though many were worried about China’s economic outlook and dissatisfied with the pace of reform.

Over half said they considered China’s market opening insufficient and criticised the absence of a level playing field for foreign companies, while almost a third expected China’s economy to worsen in the coming year.

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The results of the survey, conducted by the German Chamber of Commerce in China, were released as Beijing expressed a willingness to increase the pace of reform during a charm offensive in European capital cities.

The survey was conducted before Chinese President Xi Jinping and US President Donald Trump agreed on Saturday to a ceasefire in the trade war.

The United States agreed to postpone for 90 days the threatened January increase in its tariffs on US$200 billion of Chinese imports from 10 per cent to 25 per cent to allow for further negotiations “on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cybertheft, services and agriculture”, according to a White House statement.

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In addition, China agreed to buy a “very substantial” amount of US goods to help reduce the two countries’ trade imbalance, with purchases of agricultural products, such as soybeans, starting immediately.

The US tariffs do not, of course, affect German firms directly, so the tariff regime will have little impact on their plans to continue to invest in China.

The survey shows that 86 per cent of German companies did not change their investment plans in China over the past year, which has been dominated by the trade war.

Another 10.6 per cent decided to increase investment, while only 3.4 per cent decreased or stopped investment due to regulatory and market barriers.

Some 89.3 per cent of German companies surveyed said they did not have any plans to leave the “world’s factory” within the next two years.

The survey was conducted at a point when US$50 billion of Chinese goods imported into the United States had been hit by tariffs and when political rhetoric from both the US and China was becoming increasingly harsh.

Despite this, the vast majority of surveyed firms said they had not yet been affected by the trade war, in line with the activity of major German companies on the ground there.

In July, BASF, the world’s largest chemical firm, signed a preliminary deal to build a US$10 billion complex in the city of Zhanjiang in the southern province of Guangdong. Signed during a visit by German Chancellor Angela Merkel, the plant could become the industrial giant’s third-biggest global production base upon its completion in 2030.

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In October, Munich-based luxury car maker BMW announced a 3.6 billion (US$4.07 billion) deal to raise its stake in its Chinese joint venture to 75 per cent, up from half. This was the first such move from a global automotive company and came after Beijing announced a relaxation of ownership rules in China’s car market. The deal will be completed in 2022, when the rules capping foreign ownership in the sector are changed.

Speaking at the Hamburg Summit: China Meets Europe on Tuesday, Chinese Vice-Premier Liu He cited the BMW deal as an example of China opening up its economy to foreign investors. He said BMW would be able to take total ownership of the venture, but that it wished to maintain its local partner. “We respect BMW’s choice,” he said.

The Chinese political leadership has used the European roadshow as a chance to present its free trade credentials, with Liu suggesting that China was willing to deepen cooperation on finance, trade and investments with Germany, whose trade surplus with the US has been a regular target of Trump.

The survey showed that despite their willingness to invest, 55 per cent of German companies thought China’s economic reform and market opening had been insufficient.

Similarly, 53.6 per cent of German firms in China were dissatisfied with the lack of a level playing field for foreign companies, the study showed.

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These worries echo those expressed by the European Chamber of Commerce in China, which has been critical of the pace of reform for some time.

“The vast majority of the commitments made by the Chinese government remain unrealised,” the European chamber said in November. “This constant repetition, without sufficient concrete measures or timelines being introduced, has left the European business community increasingly desensitised to these kinds of promises.”

German companies have also become less optimistic about Chinese economic prospects. Nearly 30 per cent said they thought the economy would worsen in the next year, compared with 18.5 per cent in last year’s survey.

Just 40 per cent of surveyed German companies rated current Chinese economic development as positive, 14 percentage points less than last year.

The survey showed this pessimism was shared across the three largest German industries in China: machinery and industrial equipment, automotive, and business services.

Excessive bureaucracy, legal uncertainty, unclear regulations and a slow and limited internet were the key challenges faced by German companies operating in China over the past year.

This article was published by South China Morning Post. Click here to read the original.