German economy increasingly dependent on China: report

According to a report prepared by the German Economic Institute (Institut der Deutschen Wirtschaft, IW), the country’s economy became more dependent on China in the first half of 2022. Direct investment and its trade deficit are reaching new heights, despite political pressure on Berlin to pivot away from Beijing.

Simultaneously, the growth of German exports to China has significantly slowed down, which economists explain with a trend toward more local production in the Chinese market.

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

Beijing's lukewarm stance on the Ukraine war and its aggressive military posturing toward Taiwan have placed German business doing business in China under scrutiny.

“Yet despite these dangers and problems, economic interdependencies with China have been moving in the wrong direction at a tremendous pace in the first half of 2022,” said Matthes.

China's share of German imports rose to 12.4 percent in the first half of 2022, compared with only 3.4 percent back in 2000. German imports of Chinese goods, in turn, have surged in value terms by 45.7 percent year-on-year in the comparable period of the first six months. Germany's trade deficit with the country had leapt to almost EUR 41 bn by mid-2022. The IW predicts that the trade gap will only grow.

The study also found that German investment in China amounted to around EUR 10 bn between January and June, far exceeding the previous peak half-year value recorded since the turn of the millennium of EUR 6.2 bn.

“The Chinese sales market and the profits beckoning there in the short term simply seem too attractive,” Matthes said.

The Economic Institute’s report calls for a change of policy, specifically a reduction in incentives for doing business with China and a shift towards more trade with other emerging markets, particularly in Asia. Matthes also called on German businesses to curb their dependency on China. As he warns, any Western sanctions imposed on Beijing, for example in the case of it invading Taiwan, would threaten particularly exposed companies with bankruptcy.

“We otherwise risk running into a 'too big to fail' situation like we saw with the banks,” he said.