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German Companies Must Cut Exposure to China, Warns Bundesbank

Central bank says operations susceptible to trade disruption as foreign minister backs Brussels’ electric vehicle probe

Germany’s central bank says an excessive dependence on trade with China is one of the main reasons why the country’s “business model is in danger”, adding that high energy prices and labour shortages are also weakening Europe’s largest economy. The Bundesbank warned on Monday that 29 per cent of German companies import essential materials and parts from China, exposing their operations to “significant” damage if this trade route was disrupted as a result of “increasing geopolitical tensions”. “The past few years have revealed the risk to economic development that comes from strong one-sided dependencies on primary products from abroad,” the central bank said in its monthly report. “There is still a need to reduce dependencies on China — especially for primary products that are very difficult to replace.”

The stark warning came as Germany’s foreign minister Annalena Baerbock called on Europe to reduce its reliance on China, voicing her support for the EU’s investigation into electric vehicle subsidies by Beijing. “If you are bound too closely it can endanger yourself,” Baerbock told Bloomberg TV on Monday.

Her remarks echoed the new China strategy adopted by Berlin in July, when companies were told to reduce their dependence on Beijing and warned that the government would not pick up the tab if they fell victim to mounting geopolitical risks. Faltering trade with China, Berlin’s biggest trading partner, is one of the reasons Germany’s economy has contracted or stagnated for the past nine months and the IMF predicted it would be the worst performing major economy this year, forecasting growth to shrink by 0.3 per cent.  In a weekend interview with Welt am Sonntag, Chancellor Olaf Scholz blamed Germany’s stagnation on the “weakness of a few of our export markets, particularly China”, adding: “For an export nation like ours, that has an effect.” He also cited high inflation including a surge in energy prices after Russia’s full-scale invasion of Ukraine in February 2022, higher interest rates that had hit Germany’s construction industry and the lingering disruption that the Covid pandemic had wrought on global supply chains. 

Scholz said his government was trying to ease the cost burden on companies by rapidly expanding wind and solar energy. But he acknowledged that excessive bureaucracy was slowing down the push to expand renewables. China is an important market for German cars and machinery. But exports to China only amount to 3 per cent of German value-added, while the country’s imports from China are much greater. “A sudden unbundling from China would probably be associated with far-reaching disruptions to supply chains and production in Germany, at least in the short term,” the German central bank said. China ranked third, behind the US and Luxembourg, as a destination for direct investment by German companies, accounting for 6 per cent of the total in 2022, the Bundesbank said. But this has doubled since 2010 and China accounts for a bigger share of direct investment in certain sectors, such as 29 per cent in carmaking. “In view of increasing geopolitical tensions and the associated risks, it is necessary for companies and politicians to rethink the evolved structure of supply chains and the further expansion of direct investment in China,” it warned.

German companies relying on critical imports from China generated a quarter of all sales in the country’s manufacturing sector last year, it found. China accounts for a large proportion of German imports of intermediate goods, such as batteries and electric components, as well as capital goods such as data processing and telecoms equipment and consumer electronic goods. China also dominates the global supply of materials for electric vehicle batteries, such as lithium and cobalt. A recent Bundesbank survey found that while 40 per cent of industrial companies relying on critical imports from China had cut their exposure, and another 16 per cent were considering such action, more than 40 per cent of China-reliant companies had taken “no action”. It called for more free trade agreements to diversify supply away from China, improved integration of immigrants into the labour market and a speeding up of state bureaucracy to “increase the attractiveness of Germany as a location”. “Politicians are currently taking some steps in this direction,” it said. “However, these must be implemented and continued.”

Source : FT

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