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Trade fair in China: Sluggish development of the market


Poor market prospects in China and geopolitical tensions make German companies in China pessimistic about the future. After the end of the zero-Covid policy in the People's Republic, the mood has not improved as hoped, according to a survey by the German Chamber of Commerce in China (AHK), which was presented in Beijing on Thursday.

"The sluggish development of the market and the ongoing geopolitical tensions have put hopes for a rapid improvement in the business environment into perspective," said Jens Hildebrandt, board member of the Beijing Chamber of Commerce. »Local companies continue to locate and diversify to take into account the changing geopolitical conditions and minimize their risk.« The mood is "even more restrained" than in the past two pandemic years.

According to the survey, more than a third (35 percent) of the companies surveyed expect the situation for their industry to deteriorate further this year. Profit expectations are also declining: 32 percent of companies expect a decline of more than five percent. In the August 2022 survey, it was only 22 percent.

Relations between China and Germany are strained above all by China's backing for Russia in the Ukraine war, its threats against democratic Taiwan and German considerations for reducing dependence on business with China. The economic outlook for the second-largest economy is also darkening. China's foreign trade has declined by 6.2 percent since the beginning of the year. Exports slumped unexpectedly sharply by 7.5 percent in May, raising new concerns about growth.

Friendly relations are important

The depressed business climate is also likely to be discussed at the german-China intergovernmental consultations in Berlin on 20 June. For the new head of government, Li Qiang, it will be the first trip abroad since he took office in March. After political talks on Thursday in the powerful Reform and Development Commission and the Foreign Ministry, the President of the German Chamber of Industry and Commerce (DIHK), Peter Adrian, was "very confident" that the consultations "will lead to good results".

It is precisely these personal contacts, which were not possible during the pandemic, that are important, "that you sometimes tell each other what you don't like so much about the other person". This is part of the political business and on the corporate side in order to address problems "clearly and objectively". Adrian emphasized the great importance of Germany's second-largest economy: "China is the most important trading partner for the German economy."

In view of the irritations between Beijing and Berlin, Adrian said: "Friendly relations with China are important and the basis for the long-term development of economic cooperation." However, the relationship remains good, said Chamber Chairman Hildebrandt: "Our impression is that we are not on the way to a deterioration in bilateral relations."

Despite the subdued business expectations, more than half of German companies (55 percent) intend to continue investing in China in the coming years. However, the number is significantly lower than during the pandemic in 2020 and 2021, when it was more than 70 percent. And when companies invest today, despite all this, they do so predominantly (62 percent) in order to remain competitive in the Chinese market. However, 17.7 percent also want to reduce their investments, which is significantly more than in 2020 and 2021.

57.8 percent of companies cite poor expectations for market development as the biggest problem. 42.2 percent fear the increased geopolitical tensions with sanctions, export controls, the Ukraine war and the conflict over Taiwan. Chinese efforts to become less dependent on foreign countries are also cited by 28.4 percent as a reason for reluctance to invest.

In order to reduce their dependence on China because of the risks, German companies are increasingly pursuing local localization (27.4 percent), but also diversifying supply chains away from China (20.5 percent). Just under a fifth (18.8 percent) have suspended planned investments. Another 18.4 percent are increasing their investments in countries other than China. In 16.3 percent of the companies, there are plans for the "worst case": If a complete withdrawal from China becomes necessary.