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German business chief clashes with Berlin over China policy

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  • Berlin aims to reshape policy to reduce dependence on China
  • Industry lobbying against restrictions on doing business with China
  • German investment and trade with China hit record highs
  • Large companies enclose Chinese business by localizing

BERLIN (Reuters) – Germany’s top business leaders were thrown into a frenzy last month when they heard the German economy ministry’s proposal to review all corporate investments in China as part of a series of new measures. became.

The investment proposal was immediately shelved, ministry sources and business leaders told Reuters.

Angered by the lack of consultation on a proposal that could make business with China less attractive and could have big implications for German companies, the senior business leader later said at a meeting with Economy Minister Robert Habeck. rebelled.

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The Sept. 21 videoconference was inconclusive, but two of the participants said the meeting raised fears within the German board over the government’s attempt to realign relations with China. sheds light on

Executives at the meeting included the chief executives of chemical giant BASF (BASFn.DE), Deutsche Bank (DBKGn.DE) and industrial group Siemens (SIEGn.DE), two people said. a source said. Both companies declined to comment.

The economy ministry declined to comment when asked about the meeting. The ministry’s Green Party has long advocated a tougher stance on China, and Häbeck said last month that Germany would adopt a tougher approach to trade.

The investment review proposals put forward by the ministry were driven by a desire to limit the transfer of certain technologies and avoid increased reliance on some sectors, said people present at the meeting. one of them and a government source said.

“Don’t let Germany turn its back on China,” said Markus Järger, head of the Mittelstand Association, part of an alliance representing more than 900,000 small and medium-sized enterprises that form the backbone of Europe’s largest economy. I can only warn you,” he said.

“The economic ministry wants or is trying to suspend the German economy’s activity in China, but it is the wrong way to go,” said Jerger, who also attended a meeting with Habeck.

German politicians and executives have come to broadly agree that the country needs to reduce its economic dependence on China, given concerns about industrial espionage, unfair competition and human rights violations.

Russia’s invasion of Ukraine also hits a long-held German maxim that economic interdependence helps open up authoritarian states, and the German government’s question of how it weighs benefits and risks in its relationship with authoritarian states. I sharpened my focus.

But when it comes to China, companies are wondering if Germany can reduce its dependence without further damaging its economy, which is already facing a recession next year, and without provoking a backlash from Beijing. Say it’s a problem.

“Local for Local”

The tripartite coalition government that was formed in December is also cracking, and Germany plans to release its first strategy document for China next year.

The lower parties, the Greens and the Liberal Democrats, are more hawkish than Prime Minister Olaf Scholz’s Social Democrats (SPD) and want to avoid triggering a US-style Cold War with China.

“Decoupling is the wrong answer. We don’t have to disconnect from some countries,” Scholz, who plans to visit China later this year, said on Tuesday. “I would strongly say that we must continue to do business with China.”

German investment and trade in China will reach record levels in the first half of 2022, and big companies say they will no doubt exit the world’s second-largest economy.

Instead, giants such as BASF and automakers BMW (BMWG.DE), Mercedes-Benz (MBGn.DE) and Volkswagen (VOWG_p.DE) are pouring more money into China to create independent local supply chains. I’m trying to build a Their activity from geopolitical conflicts and trade wars.

A BASF spokesperson said: “With our ‘local for local’ strategy, we are stabilizing our regional portfolio against external influences in the best possible way.

Mercedes-Benz, Volkswagen, BMW and BASF accounted for a third of all European investment in China from 2018 to 2021, according to research by New York-based research firm Rhodium Group. .

“It’s impossible to completely separate China from Europe,” Mercedes-Benz spokesman Tobias Just said.

“Our strategy is local to local not only for geopolitical reasons, but also for natural hedges, proximity to core markets and cost benefits,” Just said.

BMW and Volkswagen also told Reuters they supported plans to increase investment in their long-term China operations.

But a Rhodium survey found that European small businesses are reluctant to accept the growing risks of investing in China.

A spokesman for the economy ministry said it was closely watching the investment behavior of German companies as part of a strategic review of how to deal with China.

‘steep learning curve’

In their talks with Habeck, the leaders of big companies tried to make it clear that they were not ignorant about China and that they were looking to double their existing operations while also diversifying, two participants said, asking not to be identified. Told the conditions.

Habeck has pledged to continue dialogue with the business community, and another meeting is arranged in the first quarter of next year, the two said.

“He has a steep learning curve and is very open,” said one of them. “The problem is he’s starting from the bottom.”

The economy ministry declined to comment when asked about next year’s meeting or about Mr Habeck’s remarks.

Some of the measures Berlin says it wants to pursue to reduce its dependence on China are indisputable. For example, looking for new sources of some important commodities such as rare earth metals.

But other proposals have sounded alarm bells to the business community, which would still put them at a competitive disadvantage in the world’s fastest-growing major economy despite an expected slowdown next year. I am afraid that

Reuters reported last month that the economy ministry was considering curbing export and investment guarantees as part of a new China strategy.

Germany’s Mittelstand companies warn that this will hit them hard — and far harder than big companies with more financial power.

“If government support for exports were withdrawn, 50% to 70% of our members would not have the courage to enter the market,” said Jäger of the Mittelstand association.

Business leaders said Berlin should be in closer contact with them about China’s measures, and were relieved to finally be able to discuss the matter directly with Habeck.

Some executives said they are lobbying Berlin to encourage companies to find new markets, for example through new free trade agreements, rather than trying to curb their business in China.

“Incentives for doing business with other countries would be the right approach, rather than punishing companies doing business with China,” said Ulrich Ackermann, head of trade at Germany’s VDMA Engineering Association.

reputation risk

Business leaders told Reuters they were concerned that even discussions of possible policy changes were already affecting relations with China.

Rhodium’s Agatha Kratz said German companies underestimated the reputational risks of doubling down in China, especially in terms of how their actions are perceived in the United States, Germany’s largest export market today. He said it is possible that

“They are still a little too hopeful about being able to resist not only Chinese pressure, but also US pressure on trade barriers,” Kratz said.

China became Germany’s largest trading partner in 2016, accounting for almost 10% of Germany’s €2.6 trillion ($2.5 trillion) in trade last year.

But as the ruling Communist Party gained more control over society and the economy under President Xi Jinping, honeymoons are fading, even under former Chancellor Angela Merkel, who has brought large business delegations to China on numerous occasions. there were.

Rising Sino-American tensions over Taiwan have set new alarm bells for Berlin this year.

Government officials say Germany’s economic ties with Russia haven’t stopped Berlin from pushing sanctions against Ukraine, but some lawmakers have said they would be tough on Beijing if a dispute over Taiwan erupted. I am concerned that it may become difficult to deal with

“If the unthinkable happens, we can’t impose sanctions right now and we’ll just have to wave our fingers and say ‘we can’t do that,'” said SPD MP Marcus Toens.

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Reporting in Berlin by Andreas Rinke, Victoria Waldersee and Sarah Marsh. Additional reporting by Ludwig Burger from Frankfurt, Alexander Huebner from Munich and Eduardo Baptista from Beijing.Editing by David Clark

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