Germany’s H1 2023 FDI in China Remains Strong Despite “De-Risking” Strategy

A new study indicates that German direct investment in China was near record levels in the first half of 2023, despite the increasing calls for German companies to divest from China. At the same time, imports and exports between the two countries fell over this period, leading some to wonder whether “de-risking” has already begun. We look at the latest trade and investment figures and discuss what they tell us about the future of China-Germany trade and investment relations.

German foreign direct investment (FDI) into China in the first half of 2023 has remained near record levels, despite Germany and the EU’s attempt to shift to a “de-risking” strategy toward China. 

This is according to a new study from the German Economic Institute (IW) shared exclusively with Reuters. The study found that German FDI into China reached EUR 10.31 billion in the first half of 2023, just shy of the record EUR 12 billion invested in the first half of 2022. 

German FDI into China remained strong despite the country’s overall FDI outflows dropping drastically from EUR 104 billion in the first half of 2022 to just EUR 63 billion in 2023, according to the report as cited by Reuters. This has resulted in the share of German FDI into China increasing from 11.6 percent in 2022 to 16.4 percent in the first half of 2023.

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On June 30, 2023, the European Council (EC) issued a new decision on its official strategy towards China, in which it reiterated its goal to “de-risk” rather than “decouple” from the Chinese economy. A few weeks later, the German government released its own China strategy document, largely echoing the stance taken by the EC. On de-risking, the document states that “a reduction of risks is urgently required” but that “we reject a decoupling of our national economies.” 

Although the FDI flows from Germany to China appear to defy this shift, a drop in bilateral trade in the first half of the year has led some to wonder whether this kind of de-risking has already begun. 

Below we look at some of the trade and investment data from the first half of 2023 and discuss whether Germany has indeed begun to reduce its dependence on China. 

German direct investment in China 

According to data from the Deutsche Bundesbank, Germany’s central bank, Germany’s total net direct investment into China reached EUR 10.9 billion in the first half of 2023, a year-on-year decrease of 9.1 percent from the same period in 2022. 

On a quarterly basis, German direct investment increased in the second quarter to EUR 6.66 billion from EUR 4.3 billion in the first quarter. 

Meanwhile, data from China’s Ministry of Commerce shows that the actual use of foreign capital from Germany increased by 14.2 percent year-on-year in the first half of 2023, despite overall utilized foreign capital decreasing by 2.7 percent in the period. 

The majority of the German FDI into China were reinvestments of profits earned, which reached EUR 8.5 billion in the first half of 2023. As noted by Reuters, this indicates that companies “are doubling down on their bet on the country”. 

This reflects previous observations that EU investment in China is becoming increasingly consolidated in terms of the number of active companies, target industries, and countries of origin. 

A 2022 research report from Rhodium Group found that “the overwhelming majority of European investment in [China] comes from just a handful of companies.” Specifically, the top 10 European investors in China accounted for over 80 percent of total investments in China between 2018 and 2021. Moreover, just five sectors (autos, food processing, pharmaceuticals and biotech, chemicals, and consumer products manufacturing) accounted for nearly 70 percent of total European FDI in 2021. 

Finally, just four countries, (Germany, the Netherlands, the UK, and France), made up 87 percent of the total investment value from European countries between 2018 and 2021, with Germany alone accounting for 43 percent of the total. 

This also highlights the overwhelming dominance of German companies in particular, which, as noted by Rhodium Group, were early entrants to the China market and are concentrated in capital-intensive manufacturing and engineering industries that have witnessed strong growth in China over the past decade. 

China-Germany bilateral trade 

China has remained Germany’s top trading partner for seven years running as of 2022 when bilateral trade reached a record high of EUR 298.9 billion. 

According to ITC Trade Map, Germany’s top imports from China in 2022 were electrical machinery and equipment, nuclear reactors, boilers, and machinery, organic chemicals, and furniture. Germany’s top exports to China were vehicles, nuclear reactors, boilers, and machinery, electrical machinery, and precision instruments. 

However, bilateral trade in H1 2023 has dropped from the previous year. Another report from the IW found that German exports to China fell by over 8 percent from H1 2022, while imports from China fell by almost 17 percent. 

The report notes that declines in just a few sectors are responsible for the drop in bilateral trade. For instance, a drop in the import of chemicals accounted for 14 percentage points of the overall 17 percent decline, while a 21 percent decline in German exports of motor vehicles accounted for around three-quarters of the 8 percent overall decline in exports to China.

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While these sectors experienced significant drops, others actually grew in the first half of the year, with German imports of Chinese electrical equipment increasing by 25 percent from the previous half-year. 

The report also analyzed 800 product groups for which Germany is highly dependent upon Chinese imports in order to assess whether de-risking had begun in certain China-dependent sectors. The report found that the share of Chinese imports had reduced in around 70 percent of the products in H1 2023, compared to just 30 percent in the same period in 2022. However, the report also concluded that it was too soon to judge whether this drop is indeed a sign of de-risking, as the reductions of the Chinese share of imports became less relevant when looking at product groups with high import values and/or with an industry focus. 

It is also important to note that China’s overall imports and exports in 2023 have slowed from previous years, increasing a modest 2.1 percent year-on-year in the first half of the year. This is in large part due to weak demand in key consumer markets as inflation and high costs of living reduce demand for Chinese goods. 

Analysis: Has Germany begun to “de-risk” from China? 

It may be too soon to make a judgment on whether Germany’s recent trade data indicates a shift away from Chinese products, as there are many other factors that can affect bilateral trade investment besides policy. 

The impact of de-risking on bilateral trade and investment will also depend largely on what areas are considered risks.

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The risks identified by both the EC and the German government are the so-called “strategic dependencies” in sensitive areas, such as critical raw materials, semiconductors, health, digital technologies, and food. This would therefore require Germany and other EU countries to reduce Chinese imports in these areas. The extent to which Germany and the EU will reduce imports from China in this regard will therefore depend on how narrowly or broadly they are defined. 

It is also true that Germany remains highly dependent on China for both imports and as an export market. China held the largest share of Germany’s imports in 2022 at 12.9 percent, and many of the import products would not be considered “critical dependencies”. 

The de-risking rhetoric must also be considered against the backdrop of ongoing EU-China and Germany-China dialogue. The EU has also made it clear that it does not intend to decouple from China and encourages continued cooperation with the country. In the June 30 decision, the EC states that “the European Union will continue to engage with China to tackle global challenges and encourages China to take more ambitious action on climate change and biodiversity, health and pandemic preparedness, food security, disaster reduction, debt relief, and humanitarian assistance.” 

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