Berlin - Beijing booming economic relations

THE BOOMING of conomic relations between Germany and China (PRC) is the result of an emerging special relationship that has implications way beyond trade, argues Emanuele Schibotto, ACI Director for Development.

Since the resumption of diplomatic ties in 1982 Germany favoured the “business first” policy towards China. From the small and medium-sized companies (the so-called Mittelstand) to multinationals, Corporate Germany understood way before its European competitors the business opportunites offered by emerging economies – with China being the first and biggest bet.

German pragmatism paid off. From 1995 to 2010 German exports increased sevenfold whereas its imports of Chinese goods increased by 800%. Since 2002 China is Germany's second main export destination outside Europe. In 2009 China became Germany's first supplier and it is now its third largest trading partner, with bilateral trade volumes exceeding 140 billion euros in 2011. Today Berlin accounts for more than 25% of Chinas' total trade with Europe. It is without any doubt the most influential European player in China.

Further enhancing economic relations with China is instrumental to Germany for three main reasons. Firstly, Berlin goal is to boost trade flows with non-European countries in an effort to diversify export destinations and hold a strategic presence into one of the most dinamic regions of the globe.

A recent Asian Development Bank report estimates that Asia's contribution to world GDP will top 50% by 2050. German companies still depends massively on Europe – over 70% of their exports is shipped to European countries whereas 7 products out of 10 imported in Germany comes from the Old Continent. However, this is changing fast. If bilateral trade relations were to continue at the current pace, then Beijing would become Germany's number one trading partner by 2020.

Secondly, China is deemed fundamental to keep Germany manufacturing primacy. German firms foresaw Beijing's preminent role in the global supply chain years before their rivals.

Volkswagen is a paradigm case. One of the first international automakers to venture into China, Volkswagen first took contact in 1978 as the Chinese government decided to open up to foreign enterprises under Deng Xiaoping. In 1984 it established the Shanghai - Volkswagen Automotive Company joint venture. The following year production started.

China is now the Volkswagen Group’s largest sales market with a share of 20 percent of the passenger car market and sales of 2.8 million vehicles in 2012. “We have always assumed that growth won't occur primarily in Europe, but in China, Russia and in South and North America”, Volkgwagen Group CEO Martin Winterkorn said in a recent interview with Spiegel.

Along with Volkswagen there are over 2,400 companies operating in China, the majority of which are medium-sized or small, making the PRC the top foreign investment destination for German companies. Corporate Germany did not only saw China as the world's factory, rather it undertood its huge potential as a consumer market. The number of cities with more than a million residents is set to double by 2025 – from 120 to 240. According to McKinsey, by 2022 more than 75 percent of China’s urban consumers could earn as much as Italy's (in purchasing-power-parity terms).

Thirdly, the German government eyes the growing interest of Chinese investors in Europe. Over the past 10 years the number of transactions between Chinese and European companies has more than tripled.

In 2013 alone investors from the Chinese mainland and Hong Kong have taken over 120 companies and shareholdings in Europe. "Chinese companies create jobs when they invest in Germany, and are very welcomed," said German Economy and Energy Minister Sigmar Gabriel when celebrating the opening of the new Chinese Chamber of Commerce in Germany last month. According to the PRC's Ministry of Trade, Germany is the European country with the best investment opportunities. China is the second largest non-European investor in Germany after the United States.

Investments are piling up. Sany, a Chinese multinational heavy machinery manufacturing company, acquired German mid-sized company Putzmeister, a leading manufacturer of concrete pumps. Lenovo took over the electronics company Medion. Weichai Power bought a stake in Kion, the largest forklift truck maker in Europe. The Chinese Central Bank, through the State Administration of Foreign Exchange, has acquired a 3.04 percent stake in Munich Re, a world leading reinsurer. According to data provided by the Chinese Chamber of Commerce, more than 2,000 Chinese companies are operating in Germany and have invested 2.7 billion Euros by September 2013.

This emerging special relationship is mutually beneficial for China. Berlin is the PRC's strategic foothold in Europe, with Chinese companies gaining insights into European markets. Furthermore, the presence of high-tech German companies in Chinese soil and Chinese-German scientific and academic collaboration help the Asian giant advancing on the tecnology frontier. Industries such as automotive, pharma, renewables and high-technology in which Germany is a world champion are all considered strategically vital by Chinese political and economic leaders. Germany is not only China’s number-one trade partner in the EU, it is also the only country to collaborate with Beijing on its space programme.

Finally, as Germans continue to import ever more goods China's dependence on its traditional trade partners - USA and Japan - is progressively decreasing.

Article previously published on paper by Longitude and  online by the Asian Century Institute