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On November 4, German Chancellor Scholz paid an official visit to China. This is the first leader of the Group of Seven (G7) to visit China since the outbreak of the new crown epidemic. The delegation of business leaders composed of representatives of 12 important German companies selected from more than 100 large companies also visited. At present, the global economy is facing severe challenges. Sino-German economic and trade relations are of great importance to the economies of the two countries and even the global economy. In the first three quarters, China achieved economic growth of 3%, of which net exports contributed nearly 1 percentage point. However, with the stagnation of the US and European economies, China’s export growth rate has continued to decline since August, and it fell to a negative range (-0.3%) in October. On the other hand, the German government predicts that the German economy will decline next year.
In this context, what does the arrival of the delegation of German Chancellor and business leaders mean?
German Chancellor’s visit to China yields fruitful results
German Chancellor Scholz’s visit to China brought a high-level business delegation, including chemical giants BASF and Wacker Chemical Group, Volkswagen and BMW in the automotive field, and Bayer, Merck, Bayer and Bayer in the pharmaceutical and biological fields. BioNtech, Deutsche Bank in finance, Siemens in manufacturing, Geo Clima Design in energy, Xibao Group in food and Adidas in sports. According to media reports, more than 100 German companies have applied to accompany them, but only the 12 mentioned above were approved.
During his visit to China, Scholz received a “big order” from China. According to China Aviation Supplies Corporation, the company signed a bulk purchase agreement with Airbus in Beijing for 140 Airbus aircraft, including 132 A320 series aircraft and 8 A350 aircraft, with a total value of about 17 billion US dollars. This is the largest purchase order signed by a Chinese airline company since the outbreak of the new crown epidemic.
In addition, several German chemical companies have also announced additional huge investments in China. At the same time, China and Germany have also strengthened cooperation on the new crown vaccine. Scholz announced that the mRNA new crown vaccine developed by the German company Beintech will be able to inoculate foreigners living in China. Scholz also said that this is only a “first step” and that he and Chinese leaders have also discussed the prospect of a general authorization of the Baintech vaccine in China.
In addition to cooperation in aviation, vaccines and other fields, new energy, artificial intelligence, digitalization, green development, ecological environmental protection and other aspects are also the key words for deepening cooperation mentioned by the leaders of the two countries. This means that China and Germany have extensive common interests and have a good foundation for cooperation. It is the general trend to further deepen economic and trade cooperation.
Under the impact of the energy crisis, the German economy faces huge challenges
The Russian-Ukrainian conflict triggered an energy crisis and the German economy was hit hard. On the one hand, German inflation has climbed to a record high. In October, the German CPI reached 10.4% year-on-year, of which energy prices were as high as 43.0% year-on-year. When I joined the ECB in 2003, the inflation level in Germany was only about 1%. At the end of September, German Chancellor Scholz announced that the government will invest 200 billion euros to achieve the goal of reducing energy prices. At the same time, the natural gas surcharge, which was due to start in October, will also be cancelled.
On the other hand, high inflation worsens the trade balance and increases the risk of recession. Before the epidemic, Germany maintained a monthly surplus of around 20 billion euros all year round, but in August this year, Germany’s seasonally adjusted trade surplus was only 1.2 billion euros. In September, it increased slightly to 3.7 billion euros, still at the lowest level since 2000. In October, the German IFO business climate index fell to 84.3%, the lowest level since the financial crisis (excluding the outbreak of the epidemic in 2020). Although German GDP growth in the third quarter was better than expected (1.2% year-on-year), considering that the energy crisis, the new crown epidemic and other unfavorable factors have not been eliminated, it has become the market consensus that the German economy will fall into recession. In October, the German government lowered its forecast for German economic growth in 2022 from 2.2% to 1.4%, and from 2.5% to -0.4% in 2023.
In addition, the two deep-seated contradictions in Germany also cast a shadow over the prospects of Germany’s economy. One is that high welfare and high taxes have weakened Europe’s competitiveness. In 2020, Germany’s social welfare expenditure accounted for 26.9% of GDP, the fourth highest in the world. High taxes and high welfare go hand in hand, which to a certain extent dampens the willingness of laborers to work hard to obtain high returns; at the same time, the high welfare policy faces the financial pressure brought by refugees. The German interior minister said the number of Ukrainian refugees entering Germany had exceeded 1 million, after taking in more than 1 million refugees from Africa and the Middle East just a few years ago. With the large influx of refugees, Germany’s fiscal expenditure burden has increased, and the negative effects of high welfare policies are constantly emerging.
Second, Germany’s aggressive policies on environmental protection affect economic growth. In 2011, Merkel’s government decided to close 17 nuclear power plants with huge investment in stages. At present, there are 3 remaining, which were originally planned to be closed by the end of this year. In addition, the German government has promised to speed up the phase-out of coal power. After Merkel left office, the Green Party, which attached great importance to environmental protection, participated in the formation of the cabinet. The government proposed that the proportion of renewable energy power generation should reach 80% by 2030 and 100% by 2035. Radical environmental protection policies have led to Germany’s over-reliance on Russian natural gas, which has also laid hidden dangers for the outbreak of this energy crisis.
On the basis of complementary advantages, Sino-German trade cooperation benefits both sides
The economic advantages of China and Germany are highly complementary, and strengthening economic and trade cooperation is conducive to the economic growth of the two countries. China has the world‘s largest consumer market, while Germany’s manufacturing level leads the world, and product sales depend on the Chinese market.
In recent years, Sino-German trade cooperation has been deepened, and the total bilateral trade volume has continued to grow. Since 2012, Germany has become China’s largest trading partner in Europe. Since 2016, China has been Germany’s largest trading partner for six consecutive years. According to data from the German Federal Statistics Office, the total import and export trade between China and Germany will reach 246.1 billion euros in 2021, a year-on-year increase of 15.4%, accounting for 9.5% of Germany’s total import and export trade and 35.3% of China’s total trade with the EU.
The importance of China in Germany’s import and export trade is irreplaceable. On the one hand, China is Germany’s largest importer. In 2021, Germany’s imports from China will reach 142.4 billion euros, far exceeding the Netherlands (105.1 billion) and the United States (72.3 billion), which are ranked second and third; on the other hand, China is also Germany’s second largest exporter. In 2021, Germany’s exports to China will be worth 103.7 billion euros, only lower than the United States (122 billion).
In terms of categories, in 2021, the largest category imported by Germany from China is electrical equipment, with a total import value of 43.3 billion euros. Other major imported categories include mechanical equipment, furniture lamps, optical instruments, etc.; Germany’s largest export category to China It is automobiles and parts, with a total export value of 26.6 billion euros, followed by mechanical equipment, electrical equipment, optical instruments, medical equipment, etc.
In addition to the increasingly close trade cooperation, the two-way investment between China and Germany has also continued to increase. As of 2021, Germany has invested a total of US$38.1 billion in China, making it the country with the largest investment in China among EU member states. At present, there are more than 11,000 German companies in China, mainly in the fields of chemicals, automobiles, finance, electrical and electronic, and pharmaceuticals. In recent years, Chinese companies have also increased their investment in Germany. According to the report of the German Federal Trade and Invest, the number of Chinese investment projects in Germany in 2021 will be 149, ranking third in the world.
Since the beginning of this year, Germany’s enthusiasm for investment in China has remained high. The latest data from the Ministry of Commerce shows that from January to August 2022, the actual use of foreign capital in the country was 138.4 billion US dollars, of which German investment in China increased by 30.3%. For example, in September, the German chemical giant BASF’s first plant for the production of engineering plastics in the Zhanjiang integrated base in Guangdong was put into operation. By 2030, BASF will invest a total of 10 billion euros, which is the largest investment by a German company in China in history; In June, the Audi FAW new energy vehicle project started in Changchun, Jilin Province. This is the first pure electric vehicle production base of German auto giant Audi in China, with a total investment of 2.6 billion euros.
The author believes that under the “decoupling theory” that the market is generally worried about, the visit of German Chancellor Scholz and the delegation of business leaders this time not only heralds the deepening of Sino-German economic and trade cooperation, but also refutes the “China decoupling theory” with practical actions. “It is of great significance to China-Germany and even China-EU bilateral relations, as well as to demonstrate China’s openness.
Note: This article only represents the author’s personal views