Mutual dependence between China and Germany? Part 1

Glory past, dusty future?

Starting from the Chinese economic reform under Deng Xiaoping in 1978, the Chinese economy has grown at an incredible pace. It established itself as a key economic driver and particularly in the wake of the global economic and financial crisis, becoming a patron for investors across the globe. The Sino-German bilateral trade relationship arose on the verge of this development. And in the course of the last 40 years, this became a pillar for both sides – the German innovation and the Chinese progression.

Coming all the way from the frosty liaison between Prussia and Qing Dynasty starting in 1861, the Sino-German bilateral trade now targets a record high volume of USD 160 Billion with no abrupt end in sight. A small comparison: the Sino-German trade volume doubles the Chinese-Russian one and outweighs the trade with the United Kingdom, France and Italy as a whole together. This co-efficient underlines the reciprocal importance firmly and strengthens the trade, investment and technological cooperation.

Germany embodies the biggest European investor in China, enabled by the 6,000 German companies represented in China. The German direct investment carries a 50 Billion Euro volume package, resulting in Germany mounting up to a comprehensive strategic partner. The Sino-German relationship now enters a strategic partnership in global responsibility.

China’s slowing economic growth

However, despite China’s utopian ascent in the near past, it is not all roses anymore. The Chinese growth is slowing down, and after a decade of skyrocketing, the Chinese government is now aiming at a persisting economic growth between 6.5% and 7% for the next year. But it is highly doubted, if the government can prove their clairvoyance and reach the target. China is now suffering from the glory days in the past, leaving behind several severe problems. This mainly refers to minor productivity, old and competitively unviable industries, enormous overcapacity and sketchy air pollution. This results in a decrease for German imports as well as a matter of fact.

Furthermore, the Chinese economy is shifting away from a production-based sector, focusing now on the service industries assisting domestic performance and private consumption in the future. This provides a long-term profit in the future, but on a short-term basis it is not beneficial. It also suffers from the rapidly aging population. While now already one out of six is over 60 years, the ratio will be of out of four by 2025. This measure will hit the German export industry certainly, which is dominated by capital good and the production.

Will China and Germany now move apart?

China is now planning to hit the growth target by heavily leaning towards both fiscal and monetary policy. It foresees a 13% growth of M2 (a gauge for money supply, serving as a key economic indicator used to forecast inflation). The monetary policy that granted a total lending of RMB 2.51 Trillion in January alone is loose already. Furthermore, this time a fiscal policy with the supply-side economics is taking over. The concept is to clear the path for private companies. It also aims to refrain from pouring money into the state-company dominated infrastructure market.

This also explains China’s ongoing draft for the newest “Made in China 2025” project. The “Made in China 2025” project is an initiative to comprehensively upgrade the Chinese industry. It was first mentioned in December 2014. As the efficiency and quality among Chinese producers is still uneven, it is planned to serve as an incubator for a new generation of technological standard. Five guiding principles give a framework for this project, which are:

• innovation driven manufacturing,
• emphasizing on quality over quantity,
• achieving green environment,
• nurturing human talent.

What is the answer to “Will China and Germany now move apart?” and how will be the future Chinese-German cooperation? All of these questions are addressed in part two of our article. You should not miss it to get yourself informed.