Leading German economists have warned that Beijing’s plan to refocus the Chinese economy from export growth to domestic consumption isn’t working well, and that German firms should brace for tougher times ahead in what has long been a booming market for them.
“For German companies, the best times in China are over,” Peter Bofinger, a member of the German Council of Economic Experts, a panel of advisors to the German government, told Handelsblatt.
The council on Wednesday handed over its latest economic analysis to Chancellor Angela Merkel. In it, the economists called for structural reform in Germany and in the European Union, criticized the ultra-easy monetary policy of the European Central Bank and for the first time devoted themselves in depth to China, the world’s second-largest national economy and Germany’s fifth-biggest export market.
They said China no longer had a sustainable growth model. While export growth was flagging, much was being invested in infrastructure and real estate, in some cases far more than necessary. They noted that a large proportion of the investments were financed by borrowing, and that this posed a problem because both the government and companies were amassing high levels of debt that could cause a financial crisis.
But unlike the global financial meltdown that spread from the U.S. in 2008, there wouldn’t be much international contagion from possible bank insolvencies in China, the economists said. The country has little foreign debt and banks hold little debt in foreign currencies. So the government would have little trouble bailing out banks. But if a real estate bubble were to burst, China’s economy would suffer and the newly emerging middle class would face poverty.
The economists said protectionism was on the rise in China and that the country's role as an engine of global growth was weakening.
China’s planned conversion to a consumer economy was so far only progressing slowly, said the economists. This was due to local officials whose success was measured by the amount of growth there is in their region. They would lease out plots of land and encourage real estate investment while refraining from closing down unprofitable state companies. That was why the transformation from investment to consumer spending planned by the Communist Party wasn’t working to the desired extent, said Mr. Bofinger.
The government wasn’t prepared to withdraw from the economy, he added. In fact, it was stepping up its management of the industrial economy, he said. China needed innovations and an education system that produced people who had their own ideas. He said he doubted whether that would succeed if the party becomes increasingly restrictive in how it governs the country.
At the same time, there were clear protectionist tendencies, the economists said. Imports were frequently replaced by Chinese products. And as exports had also declined in 2015, China’s role as engine of the global economy was weakening. The German economy has adjusted to that over the past two years and was again exporting more to the euro zone and the U.S.
German direct investments in China have stagnated at 4.4 percent of total German direct investments abroad, reflecting that German companies have had a more subdued assessment of the country’s economic outlook for some time.
At the same time, Chinese companies have embarked on a shopping spree in Germany. The volume of takeovers has surged this year, such as the takeover of the robotics manufacturer Kuka, and is already higher than in the last five years. “The takeovers often target global market leaders in very specialized niche markets,” the economists said in the report. 70 percent of the Chinese buyers are state-owned companies. “There isn’t any real separation between private companies and the state in China anyway,” Mr. Bofinger told Handelsblatt. For this reason, he supports the approach of German Economics Minister Sigmar Gabriel of taking a close look at high-technology takeovers and insisting on Chinese and German firms having equal access in both markets. “It is certainly the case today that a German manufacturer is worth less when it is German hands than if it belongs to a Chinese investor – simply because of market access in China,” he said.
However, other members of the panel take a different view. They believe the import of capital will increase productivity and wages in Germany. A transfer of technology to China would make the trading partners there more interesting for German companies. “So Germany should adhere to its openness toward Chinese investors,” they wrote. An open economy like Germany’s shouldn’t insist on full reciprocity in market access.
Donata Riedel writes about politics and economics for Handelsblatt. To contact the author: email@example.com