End of 'Zero Covid' fails to boost German investment in China

China's decision to abandon its strict "zero-COVID" policy has not sparked a rebound in German firms' plans to invest there as a sluggish recovery and geopolitical tensions weigh on the business outlook, a survey showed on Thursday.

Some 55% of German companies plan to further invest within the next two years, according to a survey of 288 firms conducted last month by the German Chamber of Commerce (DIHK) in China. That was slightly above the 51% recorded last year, but well below the more than 70% in 2020 and 2021.

The survey comes amid a shift in Europe's approach towards China that aims to reduce strategic dependencies on Asia's rising superpower, after Russia's invasion of Ukraine and the ensuing energy crisis highlighted the dangers of over-reliance.

Berlin is expected to publish its new China strategy later this year, though the three-way coalition is divided on how far to go. The junior partners, the Greens and the Free Democrats (FDP), have pushed for a more hawkish stance.

A draft strategy paper from the Greens-run economy ministry leaked last December included proposals for checks on outbound German investments in China. Economy Minister Robert Habeck has also argued for export controls in certain sectors.

"Geopolitics have a profound impact on companies on the ground, prompting them to drive forward localization and diversification strategies as risk management measures," said Jens Hildebrandt, head of the DIHK China.

Nearly a fifth of surveyed companies had put planned business in China on hold and were diversifying investment away from the country, according to the survey. A sixth were preparing for "worst case" scenarios including possible withdrawal from China.

German Chancellor Olaf Scholz, a Social Democrat, is betting on German firms slowly diversifying business abroad over the course of 10-20 years in order to reduce Beijing's economic leverage over Berlin. Critics say that will take too long in case of a spat in coming years.

Germany and China are due to hold government consultations later this month.

German companies would like Berlin to lobby China for a more transparent regulatory environment, less state influence on business decisions, better access to public tenders and better IP production, according to the survey.