Merkel heads to China to defend under-pressure German business

Germany’s Chancellor Angela Merkel

BERLIN (Reuters): Chancellor Angela Merkel flies to China on Wednesday to shore up German business interests challenged by Volkswagen’s diesel emissions scandal and the flurry of deals clinched during President Xi Jinping’s visit to Britain last week.

Germany has the greatest trade exposure to China of the 28 European Union nations, largely thanks to demand for its cars and the strength of its engineering industry. But slower Chinese growth has hit German exporters and clouded their outlook.

At the same time, China’s investment in Britain signals Beijing’s growing interest in services and in securing access to financial markets, while its demand for the industrial goods that Germany produces stutters.

“The days of plenty are over,” Sebastian Heilmann, director of the Mercator Institute for China Studies in Berlin, said of Germany’s business ties with China. “Angela Merkel will be in a much tougher spot than on previous visits.”

Merkel must use the two-day trip to reinvigorate German business ties with China, while also handling pressure from Beijing to express the kind of appreciation Britain displayed last week with its show of pomp for the Chinese president.

The chancellor is taking with her a delegation of nearly 20 executives representing the machinery, auto, electrical and telecommunications sectors. Business leaders will join her for a lunch with Premier Li Keqiang on the second day of the visit.

The captains of German industry have a lot at stake.

German foreign direct investment in China amounts to 48 billion euros (35 billion pounds) and 5,000 German businesses operate there, but a golden era of quick and easy mutual gains appears over.

The German engineering sector saw exports to China shrink by 4.9% in the first half of 2015. Their machine products lag only cars as Germany’s largest sector of export goods to China.

Eastern exposure

The scandal at Volkswagen, caused by its rigging of diesel emissions tests, has highlighted Germany’s reliance on its auto industry, which supports as many as one in seven domestic jobs. The auto sector is, in turn, heavily reliant on China.

Last year, Germany’s carmakers accounted for nearly a third of the country’s 75 billion euros in exports to China. Ahead of the trip, German officials played down the risk of the Volkswagen scandal hurting trust in German products in China. “I don’t see that,” one Merkel aide said.

New Volkswagen CEO Matthias Mueller will be on board and is expected to update Merkel on the carmaker’s internal investigation into the emissions scandal, a person close to the matter told Reuters.

German airline Lufthansa will be hoping to make progress on a joint venture deal with Air China during the trip and Deutsche Boerse is aiming to seal a cooperation agreement with a Chinese financial market operator.

Still the volume of deals is not expected to approach the $61 billion sealed between Britain and China last week.

Against the backdrop of slowing Chinese growth, Merkel will be looking to develop a more advanced and mature relationship with the world’s second largest economy.

She is making the trip a year after agreeing an innovation partnership deal with China to further develop business ties.

Heilmann at the Mercator Institute in Berlin said the Chinese had been disappointed that the deal had not yielded more ‘know how’ in technological developments for their businesses.

Berlin dismisses any suggestion Germany’s position as China’s dominant European trading partner is under threat after Chinese President Xi Jinping’s four-day visit to Britain.

“Germany will remain China’s strongest partner in Europe – by far,” the Merkel aide said.