Simultaneously, researchers have documented a surge in investment activity in China. This shift has become a serious concern for Germany’s export balance.
Economic growth in China has slowed, with the government in Beijing recently reporting its weakest quarterly figures in years. Nevertheless, the country’s massive market continues to attract German companies. Last year, they substantially increased their investments in the Chinese economy.
According to calculations by the German Economic Institute (IW) in Cologne, additional direct investment amounted to over seven billion euros. This figure is the highest since 2021 and approximately 50% higher than the 2024 value. It also exceeded the long-term average for 2010–2024, which stood at six billion euros. Jürgen Matthes, head of the international economic policy, financial markets, and real estate markets department at IW, commented: “Overall, German enterprises continue to expand their presence in China, once again at an accelerated pace.”
Profits in China Directed Toward Reinvestment
Conversely, investments by German companies in the US during the first year of Donald Trump’s second term decreased by nearly half. Between February and November 2025, direct investment fell by 45% to approximately 10.2 billion euros, according to another IW study.
Specialists at IW also analyzed how German direct investments in the People’s Republic of China are being financed. According to the data, funds primarily come from the profits of Chinese subsidiaries. This capital was reinvested locally rather than being returned to Germany. Reinvested profits in the PRC amounted to approximately twelve billion euros, significantly higher than the seven billion euros in net new investment.
Companies Yield to Beijing’s Pressure
“This significant difference indicates that, as in previous years, there are German firms withdrawing substantial investment from China,” Matthes explained. However, many—and specifically several large corporations—intend to continue investing there. They often yield to Chinese pressure to move the entire value chain into the PRC.
Consequently, more companies are adopting a China for China or even a China for the World strategy. The IW specialist emphasized: “In doing so, they are increasingly turning to local suppliers and less frequently using deliveries from Germany.” This shift aims to protect against potential tariffs and export restrictions. Product development is also increasingly occurring in China, with some companies even establishing their latest research centers there.
For example, the EBM-Papst group, a global leader in fan and ventilation technology, invested 30 million euros to expand its site in Xi’an. A company representative explained: “We develop and produce where our customers are located.” According to him, the site handles not just manufacturing but local development—from engineering to adapting products to regional requirements. “This makes us faster, more adaptable, and independent of global disruptions on the ground,” the representative summarized.
Warning of Cheap Imports from China
The trend toward local production is likely to impact Germany’s export balance. Matthes noted: “All of this will further reduce our export opportunities in China, which have already suffered greatly from Chinese competitive distortions.”
Beijing demonstrably relies on government subsidies far more heavily than other nations. Furthermore, the national currency, the yuan, has been significantly undervalued against the euro. The IW analyst explained: “Both factors lead to Chinese production and exports being artificially cheapened at our expense.”
This becomes particularly problematic when German firms in China also benefit from local subsidies or are lured by them, thereby relying less on domestic German production. Matthes added: “German industry suffers even greater harm when goods produced with Chinese state support are exported to Europe, as subsidized Chinese jobs then compete unfairly with German ones.”
The institute’s direct investment calculations are based on Bundesbank data for the period from January to November 2025, extrapolated for the full year.
Source: Reuters
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