Berlin It was an urgent warning that NATO Secretary General Jens Stoltenberg recently issued. “Free trade must not triumph over freedom, and commercial considerations must not take precedence over the security of our country,” he said in a newspaper interview in Norway in early December.
One must learn from the mistakes made towards Russia with a view to China, according to Stoltenberg, companies should not make themselves too dependent on the People’s Republic.
It’s not just the NATO Secretary General who is worried about European companies becoming too dependent on China. The federal government has been urging German companies for months to reduce their sometimes very strong focus on the People’s Republic.
A rethink has long since taken place, especially among medium-sized companies. But above all the large corporations such as the chemical company BASF or the German car manufacturers are holding on to the market and continue to invest.
The federal government has already initiated measures designed to encourage more companies “not to put all their eggs in one basket”, as Chancellor Olaf Scholz emphasised. But both experts and the ministries are skeptical about how effective the measures will really be.
“When it comes to reducing economic dependency on China, politicians only have limited options if they do not want to intervene more deeply in the business practices of companies, following a good market-economy credo,” says Jürgen Matthes, head of the Global and Regional Markets department Institute of the German Economy (IW), in conversation with the Handelsblatt.
One of the measures that the federal government has already decided are restrictions on investment guarantees. With these, the state secures investments by German companies in high-risk markets – both financially and politically.
Stricter conditions for granting these guarantees have been in force since November. For example, there are upper limits for the allocation to companies in each country in order to reduce “cluster risks”.
>> Read here: Stress tests for companies, more EU votes – that’s in the draft of the new German China strategy
According to the federal government, the measures are having an effect – since November, 14 applications with a total capital cover of around four billion euros have not been approved. But experts doubt whether the company really prevents people from investing in a country.
“A more restrictive allocation of investment guarantees will probably not be decisive for German companies’ investment decisions – at least not if they continue to assess the Chinese market as very attractive and indispensable,” believes IW expert Matthes.
A second instrument that the federal government hopes will lead to greater diversification could be stricter disclosure requirements for companies. On the basis of existing disclosure obligations, companies that are particularly exposed to China should be “obliged to specify and summarize relevant China-related developments and figures, for example in the form of a separate notification obligation,” says the draft for the China strategy, which is currently in the departments is coordinated.
It is currently difficult for private investors in particular to see how exposed German companies are to China.
Increase in geopolitical risks – China stress tests for German companies?
Rating agencies have better access to the relevant data. American credit checkers would already include an assessment of the geopolitical risk, said Franziska Brantner, Secretary of State in the Ministry of Commerce, at a recent event. “And it could be very expensive for European companies to refinance if they don’t diversify.”
According to rating agencies such as Moody’s and Standard & Poor’s, however, the tensions with China have only had a limited effect on the credit ratings of companies. “Overall, the geopolitical risks have increased this year,” summarizes Tobias Mock, who is responsible for corporate ratings in German-speaking countries at Standard & Poor’s. “The large German corporations are currently so well diversified that country risks have not had a significant impact on the ratings, despite the increased geopolitical tensions,” he says.
David Staples, European corporate finance specialist at rating agency Moody’s, explains: “The two most important aspects are: How dependent is the company on a country in terms of supply chains? And how dependent is it in terms of its cash flow?”
However, many companies are diversifying their supply chains – and the impact on cash flow is often less than one might think.
>> Read here: China is important for the German economy – the key figure remains under lock and key
His colleague Marina Albo, who is responsible for European corporate financing, refers to the French carmaker Renault, which ceased its significant activities in Russia after the outbreak of war in Ukraine, which led to a massive drop in sales. “However, the Russian activities were relatively separate from the rest of the business, even the debt was local, so this did not significantly change Renault’s risk profile,” says Albo.
In particular, large corporations with a high proportion of China have increasingly separated their China business from other parts in recent years.
The federal government is also considering “whether affected companies should carry out regular stress tests in order to be able to identify China-specific risks at an early stage and take remedial measures,” as stated in the draft China strategy.
Danger of an escalation of the Taiwan conflict – there is a risk for shareholders
One of the biggest risks for German companies doing business in China is an escalation of the conflict over Taiwan. The Chinese leadership regards Taiwan as part of China’s territory, although the country has never been part of the People’s Republic founded in 1949 and has its own democratically elected government and laws.
China’s head of state and party leader Xi Jinping has said several times that he wants “reunification”, stressing in this context that he does not rule out the use of force against the island nation.
IW expert Matthes believes shareholders and lenders need to consider this risk. He believes that this could lead to a significant correction in share prices on the stock exchange and in the financing conditions for business in China.
“This means that financial market players potentially have the power to make companies more cautious about their China business,” says Matthes. But it is questionable whether politicians can rely on it. Because if short-term thinking dominates the financial market, as is so often the case, the prospects of profits that are waving in the near future are likely to override the risk of losses. Then ultimately, despite more transparency, not much would happen.
More: Scenarios of a possible escalation – The most important questions and answers in the Taiwan conflict