Politics Aside, China-Germany Business Ties Likely to Remain Tight Under Merz 

Germany will soon have a new coalition government led by Friedrich Merz. Overseeing the largest economy in the European Union, the government’s position on China will have a significant impact on the Asian country’s trade and investment relations with the region. Although Merz is seen as more hawkish towards China, the recently revealed coalition deal and sustained local business interactions demonstrate close economic ties between the two countries, which could be indispensable for the new government’s economic revitalization ambitions.  

Germany elected Friedrich Merz, leader of the conservative Christian Democratic Union (CDU) party, in its February snap election after the incumbent three-party coalition (Social Democrats, Liberals and the Greens) collapsed in November 2024 over the country’s economic policies.  

On April 9, the CDU’s Bavarian sister party, the Christian Social Union (CSU), and outgoing chancellor Olaf Scholz’s Social Democratic Party (SPD) announced that they have reached a coalition deal, which aims to revive economic growth in Germany. Once the deal is approved by the CDU and SPD, the lower house of parliament can elect Merz as Germany’s chancellor.  

While most observers of the new government’s foreign policy tend to focus on the United States and the European Union, Germany’s relationship with China—its current second largest trade partner and largest in the previous eight years—shouldn’t be overlooked. Compared to Scholz, who opposed EU duties on Chinese electric vehicles (EVs) during anti-subsidy investigations due to economic priorities, Merz is considered more hawkish on China, especially on evolving security matters.  

However, given the magnitude of China-Germany economic relations, this shift in political rhetoric shouldn’t be considered equivalent to decoupling. Indeed, statements from China and Germany at national and local levels indicate that bilateral trade and investments will likely sustain the current momentum into the new administration. 

German Narrative Shifts to Politically Hawkish but Refrains from Advocating Trade Decoupling

“I have become more convinced in recent weeks and months that the American market, including the South American market, is definitely a more secure basis for us than China alone.” – Friedrich Merz, January 2025 

The new government partners have laid out the foundations of Germany’s China policy: China has become a systemic rival; cooperation will only be sought where it is in Germany’s interest. To strengthen Germany’s resilience, one-sided dependencies are to be reduced and a policy of de-risking pursued. China policy should be more closely coordinated and shaped at the European level. On the public stage, Merz has called for decreased dependency on China, warning companies of “great risks” investing in China and stating that Berlin would not help businesses if their investments failed.  

This narrative is at odds with the trend of German investments in China. Bundesbank data showed that German foreign direct investment to China in the first half of 2024 reached €7.3 billion, surpassing the €6.5 billion total for the whole of 2023. This trend can be seen in the automotive sector, where German manufacturers have struck deals with Chinese companies in the EV market. And as China accounts for a significant proportion of German car sales, major German companies are unlikely to completely step away from China in the short term given their investment track record.  

Merz’s government also needs to take public sentiment into consideration when it comes to trade relations. A European Council on Foreign Relations (ECFR) poll in 2024 showed that 30% of Germans viewed China as an ally or necessary partner. While 55% of respondents considered China a rival or adversary, the results suggest that a pragmatic approach to working with China is still favored by a significant share of the public.  

Chinese Narrative Frames Relationship as Strong Partnership

“China stands ready to work with the new German federal government to consolidate and grow the China-Germany comprehensive strategic partnership.” – Chinese Ministry of Foreign Affairs (MOFA) spokesperson, February 2025 

China’s official tone towards Germany has consistently emphasized cooperation and frames the relationship as a strong partnership. The recent MOFA response to the German election results echoed Chinese Foreign Minister Wang Yi’s comments to Merz during their meeting on the sidelines of the Munich Security Conference in February. Even when confronted with the critical tones of Germany’s China Strategy in 2023, MOFA still stressed that the two countries are “partners, not rivals,” and that “cooperation far outweighs competition.”  

China views Germany as a key partner and considers the relationship beneficial, both in terms of trade and capacity building. In 2024, German exports to China totaled US$94.8 billion, while Chinese exports to Germany stood at US$107 billion, creating a trade surplus for China. Germany’s trade with China also includes the licensing of technology for use by Chinese businesses. These ties—plus investments—have facilitated the cultivation of industry hubs in China, especially those in the auto industry.  

Local Players Recognize Value of China-Germany Industry Cooperation

“It is hoped that this exchange will be an opportunity to promote exchanges and cooperation between the two cities to a wider field and a deeper level, and to realize a higher level of mutual benefit and win-win situation.” – Hefei Mayor Luo Yunfeng, speaking to a delegation from Osnabrueck, October 2024 

“China has achieved technological leadership through joint ventures – this is also the secret recipe to revitalize manufacturing in Europe.” – Representative of a German renewables firm during a business delegation trip to China, June 2024 

Various Chinese cities have welcomed local German delegations, and Chinese delegation visits and investment attraction events have been held in Germany. Meanwhile, the 105 pairs of Chinese and German sister cities also maintain regular exchanges. These visits, involving Chinese and German businesses and policymakers, demonstrate bilateral interest in collaborations that range from R&D to manufacturing.  

Although a November 2024 survey showed an all-time low level of business sentiment among German companies in China due to competition and a slow economy, data published in the same month revealed that the value of new German government state guarantees for investments in China stood at US$111 million, up from US$77 million in 2023 (though this was a sharp drop from previous years). State guarantees protect companies against losses, with companies paying fees to the federal government for coverage. An increase in guarantees could indicate an uptick in investments to China. 

What This Means for Business

Merz’s recent rhetoric suggests that he may maintain a hawkish tone vis-à-vis China—a position that would be in some alignment with the Trump administration. However, as economic growth is a top priority for this federal government, the new coalition will need to work with China on trade and investments, especially in closely interwoven sectors such as automotives, engineering and chemicals. U.S. tariffs on European goods, including levies on steel, aluminum and cars and a reciprocal tariff of 20% (paused, with a 10% rate in place), may drive efforts to boost trade with alternative markets. The EU has signaled an intention to engage in negotiations with the United States while preparing a package of countermeasures.  

At the EU level, Germany will push for a unified EU approach towards Chinese investments in the region. However, this might not happen immediately as the EU is facing more pressing issues such as U.S. tariffs and the war in Ukraine. In the long term, Germany and the EU need to jointly consider how Chinese investments could add value to the EU economy, and this vision will impact Chinese companies’ expansion abroad.  

Following the agreement between the CDU/CSU and the SPD, Merz’s coalition government is expected to take office in early May. A key point to watch will be how the ministerial posts with influence over China policy are assigned, with Merz’s CDU reportedly set to run the economy ministry and foreign ministry.