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Exclusive-German economy ministry reviews measures to curb China business

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© Reuters. FILE PHOTO: Employees work on assembly line during a construction completion event of SAIC Volkswagen MEB electric vehicle plant in Shanghai, China November 8, 2019. REUTERS/Aly Song

By Andreas Rinke and Sarah Marsh

BERLIN (Reuters) – Germany’s economy ministry is considering a raft of measures to make business with China less attractive as it seeks to reduce its dependency on Asia’s economic superpower, two people familiar with the matter told Reuters.

The measures could include reducing or even scrapping investment and export guarantees for China and no longer promoting trade fairs and manager training there, those people said. Loans from state lender KfW could be re-directed to projects in other Asian countries, such as Indonesia, in line with attempts to diversify trade and increase business with democracies.

The ministry is also considering screening not just Chinese investments in Germany but also German investments in China, one of the sources told Reuters.

In addition, the government is considering submitting a complaint to the World Trade Organization about what it views as unfair Chinese trade practices, together with the Group of Seven wealthy democracies, a separate source said.

“We should show Beijing that we are willing to fight for the principles of fairness,” the source said.

An economy ministry spokesperson declined to comment on these specific measures but said the ministry was checking targeted measures “to support the diversification (of trade and supply chains) and the strengthening of resilience”.

The ministry had already decided to no longer give investment guarantees for projects in the Xinjiang region or to companies with business relations there given concerns about human rights abuses there and lack of reliable information.

In May, the economy ministry denied Volkswagen (ETR:VOWG_p) guarantees for new investments in China because of concerns over Xinjiang.

Chinese foreign ministry did not immediately respond to a Reuters request for comment.

The plans mark a departure from Berlin’s policies under former Chancellor Angela Merkel, who took vast business delegations with her on her frequent trips to China, and oversaw a boom in Chinese-German economic ties.

China became Germany’s top trade partner in 2016, with a volume of trade of over 245 bln euros last year, helping fuel growth in Europe’s largest, export-driven, economy.

German carmakers are especially heavily exposed to the Chinese market, with Volkswagen making around half its profits there. Germany, and Europe, also rely on China for certain raw materials, such as rare earths.

In recent years, German politicians and business leaders have already advocated greater diversification in trade with Asia in response to Beijing’s tightening grip over the society and the economy under President Xi Jinping.

Shortly before leaving office last year, Merkel told Reuters she may have been naive at first in some areas of cooperation with China.

NEW CHINA STRATEGY

The new government agreed a tougher line on China in its coalition deal, vowing to reduce strategic dependencies on its “systemic rival”, and mentioning for the first time matters sensitive for Bejing, such as Taiwan and Hong Kong. Chancellor Olaf Scholz made his first Asia visit to Japan, unlike Merkel. [L5N2WQ44I]

Berlin is working on a national security strategy that is due to mention China, and a specific China strategy that it intends to publish next year, the sources said.

The Greens junior coalition party – in charge of both the economy and foreign ministries – says it is particularly concerned about human rights abuses and the risks of being beholden to an increasingly assertive authoritarian state, Russia being a case in point.

“We cannot … afford to just behave following the motto ‘business first’, without taking into account the long-term risks and dependencies,” Foreign Minister Annalena Baerbock told the annual congress of ambassadors this week.

“In reality we never received cheap gas from Russia,” she said. “We paid twice or three times as much for every cubic meter of Russian gas in our national security.”

Scholz’s Social Democrats are more reticent about rocking the boat, sources said. Scholz has warned of negative consequences of any “decoupling” from China and expressed confidence that companies are already diversifying.

Companies and corporate associations are increasingly making their concerns about a tougher China policy public, arguing for help diversifying trade rather than confrontational steps in such an important market.

“We cannot isolate China,” said Hildegard Mueller, the head of the German autos association VDA, told digital outlet Table Media. “That would be naive – and fatal, both politically and economically.”

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