China-Germany Relations Under Merz: Navigating the New Geopolitical Chessboard

On May 6, 2025, Chinese President Xi Jinping’s congratulatory message to Friedrich merz, Germany’s newly elected chancellor, underscored the strategic importance of Sino-German ties amid shifting global dynamics. Xi emphasized a “new chapter” in bilateral relations, framing cooperation as vital to global stability. Yet beneath the diplomatic rhetoric lies a complex interplay of economic interdependence and geopolitical tension. For investors, understanding Merz’s policy blueprint—and its implications for China-Germany trade—will be critical in 2025 and beyond.

The Strategic Significance of Xi’s Congratulatory Gesture

Xi’s message highlighted China’s desire to maintain its status as Germany’s second-largest trading partner—a relationship valued at €201.8 billion in 2024, with Chinese imports outpacing German exports by €12.2 billion. While Merz has labeled China an “increasing threat to German security,” Beijing’s outreach reflects a calculated move to counter U.S. trade pressures and solidify ties with Europe’s economic powerhouse.

Merz’s election also signals a pivot in Berlin’s approach to China. Unlike his predecessor, Olaf Scholz—who avoided overt confrontation—Merz advocates “de-risking” over decoupling, aiming to reduce systemic vulnerabilities while maintaining trade. This balance will define opportunities and risks for investors across sectors.

Merz’s Policy Blueprint: De-Risking Without Decoupling

Merz’s coalition agreement outlines a cautious path forward:

1. Economic Security Measures:
2. Annual parliamentary reviews will assess dependencies in critical sectors like automotive and tech.

3. A proposed €500 billion infrastructure package seeks to modernize German competitiveness, indirectly reducing reliance on Chinese supply chains.

   Ask Aime: What impact does Merz's anti-China rhetoric have on German-Chinese trade?

4. Export Controls and Institutional Weaknesses:

5. A controversial plan to outsource export license approvals to companies has drawn criticism, with experts warning it could undermine security.

6. The National Security Council (NSC), tasked with coordinating foreign policy, faces skepticism due to its subordination to the chancellor’s office and lack of strong leadership.

7. Trade Realities:

8. German exports to China hit €94.8 billion in 2024, driven by automotive and machinery sales. ****
9. State-backed investment guarantees for Chinese ventures rose to $111 million in 2024, signaling ongoing corporate engagement despite geopolitical strains.

The Economic Reality: A Complex Dance of Interdependence

Despite Merz’s hawkish rhetoric, economic ties remain intertwined:

• Automotive Dominance: German firms like BMW and Mercedes continue to expand in China, leveraging joint ventures and EV partnerships. China’s market accounts for ~30% of German car exports, making decoupling economically unfeasible.
• Tech Collaboration: German engineering firms (e.g., Siemens) rely on Chinese partnerships for renewable energy projects, even as Berlin tightens scrutiny of 5G and semiconductor investments.

Yet risks loom:
- Trade Imbalances: China’s trade surplus with Germany has widened since 2020, raising concerns about overexposure to its economy.
- Corporate Sentiment: A 2024 survey revealed 55% of Germans view China as a rival, but 30% still see it as a partner, underscoring public ambivalence.

Challenges on the Horizon

1. Policy Contradictions: Merz’s coalition risks diluting its security goals through compromises, such as weakening 5G restrictions to appease telecom firms.
2. EU Fragmentation: While Merz seeks EU unity on China, divisions persist. Southern European states reliant on Chinese markets may resist coordinated de-risking measures.
3. Geopolitical Pressure: U.S. trade tariffs on European steel and autos could force Germany to deepen ties with China, even as transatlantic alliances fray.

Investment Implications: Navigating the New Landscape

For investors, Merz’s tenure presents both opportunities and pitfalls:

• Auto Sector: Maintain exposure to German automakers (e.g., Daimler, Volkswagen) benefiting from China’s EV boom, but monitor trade policy risks.
• Tech and Infrastructure: Favor firms like Siemens or Bosch, which balance innovation with supply chain diversification.
• Risk Mitigation: Diversify into Asian markets (e.g., India, Southeast Asia) to reduce reliance on China.

The Bottom Line: Merz’s “de-risking” strategy is a high-stakes balancing act. With China remaining Germany’s second-largest trade partner and €94.8 billion in annual exports at stake, abrupt shifts are unlikely. Investors should prioritize sectors with diversified supply chains and monitor policy implementation—particularly export controls and NSC efficacy—to capitalize on emerging opportunities in this volatile landscape.

Final Data Point: China’s trade surplus with Germany has grown from €8.2 billion in 2020 to €12.2 billion in 2024, underscoring the depth of economic ties—and the scale of the challenge ahead.