The photo taken on March 28, 2024 shows the workshop of the Volkswagen MEB (modular electric drive matrix) plant in Hefei, Anhui Province. Photo: VCG

Rapid growth in investment into China by German companies in the first half of the year was a corporate response to the complex geopolitical situation and a normal market decision, showing that German companies value China as an innovation market by increasing research and development investment, analysts and industry insiders said on Wednesday.  

The Financial Times reported on Tuesday that German direct investment in China reached 2.48 billion euros ($2.73 billion) in the first three months of 2024 and rose to 4.8 billion euros in the second, citing data from the Bundesbank, Germany's central bank.

Total first-half investment stood at 7.3 billion euros, compared with 6.5 billion euros for the whole of 2023, according to the Financial Times.

The investment surge came despite warnings by Olaf Scholz's government about the "growing geopolitical risks" associated with the Chinese market and calls by the EU, the report said.

Ursula von der Leyen, European Commission (EC) president, has repeatedly called on businesses across the EU to "de-risk" from the world's second-largest economy.

The investment surge was mainly driven by large German corporations, and the trend is set to gain traction in the second half as more big-ticket deals land, according to the report.

Chinese analysts said that since 2023, high manufacturing costs, rising energy and food prices, tightening regulatory curbs and the EU's bureaucracy have forced many EU companies to move their production out of the bloc.

Zheng Chunrong, director of the German Studies Centre at Tongji University, told the Global Times on Wednesday that more German companies are bringing their supply chains to China as a result of the EC's call for "de-risking."

"The trend is particularly notable for big German corporations, which have ramped up their investments in the Chinese market, which has long been their largest, most profitable single market," Zheng said. "It is market decisions being made amid the political fanfare of 'de-risking' and attempts to persuade companies to diversify away from China."

More elements of the supply chain have come to China and the need for trade has thus partially declined, Zheng noted. "As a result, we see a rise in direct investment and a decline in bilateral trade."

Bilateral trade declined by 5.7 percent in the first seven months of the year to $115.82 billion, Chinese customs data showed. The value of German exports to China declined by 11.7 percent year-on-year.

Some of the high-profile deals announced so far this year include Volkswagen's plan to invest 2.5 billion euros to expand its production and innovation hub in Hefei, East China's Anhui Province and BMW's planned expansion costing 2.5 billion euros of its Shenyang Production Base in Northeast China's Liaoning Province.

Maximilian Butek, executive director and board member of the German Chamber of Commerce in China - East China, told the Global Times on Wednesday that it comes as no surprise that German companies are increasing their direct investment in China, as German companies need to continue to invest in their China operations to remain competitive amid increasing local competition. China is becoming increasingly important as an innovation market, which results in more research and development investment.

Despite challenges and a slowing economy, German companies remain committed to the Chinese market, Butek said.

"Our data show that more than half of German companies plan to increase their investments in the country and the vast majority don't plan to leave," Butek said. "This is especially the case for big corporates and the automotive or electronic sectors."

Zheng said that among German small and medium-sized enterprises, some have indeed heeded the call of the German government and diversified to other parts of the world. 

Although some German companies have succeeded in those smaller markets, it's still questionable whether most of them can succeed on a large scale, as there is no market elsewhere as big as the China market, Zheng said.