What does this mean for the German economy? It's clear that in case of doubt, the Chinese government will enforce far-reaching changes, even in the short term. For example, publicist and analyst Shi Ming reports that after the Chinese stock market crash in 2015, public lending to private companies was radically reduced, but private lending through peer to peer lending was widely accepted. Participants in this parallel capital market in turn suffered immense losses in 2019, in the absence of any - previously customary - government intervention to support them. As a result of this loss of conidence, private lending in China is still scarce to this day. This, in turn, led to the effect that the state had to step in more as a money provider, borrowing more money from abroad.
As a result, China's debt has risen significantly since 2019. Although the giant’s debt level doesn't appear to be alarmingly high at present, it can quickly increase significantly if quasi-state enterprises can't service their debts anymore. Then, the state must visibly intervene and officially take over these debts. The rising debt service in foreign currency thus makes it unpleasant for China if the external value of the yuan falls. It's plausible that, in addition to interventions in the foreign exchange markets, the Chinese government will attempt to reduce the outflow of yuan abroad, not only focusing on the exchange rate. In the current deflationary economic situation, it's also important that that more money is spent domestically.
Still, the introduction of tough foreign exchange controls in China anytime soon is hardly likely. However, the Communist Party has often demonstrated in the past that it finds creative solutions to achieve its goals even below formal orders. It will thus certainly become more difficult to repatriate profits earned in China, accelerating the ongoing process of decoupling. Due to geopolitical risks alone, global companies are increasingly enhancing the autonomy of their local units in China. This will be reinforced by the processes described above. When profits can hardly be taken out of China, there are hardly any other options but to reinvest them locally.
Further decoupling of the corporations involved, which can extend to a complete split into a legally independent Chinese corporation and a corporation for the "rest of the world”, seems like an obvious solution. In principle, this is not an insurmountable problem for globally positioned stock corporations: the splitting up of groups is a process that has often been carried out in recent years. However, for Germany as a business location, such a regional division of German major corporations would be detrimental, as it would result in the loss not only of tax revenue but also of globally oriented development departments.
This problem seems much more pressing than the tiresome discussions about dependencies in foreign trade. This observation could be called a "grey rhino": a problem that is actually known, but which - apart from the half-hearted reduction of Hermes guarantees for China investments - is not being addressed by the German government. Investments in China should no longer be politically supported in any way; it's time for a strategy to counteract the trend of disengagement of German subsidiaries in China.
