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TematicheCina e Indo-PacificoChina is caught off guard as Germany refuses to...

China is caught off guard as Germany refuses to “byte” its bait

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Amid sharp criticism by political leaders from his country and the European Union, German Chancellor Olaf Scholz undertook a one-day visit to China in November. In fact, in the recent political history of Germany, no leader ever faced as severe opposition as Olaf Scholz did for choosing China as the destination of his visit. Given that the East Asian country has been overwhelmingly condemned by European Union leaders, including Germans, for its terrible human rights record and for offering diplomatic support to Russia in war with Ukraine, Chancellor Scholz’s timing of the visit kicked off controversy.

But the German Chancellor preferred business over ethics in making China as part of his Asian trip. He landed in Bejing on a mission to strengthen Germany-China bilateral economic engagement at a time when the countries were celebrating 50 years of diplomatic relations. Still, it took no time for Berlin to block the sale of two semiconductor factories to Chinese companies, citing security threats, despite a shared statement that encouraged both parties to “resist protectionism so that the fruitful bilateral cooperation can deliver benefits to the two peoples.” For China, the blocking of the chip factories’ deal came as a blow as it never anticipated that Berlin would hammer it down this way, especially when the takeover of German chip factory Elmos by the Chinese firm Si Microelectronics, and a Chinese investment in Bavaria-based ERS Electronic, were on the verge of completion and a formal announcement in this regard was just waiting to be made. 

Moreover, it took place when Germany signalled that it would overrule the government’s 2018 decision to screen and even block purchases of stakes in German firms by Chinese investors. A few weeks ago, while braving criticism from its European allies, Germany had allowed a Chinese shipping company to take a 24.9 percent stake in a terminal at the port of Hamburg, the country’s largest seaport. This development created a sense of gung-ho among Chinese authorities with Global Times stating that the move would “inject stability into important China-Germany relations.” But by blocking sales of semiconductor factories to China, Berlin showed that Beijing’s happiness was ephemeral. “We hope Germany and other countries will provide a fair, open, and non-discriminatory market environment for Chinese companies doing business there, and refrain from politicizing normal economic and trade cooperation, still less using national security as a pretext to practice protectionism,” Chinese Foreign Ministry Spokesperson Zhao Lijian said tersely.

The meaning is clear: Germany will not allow China to swallow up its companies of strategic and critical importance. In 2020, days before the European Union secured an investment deal with China, Berlin blocked the takeover of satellite and radar technology firm, IMST by a subsidiary of state-backed missile maker China Aerospace and Industry Group (CASIC). In August 2018, it discouraged China’s YantaiTaihai from purchasing Leifeld, a maker of tools for the nuclear power sector. Germany’s machinery maker KraussMaffei Group was acquired by the state-backed Chinese chemical company, ChemChina for about $1 billion in 2016. At that time, Reuters maintained that “the deal is the latest example in recent years of deep-pocket Chinese companies seeking to gain the technological expertise, distribution network and branding of western firms, often built up over several decades.” In 2016, had then US President Barack Obama not blocked takeover of Aixtron SE, a German chip equipment maker, China’s Fujian Grand Chip Investment Fund would have taken over the company.

These takeovers by Chinese companies triggered widespread concern among Germans and in December 2018, the government headed by then Chancellor Angela Merkel unveiled new rules to block purchase of stakes in German firms by non-Europeans—seen as a move to restrict unwanted takeovers by Chinese investors in strategic areas. But Chancellor Scholz, faced with a downturn in economy due to the Ukraine war, tried to overturn such rules. It was seen in the case of his initial move to accept Chinese shipping giant Cosco’s proposal to take a 35 percent stake in Germany’s Hamburg port terminal. Later, under pressure from his cabinet colleagues and the EU leaders, the German Chancellor allowed the Chinese shipping company to take below 25 percent stake in Germany’s largest port. 

Yet the development taking place last month created an impression among Chinese investors that Berlin is open to their fundings, and they moved to place their stakes in Germany’s strategic assets like semiconductor factories. After the US restricted the flow of its chip technology to China, described by The Atlantic as a “painful blow to Chinese President Xi Jinping ambitions to rival the US,” Chinese companies are feverishly looking for options to secure high quality semiconductor technology from Europe and Asia. But Germany proved smarter than the Chinese, as it threw cold waters on their plan before they could buy semiconductor companies in the world’s 6th largest economy.

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