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German economy, auto sector face risks from exposure to China, fund manager says

by Wanda Rich
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German economy, auto sector face risks from exposure to China, fund manager says

By Christoph Steitz

FRANKFURT (Reuters) – Germany’s heavy economic exposure to China carries significant risks for Europe’s top economy, the country’s second-largest fund manager said, singling out the market for electric vehicles as a specific example for how that is likely to pan out.

Union Investment, which has 432 billion euros ($462 billion) in assets under management, looked at nearly 2,000 listed companies globally in a study seen by Reuters, concluding that German companies were particularly vulnerable.

“No other country, not even China’s direct neighbours such as Japan and South Korea, has so many large companies with high exposure to China,” the study said, adding this was true for nearly a quarter of all German companies in the focus group.

China has been Germany’s single biggest trade partner since 2016, with bilateral trade of nearly 300 billion euros even surpassing that of the United States. That poses a dilemma for the German government, which is actively trying to get companies to derisk from China, the world’s second-largest economy.

The fund manager said it was striking that German companies are also increasingly relocating research and development activities to China, while others did the opposite for security reasons.

“This strategy is risky on several levels: Germany suffers as a business location as areas with significant value creation are being moved abroad while the supplier industry is losing orders.”

Union Investment holds stakes in virtually all German blue-chip companies, including German carmakers Volkswagen, BMW and Mercedes-Benz as well as BASF, which all have major ties and exposure to the Chinese economy.

The exposure means that German carmakers are facing risks such as being squeezed out of the Chinese market as well as seeing increased Asian competition in Europe, the fund manager said.

German carmakers could face retaliatory measures in China if Berlin were to protect them from Asian rivals at home, Union Investment said, adding that the technology offered by German car manufacturers can now be replaced, unlike 10 years ago.

“This makes retaliation less painful for China – an important decision-making criterion for Beijing, as we all know.”

($1 = 0.9361 euros)

(Reporting by Christoph Steitz; Editing by Paul Simao)