German direct investment in China and Hong Kong has risen to a new high – with hardly any trace of diversification

New direct investments of the German economy in China (including Hong Kong) will rise to a new level of 11.9 billion euros in 2023.

It is financed solely through reinvested profits. From 2021 to 2023 alone, German companies invested as much new money in China as they did in the six years from 2015 to 2020. There is also no evidence of diversification. The share of China (including Hong Kong) in global German direct investment flows rose to 10.3% – thus to the highest value since 2014. There has been no diversification in investment compared to the rest of Asia.

New high

The latest figures from the Bundesbank show: The German economy as a whole invested more in China (including Hong Kong) last year than ever before. Direct investment flows rose to €11.9 billion in 2023 (figure).

This is a new high – after the already high values ​​of the past two years. In the three years from 2021 to 2023 alone, German companies invested as much in China as they did in the six years from 2015 to 2020.

Split image

However, a divided picture has emerged since 2020:

• On the one hand, there is new investment in China as a whole, which is generally funded solely by profits made there.
• On the other hand, it is clear that there have also been withdrawal movements from China in the past four years. This is shown by negative values ​​of the other components, among which capital usually plays a special role. A study by IW with values ​​up to 2022 showed that in recent years the number of investments in China has been reduced more than new investments built through money flows from Germany.

Even if the Bundesbank’s figures do not currently provide a more accurate view, it is safe to assume that there is still a split between a few large companies and a majority of medium-sized companies. Other studies and anecdotal evidence support the idea that some medium-sized companies are reducing their involvement in China or even withdrawing from it completely.

Instead of diversification, even a higher share

New data from the Bundesbank also provides insight into whether there is diversification away from China. To achieve this goal, China’s share of outward direct investment flows must at least decline. However, the opposite is true. China’s share (including Hong Kong) in all foreign direct investment in the German economy exceeded the 10% mark for the first time since 2014 and reached 10.3% the previous year. In the years from 2018 to 2020, the percentage was less than 3 percent. This is also linked to the fact that German direct investments abroad fell from approximately €170 billion to €116 billion – which goes against the trend of ever-rising investments in China.

Even compared to the rest of Asia, there is no evidence of diversification away from China. For this to happen, the rest of Asia’s share must exceed China’s. Although this rate again reached a relatively high level of 8 percent compared to the previous year, there was only a stagnation in the previous year.

Updated as of April 8, 2024

The information calculated in this study is no longer current because the Bundesbank has revised the underlying data to an unusually large extent. Based on the modified data, the following picture appears: