China's importance to German exporters on the wane

China is losing importance as a market for German exporters, with data showing a steady decline in its share of total exports, a trend set to continue as Berlin and Beijing rethink their economic ties.

Despite hopes of a trade boost after Beijing lifted pandemic restrictions, exports to China made up just 6.2 per cent of total German exports in the first half of the year - the lowest share since 2016 - according to data from the German statistics office to which Reuters had access on August 4, Reuters reports.

After peaking at 7.9 per cent in 2020, the share of Germany's exports going to China has been on a steady decline, falling to 7.5 per cent in 2021 and to 6.8 per cent in 2022.

China's emergence as a market economy in the 2000s provided a massive boost to German companies and has proved a big contributor to the overall health of the German economy since.

However, this driver of growth for Europe's largest economy is set to lose steam in the coming years.

"For some years now, euro zone exports to China have no longer been growing faster than overall exports, and recently they have even been somewhat weaker, which has weighed more heavily on Germany's manufacturing sector than on that of its peers," Commerzbank's chief economist Joerg Kraemer said.

One reason for the slowdown is that growth in the Asian giant is faltering. China's economy grew just 0.8 per cent in the second quarter as a post-COVID recovery faltered, after 2.2 per cent growth in the first quarter.

Carsten Brzeski, global head of macro at ING, said it was too early to speak of the end of the China boom, since the Chinese economy could yet recover and the U.S. economy cool, changing trade dynamics.

"In the long term, however, China's share of our exports will decline significantly, and we should prepare ourselves for the fact that China will no longer save our export sector," Brzeski said.

Germany exported goods worth 791.5 billion euros ($866.61 billion) in the first half of the year, posting a 3.2 per cent increase compared with the same period last year.

A breakdown by destination shows Germany exported 78 billion euros in goods to the United States in the first half of 2023, a 4.8 per cent increase on the year, while China received exports from Germany to the value of 49.4 billion euros, a 8.4 per cent decline.

That China is increasingly able to produce goods it previously bought from Germany is weighing on German exports, Brzeski noted.

"At the same time, however, Germany's import dependence on China remains high as the energy transition is currently impossible without Chinese raw materials or solar panels," he said.

China is climbing the technological ladder, said trade expert Vincent Stamer of the Kiel Institute for the World Economy (IfW) in Germany. With its growing technological progress, the country is able to create an increasing part of the value added itself.

"This then no longer has to be imported from Germany and the rest of the world," he said.

However, Stamer believes it is premature to sound the death knell for China as a customer.

"China will remain an important sales market in the coming decade. However, the dependence of many companies on the Chinese market will no longer be so visible in export figures, but in their balance sheets," Stamer said.

For example, many German carmakers are increasingly producing locally for the Chinese market.

Weaker demand from China has had a strong impact on the German manufacturing sector. German industry has been in the doldrums, with a PMI survey this week showing that a downturn in the manufacturing sector deepened in July.