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China and Germany: A new special relationship?

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China's relationship with Germany has evolved a lot in the past few years.

A strategic partnership in 2004 evolved into a "comprehensive" strategic partnership at the end of 2014.

Politically, Germany views China as a key partner and important elements of their bilateral trade negotiations include high-level coordination on policy, dynamic trade relations, investment, the environment, culture and science.

CNBC highlights the major trading connections between the two countries and how that could change over time.


Trading partners

China is one of Germany's largest trading partners in the world. According to data from the German Chamber of Commerce, bilateral trade reached a record high of 154 billion euros ($169.3 billion) in 2014. The report also shows that German exports to China have been growing strongly with a total of 5,200 German companies operating in China as of 2015.

While Germans have on many occasions complained of bureaucratic hurdles such as corruption in the Chinese system, the economic relations between the two countries has still grown over the years.

According to official data, German exports are dominated by automobiles and machinery, which together account for more than half of Germany's total exports to China. Other items such as electrical products, optical equipment and airplanes make it to the top five product categories totaling nearly 75 percent of the total export volume.

Meanwhile, electrical products and machinery dominate Chinese products exported to Germany.

According to data from the Federal Statistics Office of Germany, China was the largest trading partner for imports. In exports, China was ranked fifth after United States, France, the United Kingdom and the Netherlands.

Analysts have pointed out that trading relations between the two countries has steadily increased by an average of 14.2 percent annually, doubling nearly every five years.

"Despite China's economic slowdown as well as Germany's low GDP (gross domestic product) growth, trade volume hit another record, reaching 154 billion euros in 2014. Notably, German exports to China have been outperforming imports from China, reducing the current account deficit," according to the latest business consumer confidence survey conducted by the German Chamber of Commerce in China.

The survey conducted with nearly 500 German companies in China showed that they remain positive about future investment potential in the region despite market speculations of an economic slowdown.


Foreign direct investment

Official government data show that foreign direct investment (FDI) into China from Germany continues to be strong and Germany has consistently been among China's top ten foreign investors. The FDI flows have nearly doubled from its value in 2010 to $2.1 billion in 2013. This level has since been maintained.

Furthermore, German companies employ close to an estimated 1.1 million staff in China, thus providing a boost to the country's economic reforms. German businesses have translated the ongoing relationship with China into a steady flow of investment.

However, China and Germany have occasionally had uncomfortable discussions over trade. Chinese Premier Li Keqiang recently told German Chancellor Angela Merkel that he did not want trade tensions with the European Union on the status of China in the World Trade Organization. The EU is currently debating whether to grant China a "market economy" status, which China says is important and was promised 15 years ago when China joined the WTO. Merkel, during her ninth trip to China assured the government that a solution would be found soon.


M&A deals

According to a report from Ernst & Young from February this year Germany was the most attractive destination in Europe for Chinese investment last year, with 36 acquisitions. The United Kingdom came second with 34 and France third with 20. In a research note, Louise Gong, associate at law firm Chadbourne & Parke believes German companies are looking to Chinese investors to provide the capital they are seeking, amid the euro zone's current woes.

"M&A (mergers and acquisitions) is attractive for Chinese investors in Germany as they can enter the EU market and diversify globally, access (the) euro currency, acquire strategic assets and management knowhow, and acquire technical expertise and intellectual property."


What lies ahead?

Relations between both the countries are not just limited to trade. According to data from the German Federal Statistics Office, China is the top destination for German airline passengers. Data from 2014 saw an increase of 1.47 million travellers to China from Germany, as compared to 2013.

On the cultural front, both Germany and China are seeing an increasing number of private cultural exchanges. According to the German foreign office, in recent years numerous outstanding German orchestras, operas and ballet companies have toured China. Similarly, a number of German cultural intermediaries are active in China, including eight German language learning centers.


Challenges

Human resource related issues remain the biggest challenge for German companies operating in China. Finding qualified staff was reported as a problem or major problem for 82.4 percent of companies, an increase of 8.3 percentage points since 2014, according to the survey. This is followed by problems retaining qualified staff as well as perceived currency risks. Some of the other problems outlined in the survey include administrative hurdles, domestic protectionism, legal insecurity and protection of intellectual property.