German Know-How Counteracts Poor Growth

The executive directors of German companies located in China expect to see continued weak economic growth in the world's second largest national economy in the second quarter of 2016. They consider the likelihood of an economic slowdown occurring within the coming twelve months to be slightly higher than it was in the previous quarter, with the indicator now at 37, as opposed to 35 per cent. An improvement in economic dynamism, however, is considered less likely, with the indicator now at 21 per cent (previous quarter: 23 per cent). This is the outcome of the latest ZEW-PwC China Economic Barometer for the second quarter of 2016, which surveyed executives from German companies in China.

"Following several years with very high rates of growth, the Chinese national economy is now in a period of fundamental upheaval," explains Thomas Heck, head of the China Business Group of PwC in Shanghai. "As a result of increasing wage costs and strong overseas competition, the model for China's economic success, based on its role as the world's primary contract manufacturer, is becoming infeasible."

Chinese investors show huge interest in German technological firms

To compensate for the lack of growth, Chinese businesses are increasingly relying on fusions and takeovers in China and abroad. According to estimates of the executives surveyed as part of the ZEW-PwC China Economic Barometer, this trend shall even become more pronounced within the coming six months. The indicator for the expected acquisition activity in China has risen from 29.7 in the previous quarter, to a current level of 44.4 points. When it comes to overseas takeovers by Chinese firms, the indicator has even reached a value of 71.6 points (previous quarter: 56.6 points). According to the surveyed executives, the attractiveness of German businesses shall continue to increase. "The first-class technological know-how of many German firms makes their takeover particularly attractive to Chinese investors," says Thomas Heck. "Firms in the sectors of environmental technology and mechanical engineering are currently particularly in demand, as China hopes to catch up with Western economies in terms of expansion in this area."

Increasing public spending and falling exports

When it comes to the financing of public spending, the executives surveyed expect to see a rapid increase in levels of public debt. The indicator for the expected growth in public debt has risen significantly from 52.7 points in the previous quarter, to a current value of 75 points. "The Chinese government wants to compensate for the continued lack of growth by increasing public spending," explains Dr Michael Schröder, senior researcher at the Centre for European Economic Research (ZEW). "Together with private consumption, public spending now represents a central factor in China's economic growth." Exports, however, for a long time the most important driver of Chinese economic growth, are increasingly playing a less significant role. The corresponding indicator has fallen yet further, from minus 9.0 in the previous quarter, to minus 25.0 points.

Moderate increase in turnover for German firms

The surveyed executives expect that the turnover of German firms generated in the Chinese market shall show moderate growth in the coming six months. Those surveyed are, however, less confident regarding a further increase in production activities. Despite slowed growth in many sectors, the climate for investment remains positive. Survey participants expect to see increasing investment activity, above all in the services, information and communication, and consumption sectors. Due to massive over-capacities, significant decreases are expected to be seen in the construction and steel and metal industries.

For more information please contact

Dr. Michael Schröder, Phone +49(0)621/1235-368, E-mail schroeder@zew.de