China’s Investments in Germany and the Impact of the COVID-19 Pandemic

This paper analyses how China’s investments in Germany have developed over time and the potential impact of the COVID-19 pandemic in this regard, based on four different datasets, including our own survey in mid-2020. Our analysis shows that Germany is currently one of the most attractive investment destinations for Chinese investors. Chinese state-owned enterprises have played an important role as investors in Germany — particularly in large-scale projects. The COVID-19 pandemic has had some negative but rather temporary effects on Chinese investments in Germany. Germany is expected to stay attractive to Chinese investors who seek to gain access to advanced technologies and know-how in the future.

In early 2020, COVID-19 fi rst caused a drastic lockdown of the Chinese economy. Subsequently, lockdown measures and further containment policies like business closures and mobility restrictions have been implemented worldwide to stop the spread of the coronavirus. The pandemic has led to a massive shock to the world economy (Ozili and Arun, 2020). Against this background, the United Nations Conference on Trade and Development (UNCTAD) expects that foreign direct investment (FDI) fl ows in 2020-2021 will drop by about 30% to 40% (UNCTAD, 2020a).
Decreasing FDI fl ows may make it more diffi cult for fi rms to acquire resources for their business and best satisfy the market needs. Such FDI decreases may further weaken the investment-based development impetus in many countries, impede the processes of idea exploration and research and development (R&D) and thus pose a threat to global prosperity.
This paper provides empirical evidence of how China's investments in Germany have developed over time and of the investment impact of the COVID-19 pandemic. It also shows the relevance of China's policies in this regard. The analysis is based on four different data sources, including our small-scale survey in mid-2020 on the COVID-19 impact on FDI.

Policy background: Outward FDI for China's development
Many Chinese fi rms investing abroad were motivated by their business interests (e.g. Cheung et al., 2012;Li et al., 2017;Wu, 2007). But their investment decisions and engagement have also been strongly guided and regulated by the Chinese government. China's economic development foci and strategies to overcome its economic challenges have been refl ected in related Chinese policies that build the rules and regulations guiding Chinese investors' behaviour abroad (e.g. Child and Rodrigues, 2005;Morck et al., 2008).
China's 'Go Global' policy was announced in 1999 and marked a turning point in the Chinese government's attitude towards actively encouraging and supporting Chinese investments abroad (Rosen and Hanemann, 2009). Increasing investments abroad will help China to better deal with the appreciation pressure on the renminbi and more effi ciently allocate the accumulated foreign exchange reserves.
With its accession to the World Trade Organization in 2001, China faced increasingly severe market competition. China thus increased its emphasis on the key role of science and technology and later also indigenous inno-Foreign Direct Investment vation and upgrading for enhancing Chinese fi rms' competitiveness and for sustaining China's economic growth in the long term. The Go Global policy was then formally integrated into China's national development strategy as refl ected in the 10th Five-Year Plan (2001-2005 and reasserted in the 11th Five-Year Plan (2006-2010. Increasing Chinese investments abroad is intended to help Chinese fi rms gain better access to more advanced know-how and technologies, develop innovation capabilities and move up the global value chains. With its strong economic development over decades, China became the second largest economic power worldwide in 2008 and the world export champion in 2010. China's economic growth has been, however, much weaker since then (Liu and Langhammer, 2016). New initiatives such as the Belt and Road Initiative (Felbermayr et al., 2019), Made in China 2025 (e.g., Garcia-Hererro et al., 2020;Zenglein and Holzmann, 2019) and the National Innovation-driven Development Strategy (Central Committee of China's Communist Party and State Council of China, 2016) were carried out to explore new development stimuli to deal with the emerging growth challenges. In the new wave of innovation promotion as a national strategy, private fi rms have received more attention than ever before. These initiatives co-shaped China's policies for guiding and encouraging outward FDI, which gained a much clearer regional and industrial/technological focus of FDI destinations or targets than before to help achieve the national long-term development goals. A key FDI guiding and regulating document announced by the National Development and Reform Commission (NDRC et al., 2017) clearly shows that Chinese outward investments that are more advantageous for supporting China's developing strategies such as its Belt and Road Initiative as well as structural change towards high-tech and advanced manufacturing are encouraged, while the investments in, e.g. real estate, sports and entertainment sectors are rather restricted. 1 1 In 2014/2015, several bureaus in charge of regulating Chinese investments abroad such as MOFCOM (2014) and SAFE (2015) simplifi ed the regulation measures and approval procedures for Chinese investment projects. The Chinese government considered, however, a part of the strongly expanding Chinese outward FDI as ineffi cient and thus turned to strengthen its guiding and regulating role in 2017 (Huang and Tang, 2017 Such an agreement will further enhance the attractiveness of Europe (and Germany) for Chinese investments in the future, although it is still highly uncertain whether the agreement can be adopted and ratifi ed and how long it will take until it can really be enforced.

Research data
To learn more about how China's investments in Germany have developed over time and how they have been affected by the coronavirus pandemic, four different datasets with their unique strengths are analysed in this paper. First, the data from the Annual Statistical Bulletin of China's Outward Foreign Direct Investment (MOFCOM et al., 2007(MOFCOM et al., -2019 helps to provide an overview of the development of Chinese investments abroad in general and those in Germany in particular. Second, the data from the Investment Project Database provided by MOFCOM gives information about the distribution of all approved Chinese investment projects in Germany by ownership and by sector. Third, the China Global Investment Tracker (CGIT) provided by the American Enterprise Institute and the Heritage Foundation (2020) is used to deepen and update the investment distribution analysis by focusing on Chinese large-scale investment transactions in Germany. Last but not least, our own survey "Potential Impacts of the COVID-19 Pandemic on the Chinese Investment in Germany" also provides insight on the topic.
Different from many previous studies (e.g. Knoerich, 2010) for which investor data were analysed, our survey addressed consulting fi rms and organisations in Germany that have been intensively engaged in providing FDI consulting services to Chinese investors in mid-2020. 2 Since 2 The list of invited fi rms and organisations is based on sector-related information collected from the Chinese Chamber of Commerce in Germany, the German-Chinese Business Association, the Investment Platform China/Germany and the German-Chinese High-Tech Alliance. We also consulted an expert in the consulting sector in Germany to further extend our list to include smaller key players less visible on the public platforms.

Figure 2 Number of Chinese investment projects in Germany by investing fi rm ownership
Note: SOE stands for state-owned enterprises.
Source: China's Investment Project Database provided by MOFCOM.
they consult not only investors who are already active in Germany, but also potential investors and those who left or are leaving the German market, our survey can help to provide a broader overview of whether and how Chinese investors may change their engagement in Germany in response to the COVID-19 pandemic. In total, 71 consulting fi rms and organisations in Germany were invited to join our survey, and 18 questionnaires (25%) were completed and returned. The small-scale survey might not be representative, but it can still provide some up-to-date information for business and policy orientation. The majority of these 18 fi rms and organisations are small in size in terms of the number of employees who were involved in providing consulting services related to Chinese investments in Germany at the end of 2019 (56%: 1-9 persons; 39%: 10-25 persons).

Chinese investments in Germany: Key developments
Since the beginning of the new century, even against the backdrop of the global fi nancial crisis and a signifi cant slowdown in long-term global economic growth, Chinese investors continuously increased their FDI. Chinese SOEs played an important role as investors in Germany -particularly in large-scale projects Figure 2 shows that there were 89 approved Chinese investment projects in Germany in 2014, compared to 11 projects ten years earlier. 5 A continuous increase in FDI projects can be observed after the global fi nancial cri-3 The top three destination countries/regions are well-known stop-over destinations and/or offshore fi nancial centres: Hong Kong (58%), the Cayman Islands (12.6%) and the British Virgin Islands (6.5%). 4 The relatively strong decrease in China's investments in Germany compared to the world that led to a reduction in the corresponding share in 2018 can also be attributed to the increasingly strict supervision over non-EU FDI in Germany. In 2018, the German government for the fi rst time prohibited an acquisition of a German fi rm by a Chinese company on national security grounds and prevented another acquisition attempt by a Chinese electricity giant. Large-scale Chinese investments in Germany increasingly focused on transport and high-tech sectors 6 SOEs refer to enterprises with capital injection from the central and/or local governments (National Bureau of Statistics of China, 2003). 7 CGIT is able to identify the fi nal recipients of Chinese investments, even if they have been made via third countries (Scissors, 2019). Comparing Figure 3 with the fi rst two fi gures suggests that a great amount of Chinese FDI in Germany have been carried out indirectly, i.e. via third countries and this is particularly the case for Chinese SOEs as investors.
From 2005 to 2014, the large-scale investment transactions by Chinese investors in Germany were mainly targeted in the real estate sector (seven of the 20 projects in total), followed by the transport sector (fi ve projects). 8 While the transport sector clearly gained in importance as a target industry after 2014, the attractiveness of the real estate sector substantially decreased. From 2005 to 2019, 20 of 25 large-scale transport investment projects (80%) in Germany were carried out in the last fi ve years, compared to 30% in the real estate sector (three out of ten projects) in the same period. The investment projects in the transport sector in the last fi ve years accounted for more than 92% of the total investment value in this sector from 2005 to 2019. 9 The technology sector was ranked third in terms of project number and value for the large-scale investment transactions for the whole period considered. Similar to the transport sector, this was a result of a strong increase in attractiveness of the technology sector among largescale investment projects by Chinese investors in Germany after 2014. Five of the six (83%) investment projects and 89% of the $5.9 billion investment amount in this sector from 2005 to 2019 were realised in the last fi ve years.
The increasing importance of the transport sector and the technology sector as target industries of Chinese largescale investments in the recent past is not surprising. As described above, in this period the Chinese government particularly encouraged outward FDI projects in support of China's new initiatives such as its Belt and Road Initiative and its need for structural change towards high-tech and advanced manufacturing.
Both SOEs and non-SOEs had large-scale transport investment projects in Germany and non-SOEs played a more dominant role in this regard ( Figure 4). Non-SOEs were responsible for 13 of the 20 (65%) large-scale transport investment projects from 2015 to 2019 (75% measured in value), when the transport sector gained attractiveness as a target industry. Although the transport sector was also an important target industry for SOEs' investment in Germany (50% of their large-scale investment projects in number from 2015 to 2019), the average size of the SOEs' transport investment projects was smaller than 8 If all Chinese investment projects that were approved by the Chinese government are considered, i.e. not focusing on large-scale investment projects only, two services sectors played a highly dominant role: wholesale and retailing as well as leasing and commercial services. 9 Three of the 25 large-scale investment projects in the transport sector from 2005 to 2019 were related to the aviation fi eld, while the others targeted at the automotive fi elds covering different parts of the supply chain of the automotive industry, such as automotive parts and components, engines and automatic control, and whole car production.

Figure 3 Chinese large-scale investment projects in Germany by investing fi rm ownership
Notes: Projects with at least $100 million in investment. SOE stands for state-owned enterprises.
Source: American Enterprise Institute and the Heritage Foundation (2020). The role of non-SOEs was even more prominent in large-scale investment projects in the technology sector in Germany. They were responsible for all six such projects for the whole period from 2005 to 2019, including fi ve that were carried out from 2015 to 2019. In contrast, SOEs were clearly dominant in Chinese large-scale real estate investments in Germany. They carried out eight of ten such projects for the whole period and accounted for more than 90% of the corresponding investment value, completely dominating in this area from 2015 to 2019 (three of three projects). SOEs' dominance in real estate investment projects in Germany and the stricter restrictions upon such projects imposed by the Chinese government provide some additional explanation to the strong decrease in SOEs' large-scale investment projects in Germany from 2016 to 2017.
The COVID-19 pandemic has a negative but temporary impact on Chinese investments in Germany Eighteen of 71 invited interviewees joined our small-scale survey. Twelve of them indicated that they received fewer general enquiries from Chinese investors regarding investment in Germany for the fi rst half year of 2020 compared to the same period in 2019. They indicated that the COVID-19 pandemic had some but not a strong impact on such decline in general investment enquiries.
Such decline seems to be mainly driven by a decreasing number of Chinese investors' enquiries about new investment projects in Germany. As shown in Figure 5, the majority of the 18 interviewed fi rms and organisations observed a decline in enquiries about new investment projects in Germany by Chinese investors in the fi rst half of 2020 compared to the same period in 2019. On the contrary, for the other investment/divestment purposes, a high share of fi rms and organisations interviewed did not observe signifi cant change over the same research period. Despite this, still more than one-third of the fi rms and organisations indicated that the enquiries by Chinese investors for expanding their business operations in Germany -in scale (36%) or in scope (44%) -decreased in the same period. However, only a (much) smaller share received more enquiries by Chinese investors about scale reduction (13%), scope reduction (23%) and market exit (31%). 10 The fi ndings suggest that at the time of the COV-ID-19 pandemic, Chinese investors turned out to be more cautious particularly regarding new investment projects in Germany. They may also hold off their investment expansion projects. But many of them may not immediately choose divestment.
10 The increase in enquiries for market exit as observed by about 31% of consulting fi rms and organisations interviewed is likely to be related to the fact that the Chinese investment projects in Germany (in terms of project number) have been traditionally concentrated in wholesale and retailing as well as leasing and commercial services. These sectors have been facing immediate market demand challenges due to strict containment measures amid the pandemic.

Foreign Direct Investment
In line with the fi ndings of a reduction in enquiries about new investments as observed by many consulting fi rms and organisations, the business registration services were less in demand in the fi rst half of 2020. Almost half of the consulting fi rms and organisations that provided such services observed such a decline in development ( Figure 6). Many of them (40%) also received fewer enquiries from Chinese investors for searching investment locations.
Consistent with the fi nding that Chinese investors may not immediately decide for divestment, but for problem-solving, many consulting fi rms and organisations observed increasing enquiries from the Chinese investors for consulting services for employment and labour issues (67%), fi nancing and liquidity problems (50%) as well as supply chain disruption between the EU and China (60%). For the other consulting services, a clearly dominant share of the fi rms and organisations surveyed did not perceive significant change in enquiries from Chinese investors over the research period.
Firms and organisations interviewed tend to be optimistic as to their future business perspective (Figure 7). Focusing on consulting fi rms and organisations that also answered the survey question as to the current change in investment enquiries ( Figure 5), almost half of them expect an increasing number of enquiries about new investments in Germany in the near future. Almost 40% (34%) of fi rms and organisations expect more enquiries from Chinese investors to expand their investment projects in scale (scope) in Germany. The shares of fi rms and organisations expecting more enquires for divestment in the future are smaller and they are hardly different from those in the early crisis period.

Conclusions
The analysis presented in this paper shows that Chinese investments in Germany increased strongly after the global fi nancial crisis, when China's policies shifted towards intensively encouraging quality-and innovationbased economic growth with outward FDI as an important instrument for Chinese fi rms to better access knowhow and advanced technologies from abroad. Chinese SOEs were found to play a more important role in largescale projects than in small-sized projects in Germany.
The transport sector and the technology sector have become particularly more attractive to Chinese investors in large-scale projects since 2015 -the year of the release of China's strategy Made in China 2025. Our survey results suggest that the COVID-19 pandemic had some but not a strong negative impact on Germany's attractiveness for Source: Authors' own survey.

Figure 6
Perceived specifi c development in Chinese investors' enquiries by investment topic, fi rst half of 2020

Share of fi rms and organisations
Notes: Compared to the same period in 2019. Numbers in parentheses are the total number of fi rms and organisations that provided corresponding services to their clients.
Source: Authors' own survey.

Share of fi rms and organisations
Notes: Compared to the same period in 2020. Numbers in parentheses are the total number of fi rms and organisations that provided corresponding services to their clients.
Source: Authors' own survey.

Foreign Direct Investment
Chinese investments and that such a negative impact is expected to be short-lived. Our fi ndings are in line with the expectation that Germany, with its clear strength in high-tech, smart manufacturing and innovation activities, has become an attractive target for Chinese investments with their developments being strongly guided and regulated by Chinese policies.
The closing communiqué of the Central Committee of the Chinese Communist Party suggests that promoting innovation will continue to be one of China's top policy priorities. China will, inter alia, continue to work on modernising its industries and supply chains as well as on strengthening its manufacturing capability to pursue quality-based and innovation-driven growth in the future (Central Committee of China's Communist Party, 2020). Against this background, it is to be expected that Chinese policies will further encourage Chinese investments abroad that can help China to achieve its future innovation-driven development goals. Thus, Germany will probably continue to be attractive to Chinese investments in the future. This can be advantageous for sustaining Germany's future economic growth. A key question is, however, whether and how Germany should deal with Chinese investment attempts where the Chinese government plays a strongly guiding role. On the one hand, it is essential for Germany to develop adequate FDI policies to ensure its openness towards (Chinese) FDI so that Germany and its industries can further benefi t from the foreign capital infl ows and probably enjoy a fairer Chinese market access in return. The EU-China investment agreement may help here. On the other hand, while staying open to Chinese investments, addressing national security concerns without curbing Chinese investments in an unnecessary way is a critical challenge to Germany's FDI policies. Germany will also need to ensure fair competition, especially in mergers and acquisitions. Last but not least, how German fi rms and industries facing intensifi ed competition from China can increase their competitiveness and whether and how the German government should support them in doing so will remain an important question for Germany's industrial policy.