Scholz Faces Tricky Balancing Act in Germany-China Talks

BERLIN (Reuters) - Chancellor Olaf Scholz is facing a delicate balancing act this week at German-Chinese government consultations in Berlin, seeking to maintain good ties with Germany's largest trade partner while complying with a G7 pledge to "de-risk" from Beijing.

Scholz is receiving Chinese premier Li Qiang for dinner in the chancellery in the evening of Monday 19 June 2023, ahead of the seventh round of bilateral, biennial talks which are also the first face-to-face session since the COVID-19 pandemic.

The summit is taking place on Tuesday 20 June 2023 in the chancellery before Li and the Chinese ministers for trade and reform attend the German-Chinese forum for economic and technological cooperation.

The fact Li chose Germany for his first overseas trip as premier reflects the special relationship between Europe and Asia's largest economies. Rapid Chinese expansion and demand for German cars and machinery fuelled Germany's own growth over the past two decades.

China became Germany's single biggest trade partner in 2016 and is a core market for top German companies including Volkswagen, BASF and BMW.

"The China-Germany government consultations are very distinctive among China’s relations with large Western countries," said Wang Yiwei, director of the Centre for European Studies, Renmin University of China.

The relationship has, however, come under strain amid concerns in the West about rising Communist party control over society and the economy, unfair competition and Beijing's territorial ambitions.

Scholz joined other leaders of the Group of Seven (G7) rich democracies last month in pledging to "de-risk" without "decoupling" from China.

The meaning of "de-risking", however, remains to be defined, say analysts, with China hawks pleading for a general reduction of business and doves singling out areas like critical minerals.

Scholz's government is divided between the more hawkish junior coalition partners, the Greens and Free Democrats, and his centre-left Social Democrats.

Analysts in Berlin said the Chinese delegation would likely lobby the German government directly and indirectly via big business to press the European Union not to go too far in regulating business in China. "They know German companies will run up direct channels to the chancellery," said Andrew Small, a senior fellow at the German Marshall Fund's Asia program.

Avoiding political escalation

Mikko Huotari at the Mercator Institute for China Studies (MERICS) in Berlin said the talks were a coup for Beijing, showing it still had important partners in the West. "That said it is up to us, to get something out of it - and we have an interest to remain in close contact with China on questions like sustainability and in general, for stable economic relations," he said. "We also have an interest not to let political tensions escalate."

The talks came after Antony Blinken became the first US secretary of state to visit China in five years, on Sunday 18 June 2023, stressing the importance of keeping open lines of communication to reduce the risk of miscalculation. The talks also came as Germany's foreign ministry is finalising a paper on its approach to China, which is expected to reflect the tougher stance it outlined in its first national security strategy published last week.

China is posing a growing threat to global security, aggressively claiming supremacy in Asia and seeking to use its economic might to achieve political goals, the strategy said.

The government is urging companies to diversify away from China but many German CEOs have warned of the risks of cutting or reducing links with the world's second-biggest economy while Germany is in recession.

The Chinese delegation will meet with some of those CEOs on Monday, according to people familiar with the plans. On Tuesday, after the government consultations, it will head to Munich to meet regional officials and corporate executives reflecting the level of Chinese business with the southern German state of Bavaria.

The Chinese delegation will head to Paris for an official visit and to attend a financial conference from  Thursday 22 June to Friday 23 June 2023.