German Companies Operating in China Experience a Brexit Boost

The EU and Germany are already profiting from the UK’s decision to leave the EU. According to the assessment of German managers working in China, Brexit is offering many European companies the opportunity to expand their trade with China. These are the findings of the ZEW-PwC China Economic Barometer, a survey carried out by the Centre for European Economic Research (ZEW), Mannheim, together with the accounting and consulting firm PricewaterhouseCoopers (PwC), for the fourth quarter of 2017.

Of the surveyed corporate decision-makers, 54.1 per cent predict that trade between the EU and China will intensify, while 56.8 per cent say they expect an increase in trade with Germany in particular. “These assessments show that the EU has emerged as the clear winner from the Brexit decision and could become an increasingly attractive location for Chinese investors,” says Thomas Heck, Partner at PwC and head of the China Business Group for Germany and Europe.

Economic climate looks promising

The economic outlook for China looks promising, with the overall assessment of the nation’s current economic situation standing at 29.7 points in the most recent survey. This represents an increase of 2.9 points compared to the third quarter and also the indicator’s highest reading since 2014. The reading reflects the balance of positive and negative survey responses in percentage points. The CEOs also seem optimistic about the future, with expectations for the coming six months currently at a level of16.7 points. Though this is not quite as high as the reading from the previous quarter (17.1 points), it still remains far higher than the average of -2.4 points.

Private consumption is gaining momentum

According to the study, one of the main drivers of the economy is private consumption. The surveyed CEOs expect wages to increase and the savings rate to drop. “Private expenditure is becoming increasingly important for the development of the Chinese economy,” says Thomas Heck. “Though expectations regarding public spending remain high at 48.6 points, it seems like over the next six months momentum will increasingly come from the private sector.” With this in mind, the survey participants anticipate that German companies will intensify their manufacturing activities in China. The corresponding indicator has climbed from 27.8 points in the previous survey to a level of 36.8 points.

M&A indicators drop considerably

Despite good economic conditions, according to the assessment of the German CEOs, the number of corporate mergers and acquisitions is likely to decrease. The M&A indicator for domestic firms experienced a significant drop from 52.9 points in the previous quarter to 34.2 points. The same applies for China’s international acquisitions with a current reading of 33.3 percentage points compared to 51.5 in the previous quarter. Many of the surveyed CEOs identified as the reason for this drop the Chinese government’s decision to limit the number of firm acquisitions outside of China in an attempt to prevent too much capital flowing out of the country. “We have to put these numbers in the proper perspective.  Chinese activities overseas will in all likelihood continue to increase dramatically, just not quite as dramatically as previously expected,” says Dr Michael Schröder, project leader and senior researcher in the ZEW Research Department “International Finance and Financial Management”. “Germany is and will remain an important target country for Chinese foreign investment.”

Boom in ICT and Service Sectors

The economic barometer shows few changes to investment activities in the most important branches of the economy over the coming six months. Far in the lead is the IT and communications sector (58.3), followed by the service sector (48.6). Electronics (35.7), energy (34.8) and consumption (33.3) are also experiencing a boom. Meanwhile, the construction sector (-11.1) and in particular the steel and metal sector (-31.4) continue to suffer losses.

For further information please contact

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