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The colors of the German flag are seen above in the atrium of the German Center for Industry and Trade in Shanghai, China, on Thursday, August 30, 2018.
© Qilai Shen/Bloomberg
Germany's banks could get into trouble if trade relations with China suddenly had to be cut.
The Bundesbank is urgently warning the German economy.
Germany's close trade ties with China could wreak havoc on the financial system of Europe's largest economy if they deteriorate, the Bundesbank has warned.
While direct exposure is relatively small, "significant risks" arise from lenders' relationships with domestic firms that are either invested in China or sell a large portion of their production there, the central bank said.
Banks have also lent large amounts to sectors of the economy that rely on Chinese suppliers, according to an article in their monthly report.
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“A profound disruption of German-Chinese economic relations would have significant effects and would ultimately increase the likelihood of loan defaults,” said the Bundesbank.
In such a scenario, the financial system could also be affected by the high level of uncertainty on the global markets, according to the Bundesbank.
Relations with China have recently become more tense
While Germany has benefited greatly from China's rise to number 2 in the world, trade relations have become more tense in recent years.
In 2023, the European Union launched an investigation into Chinese electric vehicle subsidies to ward off cheap imports.
Beijing responded by investigating European spirits products.
Russia's war in Ukraine and the conflict in the Middle East have also highlighted the geopolitical risks.
Since the Kremlin cut off natural gas supplies, Germany has struggled to get going, driving up energy prices and forcing the government to quickly find alternative sources.
The damage to Germany would be particularly great if political tensions led to a sudden “decoupling” from China, the Bundesbank said.
A pure economic crisis in the Asian country was seen as more manageable.
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At the end of 2022, German banks' exposure to companies heavily invested in China amounted to almost 220 billion euros, according to the Bundesbank - around 7 percent of their risk-weighted assets.
Large, systemically important lenders were more involved than smaller competitors.
Germany must become more independent from China
“Companies and politicians should continue their efforts to reduce risks and strengthen the resilience of the German economy,” it said.
“It seems important for financial institutions to keep an eye on the indirect vulnerabilities that can arise from the business activities of borrowers.”
A separate report released on Wednesday by the German Chamber of Commerce in China showed that most German companies in China believe the Asian country's economy is declining and will take at least a year to recover.
By Alexander Weber
We are currently testing machine translations. This article was automatically translated from English into German.
This article was first published in English on January 24, 2024 at the “Washingtonpost.com” - as part of a cooperation, it is now also available in translation to readers of the IPPEN.MEDIA portals.