German investment in China jumps by a third as US investment plunges 65%

German companies increased investment in China by around one-third during the first half of 2026 even as investment in the United States fell by roughly two-thirds, creating a striking contradiction between Germany’s political push to reduce strategic dependence on China and the commercial decisions being made by its companies.

An analysis by the German Economic Institute based on Bundesbank data showed German companies invested approximately €5.6 billion more in China than during the comparable period a year earlier. Investment into the United States, by contrast, fell nearly 65% to about €4.3 billion, the lowest first-half level in several years.

Why are German companies increasing investment in China despite political calls to de-risk?

China remains one of the world’s largest industrial and consumer markets, creating a simple commercial problem for German companies: withdrawing from China can mean surrendering market share to Chinese competitors.

German Economic Institute economist Jürgen Matthes described China as both an important sales market and a competitive training ground where German companies need to remain present if they are to understand and compete with increasingly sophisticated Chinese rivals.

The logic is particularly strong in automobiles, industrial equipment, chemicals and other sectors where Chinese companies have moved rapidly up the technology and quality curve. A German manufacturer producing only in Europe may face higher costs and slower product development while Chinese competitors refine products at enormous domestic scale.

Investment inside China can therefore serve multiple purposes: supplying Chinese customers, lowering local manufacturing costs, shortening development cycles and learning from one of the world’s most competitive industrial markets.

That commercial logic can conflict directly with government efforts to reduce excessive economic dependence on Beijing.

Does higher investment mean Germany’s China de-risking policy has failed?

Not necessarily, but it reveals the difference between de-risking and disengagement. Germany’s official strategy has generally focused on reducing dangerous concentrations in critical supply chains rather than ordering companies to abandon China.

A business can diversify suppliers for sensitive components while still expanding factories serving Chinese customers. It can also localise production inside China so that Chinese operations become less dependent on exports from German plants.

That second strategy, however, introduces another risk for Germany itself. If German companies increasingly manufacture in China for the Chinese market, investment and employment may migrate away from domestic factories.

Matthes explicitly warned that greater Chinese investment could shift production and jobs out of Germany.

De-risking therefore contains a paradox: companies may reduce geopolitical exposure by making Chinese operations more self-sufficient, while simultaneously reducing the amount of value created in Germany.

Why are German investments in the United States falling so sharply?

German companies invested around €4.3 billion in the United States during the first six months of 2026, approximately 65% below the previous year and nearly 80% below the comparable first half of 2024.

The German Economic Institute linked the decline to uncertainty surrounding United States trade policy following Donald Trump’s return to the presidency. Tariffs can make it difficult for companies to calculate whether factories built for a particular supply chain will remain commercially viable over a multi-year investment horizon.

Investment decisions involving factories, research centres and logistics facilities depend on predictability because capital may remain committed for decades. Companies can adapt to a known tariff rate more easily than to repeated changes in rules, exemptions and threatened duties.

That does not mean German businesses are abandoning the United States. It remains an enormously important market and manufacturing location, particularly for automotive, chemicals and industrial companies.

The contrast with China nevertheless demonstrates where companies currently perceive a stronger commercial requirement to keep expanding capacity.

Is China becoming cheaper for German companies because of government subsidies and currency policy?

The German Economic Institute argues that Chinese state subsidies and what it views as an undervalued yuan can make production inside China artificially attractive. Matthes has argued that these conditions encourage German companies to manufacture locally in order to compete with Chinese rivals operating from a lower cost base.

Beijing would dispute many Western claims that Chinese industrial competitiveness mainly reflects unfair state support, pointing instead to infrastructure, supply-chain density, skilled labour and scale.

Both explanations can contain elements of truth. China has built unusually deep supplier ecosystems in areas such as batteries, electronics, machinery and electric vehicles, while industrial policy has also played an enormous role in directing capital toward strategic sectors.

For German manufacturers, the commercial consequence is the same: competing globally without matching Chinese cost structures has become increasingly difficult.

Which German industries have the most at stake in the China investment shift?

Automobiles are the clearest example. Volkswagen AG, Bayerische Motoren Werke Aktiengesellschaft and Mercedes-Benz Group AG built substantial Chinese businesses over several decades, but domestic competitors now dominate much of the electric-vehicle market.

Chemicals are another important case. German producers need access to Asian growth markets while simultaneously dealing with significantly higher energy costs at home.

Mechanical engineering and industrial automation companies face a similar challenge as Chinese manufacturers increasingly compete in markets once dominated by German suppliers.

China became Germany’s largest individual trading partner again in 2025, with bilateral goods trade around €250 billion, illustrating how deeply the relationship remains embedded in German industry.

Why could more German investment in China mean fewer industrial jobs in Germany?

Capital is finite. A billion euros spent expanding production capacity in China cannot simultaneously be invested in a German plant unless the company increases its overall investment budget.

The employment effect becomes more important when Chinese factories begin supplying markets outside China. Localisation originally intended to serve Chinese customers can evolve into an export platform if the cost advantage becomes large enough.

That would put German factories in direct internal competition with their own companies’ Chinese operations.

Europe’s energy disadvantage intensifies the problem. Chemical and other energy-intensive manufacturers already face gas and electricity prices significantly higher than those in competing regions, creating incentives to locate incremental capacity elsewhere.

This is why policymakers increasingly focus not only on stopping companies from leaving but on improving the economics of producing inside Europe.

Could the European Union respond with higher tariffs on Chinese imports?

The German Economic Institute has argued for stronger countervailing measures where Chinese subsidies distort competition. The European Union already uses trade-defence instruments against specific Chinese products, while pressure for broader action is increasing.

Yet tariffs create difficult trade-offs. They can protect European manufacturers but increase costs for companies and consumers using Chinese inputs.

China can also retaliate against European exports, which would particularly affect German companies with substantial Chinese sales.

The growing divergence between investment in China and the United States nevertheless sends a powerful message. Corporate strategy is not following geopolitical rhetoric automatically.

Germany may want companies to reduce China-related risk, but until Europe becomes a more competitive location for manufacturing and investment, many companies will continue making decisions based on market size, costs and competitive pressure rather than political preference.