Guanxi Writ Large: China and Germany’s “Special Relationship”

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SHANGHAI – German Chancellor Angela Merkel and Chinese President Xi Jinping are seeing a lot of each other lately. Just this past week, Merkel concluded a three-day visit to Beijing and Chengdu, accompanied by German executives from Siemens, VW, Airbus, Lufthansa and Deutsche Bank. This comes just three months after a high-profile meeting between Merkel and Xi in Berlin, with much commentary being made on the “special relationship” between the two countries.

The earlier meeting between Merkel and Xi was lauded for an MOU signed between Deutsche Bundesbank and the People’s Bank of China establishing RMB clearing center in Frankfurt—and narrowly beating London to the claim of the first such institution outside of Asia. Also in March, China and Germany entered into a revised version of the double taxation agreement (DTA) in place between the two countries since 1985. The newly signed agreement halved the rate of withholding tax (from 10 to 5 percent) owed on dividends paid by German companies, as well as made changes to several basic tax definitions.

Merkel’s latest visit largely centered on solidifying bilateral commitments to earlier proposals, such as the Frankfurt clearing center and Germany’s role in the “Silk Road Economic Belt.” Merkel singled out several industries for cooperative development, including finance, manufacturing, IT, aerospace and security. In return, German investors were granted a RMB 80 billion quota to purchase securities in China through the country’s Renminbi Qualified Foreign Institutional Investor (RQFII) program.

China’s relationship with Germany is certainly old—Volkswagen was the first foreign carmaker to enter the country, now more than 30 years ago, through a joint venture with state-run FAW. And there’s no denying that interaction between the two nations runs deep—last year bilateral trade reached US$161.6 billion. But what makes this relationship “special” is considerably more complex.

Germany became China’s de facto partner in Europe as a result of Angela Merkel’s leadership in smoothing over Chinese concern during the eurozone debt crisis. And later, in 2013, Germany was instrumental in resolving an anti-dumping suit against Chinese solar panel manufacturers, on terms criticized by European solar manufactures as overly favorable to Beijing. The latter measure especially demonstrates Merkel’s commitment to keeping Chinese investment flowing into Germany, with Xi demonstrating this week that China is apparently more than willing to reciprocate in kind.

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