BERLIN—The German government has refused a request from Volkswagen HER

that Berlin is renewing risk insurance for the automaker’s operations in China, marking an inflection point for a country that has long put trade before politics in international relations.

The decision, which has not been officially announced but has been confirmed by several people familiar with the situation, is unlikely to prevent German companies from doing business in China, but it does increase the risks of doing so. It also sets a precedent that for the first time links support for German companies investing in China to Beijing’s treatment of Muslims in Xinjiang province.

“In the face of forced labor and abuse by Uyghurs, we cannot provide insurance for any project in the Xinjiang region,” German Economy Minister Robert Habeck said over the weekend, explaining the government’s decision.

VW CEO Herbert Diess in an interview with German broadcaster N-TV on Wednesday said the automaker continues to see China as the world’s main engine of economic growth and VW remains committed to the China and factory in Xinjiang.

“We can guarantee that we have no forced laborers there, that we work there according to our standards and that we make a positive contribution with our presence in this region. And that’s why we don’t question it, Diess said.

A VW spokesperson declined to comment on the government’s decision, saying the company had not received official notification regarding its requests to extend existing government investment guarantees.

Businesses can apply for government insurance that would compensate them in the event of loss of business or assets caused by political unrest in a foreign country. For years, most of these government assurances have gone to companies operating in China.

When the government stops providing insurance to a country, as it did in Russia in February after Moscow invaded Ukraine, it means that companies operate in the country at their own risk, which , according to economists, may discourage investment in these countries.

A VW assembly plant in Chengdu, China. The company generates a significant portion of its profits in China.


Photo:

Liu Kun/Zuma Press

The rejection of VW’s request to renew its guarantees comes as the German government is engaged in a broader recalibration of its relationship with China aimed at reducing Germany’s strategic and economic dependence on Beijing.

As part of this new approach, Berlin has pushed companies to diversify their global footprint and reduce their dependence on the gigantic Asian market. The boost could accelerate an emerging trend for globally active European companies to shift some investment to the United States as a counterbalance to China, which they see as a less promising and less predictable market after a wave of strict Covid lockdowns there earlier this year.

“The Habeck decision is important not because these guarantees are crucial for VW but because it is a sign that the government is looking at investments in China in a much more skeptical way,” said Rhodium Group analyst Noah Barkin. , a research group. .

Berlin’s change accelerated after Russia’s attack on Ukraine, which Beijing refused to condemn but had been in the making for some time before. Under the previous government led by Chancellor Angela Merkel, Germany passed legislation allowing it to block takeovers of its companies on national security grounds, a move seen as a reaction to a campaign of technology acquisitions by Chinese companies in Germany.

Yet despite growing concern in the West about Beijing’s authoritarian drift at home and its more aggressive stance abroad under President Xi Jinping, many German companies have continued to see the country as their most promising market.

VW, BMW HER

and the Mercedes-Benz Group HER

, the flagships of the German automotive industry, and many of their suppliers generate up to 40% of their annual turnover and a significant share of their profits in China. For some, like VW, this has come at the expense of investing in other markets, like the United States.

Economists say this exposure puts them and the wider German economy at risk in the event of political or economic disruption, as seen in the past two years during the pandemic, when lockdowns in China disrupted global supply chains and hit factories in Germany.

The new German Chancellor, Olaf Scholz, was not the driving force behind Beijing’s pivot on China. Instead, members of the Green Party, which is part of Mr. Scholz’s three-party ruling coalition, championed policy change in the economics and foreign affairs ministries, which they now occupy.

German Foreign Minister Annalena Baerbock and her experts held workshops with think tanks to flesh out a new China strategy. In early May, she met CEOs of blue-chip German companies with high exposure to China.

She asked the group if their businesses could become fully independent from China in a few years if necessary, according to a person familiar with the discussion.

Pressure from Washington and Brussels also helped push the agenda forward. In March, the European Union imposed sanctions on China for “large-scale detentions” of Uyghurs in Xinjiang.

Revelations about China’s crackdown on Uyghurs continue to come to light, bolstering public support for change. Last month, a human rights group called Victims of Communism Memorial Foundation released a cache of documents and images purporting to show Chinese police operations against Uyghurs, including images of those detained in internment camps.

Ms Baerbock, citing the records, called for an independent and transparent investigation.

“Everyone who sees these images gets shivers down their spine. They are disturbing and frightening,” Ms Baerbock told reporters last month.

In early May, Lars Klingbeil, co-chairman of Mr Scholz’s Social Democratic Party, said that in light of the war in Ukraine, Germany needed to “act differently today and be more critical” of China .

Mr Scholz, in a speech at the World Economic Forum in Davos last month, warned of China’s political isolation, but added: “Nor can we look the other way when human rights men are raped, as we see in Xinjiang”.

Write to William Boston at [email protected]

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