Summary of Key Points
In the first half of 2026, the trade landscape between China and Europe is undergoing significant restructuring: Trade between China and Germany has shown divergence (China's exports to Germany have increased, while imports have decreased; however, Germany's exports to China have plummeted), while European countries such as France, Italy, and Hungary have made up for this with double-digit growth in exports to China. At the same time, there are new trends in bilateral investment between China and Germany (German investments in China are focusing more on localized production, with China becoming the largest source of foreign investment for Germany), and Chinese investment in Europe is rebounding and expanding into various sectors. Chinese automobile exports have been strong, with companies adjusting their product mix (hybrid vehicles now outpacing pure electric vehicles) to adapt to EU policies, thereby reshaping the trade landscape between the two regions.
I. Changes in Sino-German Trade: China Selling More High-End Goods and Buying Fewer German Products; The Automotive Sector Shows a Reversal
In the first half of 2026, China's exports to Germany increased by 14.8%, but imports decreased by 1.7%. Why?
- Export Growth Depends on High-End Products: China is exporting high-value-added goods such as new energy vehicles, AI equipment, and advanced machinery, rather than traditional commodities like clothing and toys. Previously, China relied on importing industrial parts and complete equipment from Germany; now, it can produce these domestically and even sell them to Germany, driving up export volumes.
- Reasons for the Decline in Imports: Firstly, China's industrial upgrading has reduced its need for German equipment. Secondly, German companies are producing and selling directly in China, eliminating the need for exports.
The automotive sector is the most evident example of these changes: Germany's exports of cars to China have halved compared to their peak in 2022, while China's imports of cars and car parts have increased by two-thirds. EY predicts that trade in automobiles between China and Germany will balance out in 2026, ending decades of a one-way flow of German cars to China. German automobile factories are currently operating at only 68% of their capacity (the break-even point is 85%), indicating challenging market conditions.
II. Germany Slows Down, While Other European Countries Step Up: Double-Digit Growth in Exports from France, Italy, and Hungary
The decline in German exports to China has created opportunities for other European countries:
- Statistical Evidence: In the first half of 2026, China's imports from France increased by 19%, Italy by 13.1%, and Hungary by 15.6%, far exceeding the EU's overall import growth of 4.9%. These countries contributed significantly to China's 26.3% increase in total European imports.
- Reasons for the Shift:
1. China's industrial upgrading has reduced its dependence on German equipment.
2. Rising energy costs in Europe and EU efforts to diversify supply chains have led to trade shifts towards Central and Southern Europe.
3. These countries offer differentiated products: France's agricultural products and luxury goods, Italy's luxury goods and machinery, and Hungary's manufacturing services complement Germany's offerings.
III. New Trends in Investment
Changing trade patterns have also affected investment:
- German Investments in China: In 2025, German investments in China increased by 55%, with a focus on establishing local production bases and serving the Chinese market, rather than solely for export.
- Chinese Investments in Germany: In 2025, the number of Chinese investment projects in Germany increased by 14.6%, surpassing those from the United States for the first time, making China the largest source of foreign investment in Germany. Chinese companies are more proactive in integrating production and research and development activities in Germany.
- Chinese Investments in Europe: Overall, Chinese investments in Europe increased by 67% to 16.8 billion euros (the highest level in eight years), with a focus on the automotive industry (especially electric vehicle supply chains). However, there is also a shift towards sectors like ICT and energy. Previously, Hungary was the main destination for Chinese investment; now, Germany and France are gaining more significance.
IV. China's Strong Automobile Exports: Breaking Through One Million Units in a Single Month, with Hybrid Vehicles Outpacing Pure Electric Vehicles in Europe
In June 2026, China's automobile exports exceeded one million units for the first time. The strategy to adapt to EU policies includes adjusting the product mix:
- Response to EU Regulations: While the EU imposes anti-subsidy measures on Chinese electric vehicles, Chinese automakers have shifted their export focus. Pure electric vehicle exports increased by 52% but accounted for only 47%, while hybrid vehicle exports surged by 206% to account for 53%.
- Rising Brands: Chinese brands, such as BYD, have seen a 315.2% increase in new car registrations in Germany in the first half of 2026, with hybrid models being particularly popular.
V. What Lies Ahead?
Experts predict the following trends for future trade and investment:
- European Investments in China: Europe will place more emphasis on localized research and development and production to serve the Chinese market, becoming more cautious about investing in high-end industries.
- Chinese Investments in Europe: Mergers and acquisitions may face more obstacles, so "greenfield investments" (new factories) are likely to become more common. China may prioritize Central and Southern Europe to avoid trade barriers and focus on new energy sectors such as battery technology and electric vehicles.
- Trade Patterns: Exports will remain the primary method for Chinese companies in Europe due to higher operating costs and regulatory uncertainties, limiting the willingness to make local investments.
Overall, the changes in Sino-European trade and investment reflect industrial upgrading and adjustments in global supply chains. China is moving from being a net importer of high-end German products to becoming a major exporter. Other European countries are also seizing opportunities, indicating that bilateral economic relations are entering a more balanced and diversified phase.