After a wave of Chinese purchases of German technology firms, Berlin is considering blocking a new acquisition. Primarily worried about security, officials are also frustrated by China's tightly-controlled domestic markets.

The Germans really mean business on this trip.

On her official visit to China this week, Angela Merkel’s constant buzzword is “reciprocity.” German companies face far too many restrictions in Chinese markets while Chinese firms are free to invest and sell in Europe, the German chancellor has repeatedly reminded her hosts. China has promised to open its doors wider, but Berlin is skeptical about Beijing’s reassurances – it has heard them far too often in the past.

Amid ongoing concerns about the imbalances in Germany's trading relationship with China, a security worry may now prompt Berlin to draw a line. Handelsblatt has learned that Germany’s economics ministry may block a proposed Chinese investment in Leifeld, a manufacturer of machines to process titanium steel, citing “several problematic areas” in the deal.

Chinese acquisition of German technology companies has become a sore point in the last two years. The bad feeling was triggered by a wave of takeovers in 2016, above all the acquisition of robot-maker Kuka by the Chinese conglomerate Midea. After politicians and union representatives spoke out against the moves, Germany introduced new regulations last July, giving the government greater powers to block foreign deals.

By blocking a small deal, Berlin could signal that it wants Beijing to open its markets far more quickly.

However, although grumbling about Chinese takeovers has continued, the new regulations have to date never been used to actually block a deal. Just last week, aircraft parts supplier Cotesa became the latest tech firm to accept major Chinese investment, after the economics ministry green-lighted the deal.

Things may be different with Leifeld, if Berlin chooses to block a relatively insignificant deal – the company has annual revenues of just €40 million ($47 million). While lawmakers would act with security concerns in mind – the law was created for the purpose – the step could also be seen by some as a signal that Germany wants Beijing to open its markets far more quickly, to make reciprocity a reality.

The risk is that the move could alienate China, which may interpret it as Trump-style provocation. There is a lot at stake: China is Germany’s most important trading partner: last year Germany imported €100.5 billion worth of Chinese goods, while €86.2 billion in German exports went to China.

There has been some good news for German-Chinese trade this week. On the same day the United States announced the possible imposition of tariffs on imported cars, Beijing announced a reduction in automotive tariffs from 25 percent to 15 percent. Good news for the German car industry, for which China is a key market, especially in the luxury segment.

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But German businesses have long complained about restrictions they face in China. “We want a sea change in Chinese attitudes, moving from selective to comprehensive market access,” said Hubert Lienhard, the chair of the Asia-Pacific Committee of German Business, who accompanied Ms. Merkel on her visit this week.

The issue of Chinese investment in high-tech German companies has gained added resonance in recent months, since the announcement that state-owned State Grid Corporation of China (SGCC) would take a 20 percent stake in 50Hertz, one of four operators of Germany’s electricity transmission systems.

Economics Minister Peter Altmaier has said he wants to further tighten rules on Chinese takeovers to safeguard national security. But he is well aware that Germany, more than any other country, relies on free trade to keep its export-heavy economy booming.

Some observers say China may be comfortable with the idea of government checks on investment decisions. Chinese companies looking to invest abroad have to pass a series of stringent official tests, and authorities are said to have vetoed many investments in Europe.

At a European level, Chinese takeovers may also soon be subject to greater scrutiny. Jean-Claude Juncker, president of the European Commission, has submitted draft legislation which would impose unified European tests on possible foreign investments.

Germany, supported by France and Italy, has been a driving force behind the new legislation. But there is opposition to the measure among some Eastern European countries, which hope to benefit from the new wave of Chinese overseas investment.

After talks in Beijing with Chinese leaders, Ms. Merkel’s visit continues Friday when she flies to Shenzhen in the southeast of the country to meet prominent business people and Communist Party representatives. It’s a safe bet that “reciprocity” will be on the agenda.

Stephan Scheuer is co-head of Handelsblatt's feature and people's desk. He previously was China correspondent. Sha Hua is Handelsblatt's China correspondent, based in Beijing. Klaus Stratmann covers energy policy and politics for Handelsblatt in Berlin. To contact the authors: [email protected], [email protected], [email protected].