Merz, Xi Meeting: What's Next for Germany-China Ties?
Summary
- Friedrich Merz's visit to China yielded a 120-plane Airbus order, providing a rare bright spot in deteriorating German-China relations.
- Germany's economic model is under severe pressure, running a €90 billion trade deficit with China while simultaneously seeing auto exports to the US collapse to 18%.
- The German automotive sector has lost its dominance in China, facing "fiercely competitive" local rivals, signaling a structural decline for legacy German industrials.
Trade Ideas
"Now there is, of course, a very fiercely competitive Chinese automotive market in which the Germans are now having a very difficult time... exports of German motor vehicles... to the united states dropped to 18% last year." German automakers are facing a dual crisis: they have lost their competitive moat in China (their primary growth engine) and are failing to successfully pivot to the US market. This suggests a structural contraction in earnings power. Short German Autos as they lose market share in both East and West. Unexpected Chinese stimulus benefiting foreign JVs or a sudden resurgence in US demand.
"I think that Airbus order of 120 planes is certainly something that will give some credence to the idea that this was a positive trip." While the broader German industrial base struggles, aerospace remains a critical need for China. This order confirms Airbus has revenue visibility and geopolitical insulation that the auto sector lacks. Long Airbus as the sole clear winner from the diplomatic engagement. Potential future tariffs or order cancellations if EU-China trade wars escalate.
"It accounted for a €90 billion trade deficit that the Germans were running with the Chinese... The Germans wanted to pivot towards the united states. That has proved a lot more difficult." The German economy is trapped in a "land of frenemies." Its export-driven model is failing because it runs a massive deficit with China and cannot sufficiently increase exports to the US to compensate. Avoid broad German equities until the trade imbalance is rectified. A significant weakening of the Euro making German exports attractive again.
Up Next
This Bloomberg Markets video, published February 26, 2026, discussing BMW, VWAGY, MBGYY, EADSY, EWG. 3 trade ideas extracted by AI with direction and confidence scoring.