OFFENBACH, GERMANY (BLOOMBERG) – European investment in China is holding up for now despite deteriorating political relations between the two trading partners, with businesses looking for ways to work around any decoupling threat.

Investment from the European Union into China was up 15 per cent in the first half of 2022 compared with a year ago, according to data from Rhodium Group, helped by BMW’s purchase of a controlling stake in its car-making joint venture in the first quarter.

Although investment has shown some weakness more recently, European firms are not pulling out of China as some had feared. In fact, rising geopolitical tensions may even be encouraging businesses to expand local production chains, analysts say.

“We are not seeing any large exodus yet and companies are still working on completing already planned projects,” said Mr Mark Witzke, a research analyst at Rhodium Group. “At least for European companies, it is mostly the larger players that already have significant interests in China continuing their planned investments, albeit with some delays.”

The delays are due to lockdowns to curb Covid-19 infections.

Relations between Europe and China have been deteriorating for more than a year, with Beijing’s refusal to condemn Russia’s invasion of Ukraine only worsening political ties. A bilateral investment treaty with Brussels was frozen last year, adding another layer of risk. On top of that, punishing lockdowns across China this year pushed the economy into contraction and hit business profits.

Despite that, exports from Europe have held up, with the total value of shipments in the first six months of 2022 basically unchanged from last year despite harsh Covid-19 lockdowns in some Chinese cities significantly crimping demand in the second quarter.

The Chinese market had been a saviour for many foreign firms’ balance sheets in recent years, with the government bringing Covid-19 infections under control and quickly reopening the economy in 2020 and growth reaching 8.1 per cent last year, compensating for recessions and lockdowns in other markets. This situation has reversed in 2022, with lockdowns in Shanghai and elsewhere shuttering factories and hitting profits so far this year.

However, many foreign firms still believe there is more to gain than lose from being in China.

BMW opened a multibillion-dollar factory extension in Shenyang earlier this year, Audi is building its first electric-vehicle plant in the country, and Airbus is cementing its position in the Chinese market thanks to a local final assembly line that helped it score an order worth more than US$37 billion (S$51 billion) last month.

“If your definition of decoupling is foreign companies either leaving China outright, or at least significantly decreasing their footprints and diversifying investments out of China, then that certainly is not happening,” said Mr Jacob Gunter, a senior analyst at the Mercator Institute for China Studies in Berlin. “What we generally see across most industries is kind of the opposite.”

Whether that will change in the future is unknown, but for now, some European companies with activities in China are choosing the less radical option of separating their China operations from global ones. So-called “localisation strategies” involve building up local supply chains and partnerships to avoid getting caught in the fray of geopolitical risks.

One of the latest examples of that trend was German carmaker Volkswagen’s decision to set up a regional China board to give it more autonomy and streamline decision-making. The company already employs more than 90,000 people in the country and operates over 40 vehicle and component factories along with partners.

But such moves do not do much to minimise European companies’ reliance on China. They are also possibly statistically underestimated, as some data on foreign direct investments (FDIs) do not fully capture profits that are saved and reinvested locally.