Think of Germany and it isn't long before visions of bustling business districts and thriving manufacturing plants spring to mind. It isn't surprising: it's these industries that have elevated the country to rank among the world's leading economies. But increasingly they have also become the subject of political power play with one of Germany's biggest competitors – China. A bonanza year of Chinese takeover bids in 2016, of which Germany was the primary target, brought China's seemingly insatiable appetite for foreign firms starkly into focus, and prompted regulators to take note. New restrictions were rolled out in Germany in the interests of "national security", allowing ministers further scope to investigate buyouts deemed endangering to critical industries, such as technology and infrastructure. Meanwhile China, in a bid to keep its devaluing renminbi afloat, introduced controls to limit capital outflows. The measures so far seem to have had the desired effect. Though tabled by the German government as targeting all non-EU investors "regardless of origin", China, the largest international investor into Germany – and indeed most countries – felt the burn. Chinese foreign direct investment volumes into Germany more than halved in the six months to June compared with the record highs seen in the first half of last year, according to Reuters. Yet, the rules have also been met with accusations of hypocrisy. Germany's economy minister called on China last year to "level the playing field" and ease inward investment into China. But Germany's new swathe of restrictions appears to have upped the ante, posing new questions about just who stands to gain from the country's increasingly protectionist stance.
How are German businesses responding? "This is where opinions diverge," Michael Wiehl, partner and head of M&A at Rodl & Partner, a consultancy firm for the German Mittelstand, told CNBC via email. The Mittelstand refers to Germany's more than 3.3 million small- and medium-sized companies which underpin up the country's economy. "On the one hand the know-how and sensitive data of key German industrial companies can be protected by such restrictions," he said. "However, this is primarily a fear of politicians and not the industry itself." For many firms, tighter regulations are an infringement by the state on the free market and simply block much-needed investment. "I'm wondering how many companies need protection," Kim Schindelhauer, chief executive of Aixtron, told CNBC. "We are talking here about global companies who do huge amounts of business overseas." Aixtron was the subject of a high profile $728 million Chinese takeover bid in 2016 . The purchase of the semiconductor manufacturer by Fujian Grand Chip Investment Fund fell through, however, after the sale of its U.S. arm was blocked on security grounds similar to those later brought in in Germany. "We, Aixtron, do not need protection: we wanted the deal," he said, noting half of Aixtron's revenues are generated in China. "We need the funding for research and development. Technology companies need that and European bodies certainly aren't going to provide it." Experts are also concerned that Germany's hardened stance could result in efforts by Chinese investors to circumvent the rules and access core intellectual property via partner firms outside of Germany. "The implementation of tighter restrictions on foreign takeovers ... may lead to a higher Chinese interest in buying companies from Central Europe operating as sub-vendors to German companies," Rodl & Partners's Wiehl said. "This would be another possibility at gaining access to German know-how." Tougher EU regulations on the cards Already, the leading forces within the EU have become wise to this prospect. Germany, France and Italy have been lobbying the European Parliament to make EU-wide rules, and it appears to be working. In September, Jean-Claude Juncker, president of the European Commission, the institution responsible for proposing EU legislation, is to use a keynote speech to announce new measures to tackle perceived gaps in the vetting of foreign takeovers across all 28 member states. Currently, less than half of EU nations have formal systems in place for screening foreign investments and the risks they may pose to national security. "There is a need for an overall European strategy," Jost Wuebbeke, head of Program Economy & Technology at Merics, a German think tank exclusively focused on China, told CNBC over the phone. "All European countries are feeling an increased level of Chinese investment and there is likely to be a push for change from policymakers," he said.