Germany has decided to tighten rules on share purchases in German firms by non-EU companies. Chancellor Angela Merkel's cabinet approved the law change on Wednesday.

The rule applies to "security relevant" companies that are crucial to Germany's defense or "critical infrastructure," including many high-tech and power companies. The measure will allow the German government to review or block foreign purchases of stakes as low as 10 percent in such companies, down from 25 percent now.

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Observers believe Berlin's move is due to the growing disquiet about stake purchases and acquisitions of German firms by Chinese investors.

Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, an investment bank, and a senior research fellow at Bruegel, told DW, that Germany needs to step up scrutiny of the purchase of high-value added companies.

"The reason is that the US has already done so with the reform of its Committee on Foreign Investment in the United States (CFIUS) which means that Chinese companies are facing increased scrutiny there."

"The value of Chinese mergers and acquisitions (M&A) in the US is decreasing while that in Europe (and especially Germany) remains very robust," she pointed out, adding that most of the M&A in Europe is directed at high-tech industrial sectors.

Not everyone in Germany, however, thinks that toughening rules on non-EU share purchases is the right approach.

Thilo Brodtmann, the head of Germany's Mechanical Engineering Industry Association (VDMA), believes the German government's decision is "politically motivated" and causes "additional uncertainty" for foreign investors. "Germany relies on open markets, also for foreign investment. At the same time, we expect open investment markets from our partner countries outside the EU," Brodtmann said in a statement.

Close trade partners

Over the past few decades, Germany has grown economically closer to China. The Asian nation is now Germany's biggest trading partner, with total bilateral commerce amounting to about €186.6 billion ($230 billion) in 2017, according to German government data.

Since its "reform and opening up" 40 years ago, China has undergone a stunning transformation from being an impoverished, agrarian society to the world's factory and second-biggest economy.

The reforms ditched Maoist-style collectivization that left the nation destitute and backward, launching a new era which led to double-digit annual growth that pulled millions out of poverty and turned China into a leading industrial power. Beijing has now set its sights on becoming the world's preeminent player in high-end manufacturing.

As part of a 10-year strategy labeled "Made in China 2025," Beijing aims to reorient the Chinese economy, moving it away from labor-intense and low-value production towards higher value-added manufacturing.

It includes plans to improve innovation, integrate technology and industry, strengthen the industrial base, foster Chinese brands and enforce green manufacturing. By doing so, China wants to emerge as a leader in 10 key industries in the future, including aerospace, railways, electric vehicles, robotics and information technology.

Read more: Trade worries put extra burden on Germany-China talks

Emerging industrial rivalry

Germany views the Made in China 2025 initiative as a challenge to its own dominant position in advanced industrial manufacturing. German policymakers and businesses routinely express concerns about China's attempt to climb up the technological ladder, particularly by acquiring German and European technological knowhow in strategic industrial sectors. 

A number of European firms moved into Chinese ownership in recent years, like the former global market leader for concrete pumps, Putzmeister, the mechanical engineering company Krauss-Maffei, the offshore wind farm operator WindMW, the waste management company EEW and the energy service provider Ista.

A study released in May by the German media group Bertelsmann indicated that of 175 firms either partly or completely bought by Chinese investors between 2014 and 2017, 112 were in areas that China was targeting for its Made in China 2025 strategy.

When the Chinese home appliance maker Midea took over Kuka, a cutting-edge German robotics manufacturer, in 2016, business angst in Europe's economic powerhouse was palpable. Many in business and government worried about the impact of losing such a major German robotics firm to a Chinese investor.

Earlier this year, many in Germany were surprised when it emerged that Chinese businessman Li Shufu, the head of carmaker Geely, had acquired an almost 10 percent stake in Daimler, a German automotive giant that owns the iconic Mercedes-Benz brand.  

European concerns about Chinese acquisitions were magnified by Beijing's failure to allow equal or reciprocal treatment for foreign investments in China.

Not a level playing field

Foreign businesses operating in China routinely complain about the lack of a level playing field on the Chinese market. They point to a raft of regulatory hurdles that restrict market access and curtail their ability to freely do business there.

The Business Confidence Survey 2018, conducted by the European Chamber of Commerce in China, concluded that the Asian nation is "one of the most restrictive economies in the world."

Hermann Simon, co-founder of the business consultancy Simon-Kucher & Partners, stresses the unequal state of economic affairs between Germany and China.

"Can one speak of a level playing field? I don't think so. But we are unlikely to gain much by keeping Chinese investments away from Germany," Simon said, adding that the German government should ensure that Beijing creates free and fair competitive conditions for German firms operating in China.

Western analysts say Beijing needs to take a number of measures to level the playing field on the Chinese market, including the lifting of foreign equity restrictions across all sectors as well as elimination of technology transfer requirements and the condition that foreign firms enter into joint ventures with local partners to gain market access.

China and Germany also have major disagreements over protection of intellectual property and government subsidies to Chinese state-owned companies.

Against this backdrop, economist Garcia-Herrero said she agrees with Germany's attempt to tighten foreign investment rules but doesn't think it is enough to level the playing field with China. "Europe should use other instruments at hand, such as competition and state-aid policies," she said.