Germany's Merz says challenges remain as he concludes inaugural China trip

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Merz highlights overcapacity issues with Chinese exporters

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Germany plans regular consultations with China by next year

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German firms concerned over China's trade surplus and market access

(Adds quotes from visit, background)

By Andreas Rinke

HANGZHOU, China, Feb 26 (Reuters) - German Chancellor Friedrich Merz wrapped up his two-day visit to China on Thursday hailing "good cooperation" with Beijing but pointing to overcapacity by Chinese exporters that have taken a growing share of German markets.

Merz, on his first visit to China as chancellor, visited Chinese robotics producer Unitree, where he was welcomed by dancing robots, a Siemens Energy site and saw self-driving Mercedes-Benz technology in the high-tech hub of Hangzhou.

As well as these "impressive examples of good cooperation, technological development", he said there were "difficult issues" that needed to be addressed openly.

"Above all, there are issues relating to competition - China has high capacities, some of which are now also posing a problem for Europe because they far exceed market demand," he said. "We will have to discuss this in detail after my visit," he said, adding that he would ask Economy Minister Katherina Reiche to also visit China and said regular government-to-government consultations with China would begin by the start of next year.

CHINA SAYS ITS STRENGTHS AID GREEN TRANSITION Beijing has repeatedly rejected EU accusations about overcapacity, calling them "entirely unfounded" and instead saying its strengths in areas like renewable energy support common goals including the green transition. China was Germany's largest trade partner last year and German manufacturers have been embedded in China's economy for decades but the pattern of trade has shifted dramatically over the past five years.

Chinese exporters, helped by what German officials consider an undervalued yuan, have reversed years of German surpluses, leaving Europe's major industrial power with a yawning trade deficit with China of almost 90 billion euros ($106 billion) in 2025. The visit by Merz, who travels to Washington next month, came as basic assumptions of German foreign policy for decades have been overturned by U.S. President Donald Trump's confrontational turn against longstanding European allies. The German chancellor, who was accompanied by a large delegation of business leaders, met President Xi Jinping and Premier Li Qiang on Wednesday, pledging to build up a "comprehensive strategic partnership" with China.

But his visit, following visits by French President Emmanuel Macron and British Prime Minister Keir Starmer could not conceal significant issues that have clouded relations between China and Europe, and he said "numerous tasks" remained to be handled.

SUPPLY CHAIN VULNERABILITIES German business leaders say overcapacity by Chinese firms, aided by an undervalued yuan and restrictions on access to their own markets, has distorted competition. China's dominance in areas like chip production and rare earths has also left Western manufacturers vulnerable to supply shocks.

At the same time, the technical sophistication of Chinese firms, their deep integration in manufacturing supply chains and the sheer size of the country's consumer market make China an indispensable partner.

Chinese Premier Li told Merz on Wednesday that China would address "reasonable demands" of Western companies. But on the yuan, Beijing has called itself a "responsible major country", and said it has no need to seek an advantage in international trade through currency devaluation.

($1 = 0.8475 euros) (Additional reporting by Ethan Wang, Writing by Friederike Heine and James Mackenzie Editing by Ludwig Burger and Sharon Singleton)