When heads of German companies learned last month of a proposal by the Economics Ministry to screen all investments in China, as part of a series of new measures, there was an uproar. The proposal was soon shelved, a ministry source and a business executive told Reuters, Reuters wrote.

Frustrated that they were not sufficiently consulted on proposals to make business with China less attractive, which could have big consequences for German firms, senior business leaders later rejected the proposal in a meeting with Economy Minister Robert Habeck.

According to two sources, executives from chemical giant BASF, Deutsche Bank and industrial group Siemens attended the meeting.

The Green Party, which runs the ministry, has long advocated a tougher stance on China, and last month Habeck said Germany would adopt a tougher approach to trade.

The ministry's investment review proposal was driven by a desire to limit the transfer of certain technologies and avoid increased dependence in some sectors, one meeting participant said.

"We can only warn against Germany turning away from China," said Markus Jerger, head of the Mittelstand Association, part of an alliance representing over 900,000 of the small and medium-sized firms that form the backbone of Europe's biggest economy," he said.

Politicians and German leaders generally agreed that the country needed to reduce its economic dependence on China, given their concerns about industrial espionage, unfair competition or human rights abuses.

The war in Ukraine has also dealt a blow to the longstanding German tenet that economic interdependence will help open up "authoritarian" states, and has forced Berlin to focus on how it should balance profit and risk in its dealings with them.

But when it comes to China, companies say the stumbling block is how Germany can reduce its dependence without causing more damage to an economy that is already facing a recession next year and without causing a negative reaction from Beijing.

Cracks are also appearing within the tripartite coalition government, which is set to release Germany's first China strategy paper next year.

"Decoupling is the wrong answer. We don't have to decouple from some countries," Scholz, who plans to visit China later this year, said on Tuesday. "I say emphatically we must continue to do business with China."

German investment and trade in China hit record levels in the first half of 2022, and big business says it is out of the question to exit the world's second-largest economy.

Instead, corporate giants such as BASF and automakers BMW, Mercedes-Benz and Volkswagen are putting more money into China to create independent local supply chains, in part to insulate their operations from geopolitical disputes and trade wars.

"With the 'local for local' strategy, we stabilise our regional portfolio against external influences in the best possible way," a BASF spokesperson said.

Mercedes-Benz, Volkswagen, BMW and BASF account for one-third of all European investment in China in 2018-2021, according to a study by the Rhodium Group, a New York-based research firm. "It is impossible to completely disentangle China and Europe," said Tobias Just, a spokesman for Mercedes-Benz, which sells three times as many cars in China as it does in the United States and has two Chinese companies as its largest shareholders.

"Our strategy is local for local, not just for geopolitical reasons, but for natural hedging, proximity to core markets and cost benefits as well," Just said.

BMW and Volkswagen also told Reuters that they are sticking with plans to invest more in their long-standing Chinese operations.

But the Rhodium study said smaller European companies are increasingly reluctant to take the growing risks associated with investing in China.

A spokesman for the Economics Ministry said it is closely monitoring the investment behavior of German companies as part of its strategic considerations on how to behave with China.