By Paul Carrel
BERLIN (Reuters) - Germany's export exposure to China, for years a source of economic strength, is fast turning into a risk that raises questions about the health of other sources of growth in Europe's largest economy.
Germany has the greatest trade exposure to China of the 28 European Union nations, largely thanks to demand for its cars and the strength of its engineering industry.
For years, its EU peers tried - and failed - to match Germany's export prowess in China, where German companies profited from the infrastructure and consumer spending that have helped make the Chinese economy the world's second largest.
But now a slowdown in China means corporate Germany's ventures there risk turning profit streams into cost burdens. Worries about China sent global stocks tumbling on Monday before they rebounded on Tuesday when Beijing cut interest rates.
"The weaknesses of Germany's 'special relationship' with China are becoming increasingly apparent," said Hans Kundnani at the German Marshall Fund.
"I think there is a growing perception among German business people that they are too exposed to China."
Germany's economic ties to China dwarf those of its European counterparts. Led by the big carmakers, German firms moved into China faster and more aggressively than many of their rivals, and China has been a major source of growth for German exporters.
In 2007, the Chinese market accounted for just 3.1 percent of German exports but that figure rose to 6.6 percent last year, Federal Statistics Office data shows. By contrast, the share of exports going to France slipped slightly over the same period.
Growth in China made it Germany's fourth biggest export market in 2014, after France, accounting for 9.0 percent of total exports, the United States (8.5 percent) and Britain (7.4 percent).
However, this year the Chinese market is fading fast for Germany. In the first half of 2015, export growth to China was just 0.8 percent -- the same as to crisis-burdened Greece, figures from the DIHK chambers of commerce show.
German engineers' exports to China shrank by 4.9 percent in the first half. Their machine products lag only cars as Germany's largest sector of export goods to China.
For companies like German industrial group ThyssenKrupp (TKAG.DE), the Chinese market is important. China accounts for 16 percent of ThyssenKrupp Elevator's sales, or about 1 billion euros ($1.14 billion) last year.
Already some leading German brands are feeling the impact of the slowdown, which saw activity in China's factory sector shrink at its fastest pace in almost 6-1/2 years in August as domestic and export demand dwindled.
Carmaker Volkswagen (VOWG_p.DE) last month lowered its global sales forecast and said it was braced for stagnant volumes in China, after years of double-digit growth in its biggest market.
The German government has been at pains to describe the impact of China's slowdown for Germany as "limited", and Berlin is sticking to its 1.8-percent growth forecast for this year.
That throws the spotlight onto more mature markets like the United States and the EU, which Berlin says are holding up well.
The United States actually overtook France in the first half of this year to become Germany's top export market for the first time since 1961, the DIHK said. But with European economies struggling to pick up economic momentum, the United States would be a rather singular market for German exporters to depend on.
Even if Chinese demand does hold up - Beijing still has an official 7-percent target for 2015 - China is morphing from a market for German firms to a source of competition for them.
"Chinese companies are moving up the value chain and are increasingly competing with German companies," said Kundnani. "The long-term danger for German companies is to get pushed out of the mass market into luxury niches."
This is already having an effect on Germany's carmakers, which last year accounted for nearly a third of Germany's 75 billion euros in exports to China.
VW said last month profits from its two Chinese joint ventures could even drop this year below 2014 levels amid a shift to lower-priced cars, as demand in is increasingly driven by rural, less wealthy Chinese regions.
Klaus Wohlrabe, economist at Germany's Ifo economic institute, said the China factor will grow in importance for businesses in Germany, which drove economic euro zone growth in the second quarter as France stagnated and Italy lost momentum.
China's slowdown also risks hurting other German emerging export markets. A senior government official in Brazil said on Tuesday an economic recovery which had been expected later this year could be delayed due to China.
That could pose a problem to German firms that have poured over 19 billion euros into the struggling Brazilian economy.
Exports remain crucial to Germany's economic health.
In the April-June period, they grew by 2.2 percent on the quarter, the biggest increase since the first quarter of 2011 and helped drive economic growth of 0.4 percent on the quarter, Federal Statistics Office data show.
But against the uncertain global economic backdrop, Germany could try to refocus its economy away from foreign trade.
"Germany still has room for maneuver and it would be a good thing to focus more on investment and less on exports," said Sandra Heep, economic policy expert at the Mercator Institute for China Studies in Berlin.
"With the slowdown in China, this will become more urgent."
A breakdown of Germany's economic performance in the second quarter highlighted its persistent weakness in investment. Gross capital investment fell in the three-month period and shaved 0.1 percentage points off economic output.
"Low investment is the Achilles' heel of the German economy," said Marcel Fratzscher, head of the DIW economic institute in Berlin.
Weaknesses in Germany's transport and digital infrastructure, skilled labor shortages and uncertainty around energy policy meant that companies were holding off investments in Germany, he said.
German productivity already lags that in France, Belgium, the Netherlands, and the United States, figures from the Organisation for Economic Cooperations and Development show.
By focusing so intently on export markets like China, corporate Germany risks further undermining the prospect of the domestic growth engine building steam.
($1 = 0.8751 euros)
(Additional reporting by Rene Wagner; Editing by Jeremy Gaunt)