So, German Chancellor Friedrich Merz landed in Beijing this week. On paper, it's a diplomatic trip about trade and economics. In reality, it's more like walking into a house where the furniture is being rearranged by a very powerful, somewhat inscrutable host while trying to negotiate the price of the rug.

Merz is the latest in a line of European leaders—following France's Emmanuel Macron and the UK's Keir Starmer—making the trek to China. The goal? To talk about the elephant in the room, or rather, the massive trade imbalance sitting between the European Union and China. "It's very important to me to keep and deepen this relationship wherever that is possible," Merz said before meeting Premier Li Qiang. "But we also have some issues that must be addressed."

That's diplomatic understatement. The issues are a widening trade deficit, concerns about Chinese industrial overcapacity, and growing unease in European capitals about what they see as economic coercion and China's tight alignment with Russia. And just to make the small talk even more awkward, Merz's visit comes right as China's political landscape is undergoing one of its periodic, opaque shake-ups, this time in the top ranks of the military.

In fact, a day after Merz arrived, China's National People's Congress removed at least nine senior military deputies. It's all part of a broader purge that has analysts wondering who's safe in Beijing's halls of power and what it means for everyone trying to do business with the world's second-largest economy.

The Numbers Don't Lie: A Staggering Trade Gap

Let's start with the economics, because the numbers are stark. The EU's trade deficit with China isn't just big; it's getting bigger. It widened to €359.3 billion in 2025, up from €304.5 billion the year before. For Germany, the EU's economic engine, the relationship is particularly intense. China regained its spot as Germany's largest trading partner last year, with total trade hitting €251.8 billion. In December alone, Germany ran an €8.2 billion deficit with China.

"This dynamic is not healthy," Merz said, pointing out that the deficit with China "has quadrupled since 2020, i.e. within five years." He added, "We are therefore addressing it and want to find ways to reduce this trade deficit at our expense." The subtext: Europe is buying a lot more from China than it's selling, and that's becoming a political and economic problem.

Meanwhile, China has been flexing its own trade muscles. Last October, it expanded export controls on several rare-earth elements and related processing equipment. For European companies trying to build everything from electric vehicles to wind turbines, that's a direct hit to the supply chain. Jens Eskelund, head of the EU Chamber of Commerce in China, says European companies are already feeling the pinch, with supply chain uncertainty slowing production and causing shutdowns.

Merz has been blunt about the broader strategy he sees. "China is systematically exploiting the dependencies of others, reinterpreting the international order on its own terms," he said at the Munich Security Conference last month. "Great power politics operates according to its own rules."

The Ukraine Problem: China's "Economic Lifeline" to Russia

If trade is one headache for Merz, geopolitics is another, and they're deeply connected. The war in Ukraine has created a major fault line between Brussels and Beijing. Western officials have been increasingly vocal, telling outlets like Bloomberg News that Russia's war effort "would not be sustainable without ongoing Chinese support."

They point to exports of dual-use components and critical minerals used in Russian drone production, describing Beijing as a key facilitator of Moscow's military campaign. Analyst Eva Seiwert from the Mercator Institute for China Studies put it plainly: Beijing has provided "Russia with an economic lifeline, cushioning the impact of Western dollar-centered sanctions, and allowing the Kremlin to sustain its war." She notes China now accounts for over 40% of Russia's oil exports and supplies the majority of high-priority dual-use goods for the war.

So when Merz sits down with Chinese leaders, he's not just talking about car parts and solar panels. He's also talking about a war in Europe that his country is heavily invested in stopping, and the role China is playing in prolonging it.

The Purge: When "Nobody Is Safe" in the PLA

Now, layer on the domestic political drama. Merz's visit comes on the heels of what looks like a significant consolidation of power by Xi Jinping within the Chinese military, the People's Liberation Army (PLA).

In January, China's Defense Ministry announced investigations into two of the military's most senior figures: General Zhang Youxia, the first-ranked vice chairman of the powerful Central Military Commission (CMC), and Liu Zhenli, chief of staff of the CMC's Joint Staff Department. The accusations were vague but serious: "serious violations of discipline and the law," including alleged corruption, obstructing military modernization, and undermining command authority.

Zhang's removal is particularly symbolic. He's a "princeling"—the son of a famous Communist general from the civil war era. His fall sends a chilling message. "Zhang's removal means that truly nobody in the leadership is safe now," said Jonathan Czin, a research fellow at the Brookings Institution.

The purge has been sweeping. Following the recent removal of the nine military deputies, the combined PLA and People's Armed Police delegation in the National People's Congress was reduced to 243. The shake-up has left the CMC looking thin, with only the new anti-corruption chief, Zhang Shengmin, alongside Xi himself at the very top. "This has created a power vacuum in the world's largest army," said Mei Shanshan from the RAND Corp.

Interestingly, Chinese markets have largely shrugged off the political turmoil. The CSI 300 index approached a four-year high in January. But for foreign governments and businesses, the opacity is a problem. "China's leadership shakeup is no longer a contained political issue and is increasingly shaping how risk is priced across geopolitics and trade," wrote Arlan Suderman, Chief Commodities Economist at StoneX Group.

What Does a Gutted Military Command Mean for Asia—and Europe?

For experts watching China's military posture, the purge has immediate implications for regional security, particularly regarding Taiwan. The removal of experienced commanders like Zhang Youxia, a veteran of the 1979 Sino-Vietnamese War, represents a "significant loss of operational expertise," especially for the Eastern Theater Command, which would be central to any Taiwan scenario.

"Their simultaneous removal leaves a gap near the top of the chain of command that would direct how and to what extent the military will train, equip, and fight," said Joshua Arostegui of the US Army War College's China Landpower Studies Center.

Some analysts, like Neil Thomas of the Asia Society Policy Institute, read the purge as a sign of de-escalation. "Gutting the PLA high command suggests that Xi is not contemplating a major military escalation against Taiwan in the near term," he said. The thinking goes: you don't clean house right before you plan to start a big, risky fight.

But there's a counter-argument. By removing old guard figures, Xi may be paving the way for younger, more personally loyal, and potentially more nationalistic commanders. That could make China's military behavior less predictable and more aggressive, keeping rivals like Japan on edge. Tokyo has already been enhancing its defense capabilities under a new National Security Strategy.

The European Business Dilemma: Stuck in the Middle

All of this—the trade tensions, the geopolitical rift over Ukraine, and now the internal political churn—creates a minefield for European companies that have bet big on China. A flash survey by the EU Chamber of Commerce in China in December highlighted the growing headaches: 39% of respondents reported a "lack of transparency" in processes, and just over one in five said application requirements lack clarity. A similar proportion expects "significant" supply chain disruptions or production stoppages if China fully implements its export controls.

"These dynamics suggest that policy outcomes are becoming harder to anticipate precisely when global exposure to China remains high," Suderman noted. In other words, it's getting harder to read the room in Beijing just as Europe's economic ties to it are more significant than ever.

So, Chancellor Merz has his work cut out for him. He's trying to negotiate better trade terms with a partner that holds many of the cards, while that partner is simultaneously conducting a major internal political reorganization and supporting a war that Europe is desperate to end. After his meetings, Merz struck an optimistic note: "This marks a promising direction for German-Chinese relations."

Promising, perhaps. But as the military purges and the €359 billion trade deficit show, it's also a relationship fraught with complexity, power politics, and a great deal of uncertainty. For European investors and policymakers watching from afar, the only clear takeaway might be to expect the unexpected.