Merkel arrived in China on Sunday amid growing pressure from industry and rights groups to confront the Chinese more forcefully.
The Chinese government is overseeing a broad crackdown on rights groups and activists, and is facing complaints from foreign firms about market access restrictions.
Speaking to students at a Beijing university, Merkel explained the importance of real rule of law.
‘This means the judiciary decides according to the laws and legislation of the country independently of politics and everyone is equal before the law. That means court procedures and rulings have to be transparent,’ she said.
‘If interpreted in this way, rule of law strengthens the trust of citizens in state institutions and its decisions. And thereby also strengths the social stability of a country.’
China's courts are controlled by the ruling Communist Party, though President Xi Jinping is trying to improve the rule of law and get ordinary people to resolve their grievances via the courts rather than taking to the streets.
Foreign companies also need a good legal framework, Merkel added.
‘As we see it, a legal framework for companies also has to be designed in such a way that foreign companies enjoy the same rights and privileges as domestic companies, for example as regards public tenders, the effective protection of brands and patents and data.’
China has repeatedly pledged to increase market access for foreign firms and carry out market reforms in its effort to revamp its slowing economy. But foreign critics accuse it of not following through on its reform agenda and introducing new regulations that are restricting market access even further.
Merkel's trip also comes in the midst of anger in Europe about Chinese steel exports, the robust growth of which has come under fire from global rivals, who have accused China of dumping cheap exports after a slowdown in demand at home.
‘We have to ensure that we have a level playing field,’ she said, referring to the steel issue.
‘No one wants to see an expanded trade war between the European Union and China. But that means we have to talk about the outstanding issues.’