With its own base, the German Empire wanted to make itself independent from the naval stations and the goodwill of the other great powers and establish its own sphere of influence in China. When China could not be persuaded through negotiations to hand over a leased territory to the German Empire, the German leadership waited for an opportune moment to seize territory in China by force.
The legitimation for violent action was finally provided in November 1897 by the murder of two German Steyl missionaries in the administrative district of Juye in the province of Schantung (Shandong). The German Empire, which had protected the Steyl mission in China since 1890, reacted immediately and had Kiautschou Bay (Jiaozhou) occupied by the East Asia Squadron under Rear Admiral Otto von Diederichs (1843-1918). State Secretary of the Foreign Office Bernhard von Bülow (1849-1929) justified the German Empire's action in China against criticism in the Reichstag on December 6, 1897 by saying: "We do not want to outshine anyone, but we also demand our spot in the sun."
Negotiations over Chinese compensation for the murders of the German missionaries and over territory occupied by Germany led to the settlement of the Juye missionary incident on January 15, 1898, and the signing of a lease agreement between China and the German Empire on March 6, 1898. This treaty included the lease of Kiautschou Bay by Germany for 99 years and the establishment of a German sphere of interest through construction rights involving railroad construction and mining in the region. This treaty is one of the many "unequal treaties" by which foreign powers sought to secure zones of political influence, military bases, and trade advantages in China.
The leased territory of Kiautschou was administered by the Reichsmarineamt. This was the responsibility of Rear Admiral Alfred von Tirpitz (1849-1930), who, as Secretary of State of the Reichsmarineamt, had personally requested responsibility of the new German leased territory in East Asia from Kaiser Wilhelm II. On the ground, in turn, a naval officer, as governor, was both commander of the German military and superior of the civilian agencies, reporting directly to the Secretary of State.
The village of Tsingtau (today: Qingdao) was chosen as the administrative headquarters because it was close to the water, experts estimated that the bay had sufficient water depth for large ships, and thus could be developed as a port and trading center. In the following years, the small fishing village of Tsingtau was developed into a model German city, which had the unofficial name "Little Berlin" and in 1913 was home to about 60,000 people on an area of 20 square kilometers. However, from the beginning the city was segregated into two parts, a quarter for people from Europe, the USA and Japan, whose proportion in Tsingtau was about 10%, and a district for Chinese.
As a German naval base, Tsingtau was home to the 3rd Sea Battalion. Not only did the presence of the German military initially ensure that Tsingtau was a “male-dominated society” but also the presence of foreign military, as well as the always temporary German officials of the naval administration, bachelors who saw their business future in a promising city, and local workers who built the city according to German architectural ideas and building standards made it so.
In this context, the most important public construction projects in the lease area can be counted as the Great Port and the railroad station, the Tsingtau- Kiautschou railroad line, the administrative building of the governorate, a college, a hospital, a modern sewerage system and a public road network. The Tsingtau-Kiautschou railroad line was put into operation as early as 1901, and construction continued to Tsinan (today: Jinan) until 1904, completing one of the most important infrastructure projects of the Imperial Navy Office for the political, economic and cultural integration of the region.
Throughout its existence, Tsingtau was a "subsidy colony" of the German Empire, since state investments in the leased area regularly exceeded revenues. Admittedly, investments had to be made in the artificial city of Tsingtau at first, but in the long run the entire leased area proved to be a loss-making business.
By way of comparison, in 17 years Kiautschou was subsidized to the tune of 160 million Deutschmarks, while revenues amounted to only 36 million Deutschmarks. All building materials for public construction projects were imported from Germany, which meant that the regional economy was not involved, while German companies earned well from Tsingtau. Local Chinese were used only as cheap labor, while Chinese companies did not participate financially in the railroad and mining companies. Moreover, it must also be considered that, on the one hand, Chinese farmers had been expropriated in order to implement the German colonial project, and, on the other hand, the railroad and mining companies massively interfered with the lives of the local population.
When resistance to the German colonial policy arose, the German governorate of Kiautschou reacted with "punitive actions". At the same time, industrial projects could not be realized in the leased area; Tsingtau remained a port and trading city whose value added and purchasing power remained low compared to other leased ports of the time, while the 1897 land ordinance made the city one of the most expensive, but also "cleanest" cities in the region. Only small private companies (soap factory, brickyard, and brewery) and private businesses operated successfully, while state-subsidized companies (railroad, mining, and shipyard) remained unprofitable and did not manage to break away from the state subsidized economy.
Around 1905, however, a turning point in Tsingtau's development can be observed, which was significant in several aspects. After the punitive expeditions and interventions of German troops in the "Boxer Rebellion," violent politics were gradually suppressed in order to emphasize the exemplary nature of the German presence in the region. In this context, racial segregation in Tsingtau was slowly abandoned until, under the influence of the Chinese Revolution of 1911, which led to the increased settlement of representatives of the Qing Dynasty in Tsingtau, it was entirely replaced by a new "settlement regulation" in 1914. The German Empire, in turn, tried to live up to the role model function of the "model colony" through an active cultural policy in the areas of education and upbringing. The most important and visible project in this regard was the German-Chinese college, which was founded in 1908 and housed more than 400 students in 1914.
The year 1905 also marked the end of the Russo-Japanese War, from which Japan emerged victorious. Due to the new position Japan had gained as a result of this war, the German Empire came into increasing competition and eventually rivalry with Japanese interests on the mainland. Although the German Empire was able to increase its trade with China via Tsingtau in absolute terms by 1914, in relation to Japan's trade with China, it declined: Japan emerged as the most important trading partner for China and was able to increase its share of coastal trade with China by 190% by 1911.
Japan, strengthened politically by its 1902 alliance with Great Britain and militarily by the outcome of the Russo-Japanese War in 1905, constituted a real threat to the German Empire. In this sense, the German Admiral's Staff had correctly stated as early as 1902: "The colony must be expected to be taken immediately after the outbreak of war by the superior fleets of our possible opponents in East Asia (Anglo-Japanese Alliance, Franco-Russian Alliance)." The German leasehold of Kiautschou came to an abrupt end with the attack by Japan and England on Tsingtau in 1914.