Its economy is trying to compensate for the internal weakness with ever-increasing (state-subsidised) exports in particular to it, hitting its RES and car industry. Unlike the past, when the country mainly exported goods for mass consumption, China is pushing with all its strength on future technologies. The problem (p. for its western competitors) is that the GOC supports these industries with massive subsidies, thus involving global competition in intense price competition (in particular affecting the European Union), highlights in its analysis, Handelsblatt. Experts fear that oversupply on world markets could even increase, as producer prices in China have been declining since October 2022. Pramol Dhawan, a senior emerging market expert in the American capital company Pimco, points out that “China exports its deflation worldwide”. This development is triggered by China’s real estate market, which is under severe pressure, and the fall of private consumption, which has not yet fully recovered since the coronavirus pandemic. China’s export flood particularly hits the renewable energy sector and the automotive industry. “The price war in the Chinese car market is already brutal, especially for electric cars,” says Maximilian Butek of the German Chamber of Commerce in Shanghai. And weak domestic consumption further increases export pressure for Chinese producers. “Price pressure increases dramatically”, complains German Federal Association of Foreign Trade (BGA), Dirk Yantura (Dirk Jandura). In the last two decades, China’s share of EU imports has increased very significantly and continuously, he said. Wang Tao, chief economist for China at the Swiss UBS bank, expects an increase in exports of renewable energy and electric cars, which will increase competitive pressure for European manufacturers. If the Chinese economy remained stagnant for a longer time, domestic demand in China could decrease even more sharply and therefore oversupply on the world market could increase, it believes. For each 1 container of EU goods arriving in China, more than 3.5 containers filled with exports are currently leaving China for Europe. According to a publication by the Foreign Relations Council, China’s export surplus amounts to 2% of global gross domestic product and “shows no signs of slowdown”. Subsidies lead to lower prices According to Yantura, the background to this is above all the Chinese leadership’s strategy to use subsidies to make its own economy a leader of innovation in the long term. Companies are under special pressure for sophisticated industrial products, in which Germany has so far specialized. It sees increasing competition, also in markets outside the European Union (EU), in the electricity industry, vehicle construction, engineering, battery technology and photovoltaics. Due to the overcapacity in China, the German market is also “nearly flooded” with Chinese products such as photovoltaic panels. “A reasonable conclusion,” says Yantura, “is that the competitive situation is becoming increasingly intense. As of autumn 2022, China’s export price index has decreased massively. This is accompanied by a drastic reduction in the inflation rate. Between August and January, China was even stuck to deflation of consumer prices. According to a study by JP Morgan Asset Management, particularly emerging markets are affected by wider deflationary pressures, but the price drop trend could also be “dispersed” in developed countries. Initially, this refers mainly to producer prices, but in the long term, China’s cheap exports have also maintained consumer prices worldwide at least within limits in the past, before the surge of inflation caused by Covid and war, which is now retreating again. Daan explains that “China’s economy consists of two parts with different speeds”. The domestic market is weak, but the country is still strong in exports and even penetrates technically more demanding product sectors. Export pressure on economic relations The Fitch rating agency sees only a slow recovery of the Chinese economy, which should have even “greater consequences” for the real estate market, regional governments, banks and asset managers. The rate is expected to grow China’s economy this year is 5%, according to the government’s wishes under Shi Jinbing. Due to the slump crisis, experts doubt that this value can actually be achieved. Michael Pettis, an expert on China at the Carnegie Foundation, said that in the People’s Congress in early March, there were no approaches to promoting consumption. The decoupling of western states from China, which is much discussed for geostrategic reasons, is not yet evident in commercial data. Petisse estimates China has a 31% share of the global manufacturing sector, but only 13% of consumption. He fears worsening international trade relations. Over the last two years, the country has shifted investment from real estate to industry on a large scale. From an economic point of view, this can only be justified “if the rest of the world is willing to accept the consequences for trade – and that is clearly not the case”. The European Commission, for example, initiated a formal investigation into whether Chinese subsidies are unacceptablely reducing electric cars from China. Tensions are also increasing between the United States and China, especially in view of the presidential elections in the United States in November. Claimer Donald Trump tends to block the US market. But the government under Joe Biden is also trying to slow down the strengthening of China’s technological sector, for example by lobbying companies in the semiconductor sector to limit their commercial relations there. This danger was recently noted by well-known economist Huang Yiping from the University of Beijing. He warned of the “geopolitan” consequences of China’s industrial policy, saying that a “wide wave of protectionism against Chinese products” would be detrimental to the country’s “future development and innovation”. Chinese companies’ profits are declining David Rees, an emerging market expert in Schroders, warns that cheap exports are likely to fuel anti-Chinese sentiment in the upcoming U.S. campaign and speed up deglobalization. The “export of deflation” also has another negative effect on China: as prices fall, so does domestic companies’ profits. This is currently evident in the solar industry, among others. For the US and Europe, the fall in prices of Chinese products also has its positives, Rhys argues in a recent study: They reduce inflation and remove pressure from central banks to combat price increases at continuing high interest rates. The manufacturing sector, as the “heart” of China’s global economic model, has already contributed to reducing the prices of many commodities over the past three decades. However, China’s exports place it in an unpopular position internationally, which is known in Germany. Again and again in recent years, especially in times of crisis, the German government has been called upon to do more for the domestic economy in order to reduce the high German export surplus, which is also partly responsible for tensions within the euro area, where imbalances can no longer be mitigated by monetary changes. The real estate crisis is burdening the economy on a historical scale At the same time, the internal pressure that Beijing’s leadership is currently under is not to be underestimated. Rafael Gallardo, chief economist and expert for China in the French investment company Carmignac, outlines a grim picture of China’s domestic economy: “The real estate crisis there is greater than that in Japan in the 1990s and the U.S. mortgage crisis in 2008,” he says. In his view, he obscures all comparable events in history. Galardo’s fear: “At best, China will experience a lost decade”. Although he does not expect panic, he expects “a long fall”. Galardo accuses the government of mismanagement of the crisis. It provides liquidity to banks. But history, in his opinion, teaches: “These crises can stop only if the government removes risks from banks”. In the global financial crisis that began in 2008, risks were concentrated in ‘bad banks’ with state guarantees. Thus, the US government indirectly purchased dangerous assets from banks. In Germany, Hypo Real Estate was nationalised and risk loans were assigned to external partners. Therefore, Galardo warns about the Chinese government: “The more he hesitates, the greater the damage”. However, the situation in China is not quite comparable to that in Western countries, where large banks are mainly state-owned. Another negative factor is demographic evolution in China. “The crisis strikes the country just as demographic elements are overturned,” Galardo says. ” Compared to Japan then, China is even worse today. After all, Japan has stable political and social structures. In China, on the other hand, the government legitimizes itself by promising ever-increasing prosperity. From personal contacts, he learns: “After a phase of slowing down growth, many Chinese are disappointed and no longer have the ambition of previous generations”. In his opinion, this contributes to low birth rates. “Many have lost hope that they will be able to afford their own apartment at some point,” Galardo says. All this reduces the hopes of returning to previous growth rates.
How State subsidies in China affect Europe’s RES and car industry
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