China's Changing Export Dynamics: A Global Disinflationary Force

When Xi Jinping met Joe Biden on Wednesday, it wasn't to negotiate a deal on solar panels or construction steel. China's exports have been facing challenges recently, but it's not because they aren't selling enough. In fact, Beijing is still exporting as much, if not more, volume-wise. The issue lies with the declining prices of these exports, dropping by 8% year over year, as reported by Duncan Wrigley, chief China economist at Pantheon Macroeconomics.

According to Larry Hu, chief China economist at Macquarie Group, China has become a significant force contributing to global disinflation. One of the factors responsible for this shift is the depreciation of the yuan against the dollar, down by 3% over the past 12 months. Additionally, internal dynamics within China's manufacturing industry have played a role. Manufacturers anticipated a stronger domestic rebound that hasn't fully materialized, leading to excess capacity that they are now trying to alleviate by offering discounts in overseas markets. Despite lackluster demand, Xi and his team have maintained their production levels to support employment stability. "The government is using manufacturing investment as a key stabilizer to keep employment going," explains Wrigley.

This oversupply situation is particularly evident in politically sensitive sectors. Steel exports have surged by 80% in volume but witnessed a sharp decline in prices by 40% since the beginning of 2022. Similarly, solar cells have experienced a 50% increase in volume and a 40% decrease in prices.

This situation presents both positive and negative implications for major developed economies. Cheaper Chinese products are aiding Western governments in tackling their internal inflation concerns, although quantifying the exact impact is challenging. Chinese imports account for up to 4% of the gross domestic product in European Union countries and approximately 20% of consumer goods consumption. François Chimits, an analyst at the Mercator Institute for China Studies in Berlin, emphasizes that the significance of China's role as a driver for these economies shouldn't be underestimated.

Overall, China's changing export dynamics are shaping the global economic landscape, exerting a deflationary influence on prices and impacting various sectors worldwide.

China's Advantage in Export Competitiveness

This economic disparity may have significant implications for the West's political goals, especially in renewable energy technology and the global race for electric vehicles. The U.S. and EU are committed to developing their own renewable energy capabilities, but China is rapidly moving forward to establish itself as a dominant player. Arthur Budaghyan, chief emerging markets strategist at BCA Research, highlights China's increasing competitiveness in the automotive industry as a notable structural shift.

Considering the upcoming election where inflation is a major concern, President Biden is expected to prioritize short-term gains from Chinese price reductions while postponing longer-term worries. Budaghyan predicts that the Biden administration will likely refrain from addressing yuan depreciation over the next 12 months.

Meanwhile, Europe faces a more complex situation. The EU has taken on the responsibility of leading the global energy transition without becoming overly dependent on Chinese equipment. Green-energy components now make up nearly a quarter of Chinese exports to the EU. Germany's leading auto manufacturers, Volkswagen, Mercedes-Benz Group, and BMW, rely on Chinese sales but also worry about potential competition from Chinese electric vehicles. In response, the EU has recently initiated an investigation into whether Chinese EVs benefit from unfair subsidies.

However, addressing these concerns is only the beginning of a challenging negotiation process. There are internal conflicts within the EU between producers and consumers, as well as external negotiations with China. Chimits, an expert on EU-China relations, believes that navigating this complex landscape will require difficult compromises.

In conclusion, while the West seeks to reduce its dependence on China, China's competitive advantage in exports and advancements in key industries pose significant challenges. The path forward will involve delicate negotiations and careful consideration of both short-term gains and long-term strategic objectives.