China has steadily been moving up global value chains, not just in capital goods but also in related IT and services.
Recent weeks saw spectacular rises in Chinese equities before doubts returned amidst longstanding debates on the attractiveness of China’s stock market.[1] We want to zoom in on one factor especially important to international investors, namely how much recent stimulus measures will matter beyond Chinese shores. One good way to come to terms with this question is to consider German exports to China. As our Chart of the Week shows, these used to be tightly correlated with Chinese economic growth. Over the last five years, however, the two have become increasingly decoupled. The question now is, will the comprehensive stimulus program China has recently initiated give the Chinese economy such a strong boost that it might lead to improvements in the European Union (EU) export trends towards China? Unfortunately in our view, the short answer is no, for two reasons.
First, the break down in the relationship shown in the chart is a consequence of various structural trends. China’s import demand structure has changed because it has steadily been moving up global value chains, not just in capital goods but also in related IT and services. Instead of importing German capital goods, Chinese manufacturers have even turned into competitors. In the past, carmakers from Germany, the US and elsewhere took advantage of low production costs and cheap inputs to sell their expensive gas guzzlers both on the Chinese market and for export from there. Today, instead, China's low production costs are allowing its manufacturers to outperform foreign rivals in electric cars with sophisticated software.[2] The second reason for the broken-down relationship is that China not only imports fewer but also different goods, reflecting rapid increases in the importance of services and the new economy sectors.
Even if Chinese stimulus boosts growth, the boost to German exports is likely to be muted
Sources: Bloomberg Finance L.P. as of 10/15/24
So, will the latest Chinese stimulus program have enough of an impact on growth (and hence import demand) to benefit EU exporters (albeit less than before)? Unfortunately, probably not. The boldest part of the government plans is aimed at local government debt resolutions and improving their fiscal situation. (RMB) 6 trillion is expected to be spent on this over the next few years, transforming hidden local government debt into open debt and providing local governments with more funds to buy up excess housing stock. This is necessary to eventually return the sector to (modest) growth. “All these measures should have lasting positive effects,” argues Elke Speidel-Walz, Chief Economist Emerging Markets at DWS, “but to see them will take a while.”
There are also other measures announced to support in particular low/medium income of Chinese households via increasing their disposable income, by improving social security. However, this falls well short of what markets had hoped for, in particular a big boost to consumption via cheques to consumers. In conclusion, EU exporters are likely to derive only limited benefit from China's spending program and the decoupling between China's growth and EU exports mentioned above isn't likely to disappear any time soon.
1 The Economist, Oct. 14, 2024, Buttonwood: “Why investors should still avoid Chinese stocks: The debate about “uninvestibility” obscures something important.”
2 For further details, see our previous chart of the week, Chinese electric cars are in the fast lane (dws.com)
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