The Chinese economy is stuck: Europe fears the consequences

The Chinese economy is squeaking and creaking, but the leadership of the Communist Party calls on people to remain positive. Beijing is even aiming for economic growth of five percent and is relying on new economic growth giants to lead the way. And that has consequences for Europe.

Outgoing Prime Minister Mark Rutte and Minister for Foreign Trade Geoffrey van Leeuwen are in China today and tomorrow. In addition to geopolitical topics such as the situation in the Middle East and the Russian war against Ukraine, the agenda also includes mutual trade relations.

“People here have experienced the shocks of Covid,” said Jens Eskelund of the European Chamber of Commerce, the club of European companies in China. “They are concerned about jobs, health care, retirement, their children’s education. Even though savings are at record levels, they are cautious about their spending.”

Plunging real estate prices

The announced growth of five percent is therefore mainly a positive signal, says Xu Bin, professor of Economics and Finance at the China Europe International Business School. “There are more considerations: if China had set the target at, for example, 4.5 percent, that would have been too pessimistic a signal.”

Over the past twenty to thirty years, the real estate sector has played a crucial role in the Chinese economy. Many Chinese invest their wealth in real estate and when they buy a house, they often pay for it years in advance. Due to the plummeting real estate prices, many are at risk of losing their invested savings.

“For the Chinese, real estate is actually their only major asset,” says Professor Xu. “It’s not just the roof over their heads, their entire future depends on real estate.”

According to official statistics, the Chinese economy will grow by 5.2 percent in 2023. But in the meantime, the real estate giant Evergrande has gone bankrupt and two other giants, Country Garden and Vanke, are having major financial problems. Local governments are also struggling with sky-high debts. That has quite an impact on consumer confidence.

Giant construction projects have come to a complete standstill in China:

Beijing has poured hundreds of billions into the electric car sector in recent years, hoping to create new Chinese ‘champions’. From Xiaopeng to Lynk & Co and BYD, the new big names in China’s fast-growing automotive industry. But customers appear to be scarce in China.

According to Eskelund, low consumption means that there will be overcapacity in many economic sectors. From electric cars to solar panels and batteries: these factories continue to operate and try to sell their goods on other markets for lower prices, as happened previously with solar panels.

The Dutch and European economies are closely intertwined with that of China. Now that the Chinese economy is growing less strongly, all European countries fear the consequences.

Competition

“As a consumer, in times of inflation, it is nice that you can get affordable quality products from China,” says Eskelund. “The question is whether European companies can survive if that excess capacity is exported to Europe in large numbers at low costs.”

Economist Mathijs Bouman says that European car manufacturers are indeed very concerned about such a possible influx of cheap electric cars from China. “French and German car brands also want to come up with cheaper models, but fear that prices will fall faster than they can keep up with.”

A notable exception is Mercedes, says Bouman. “This month, CEO Ola Källenius even argued for lower import tariffs for Chinese cars, because competition from that country would actually force the European car sector to come up with better models faster.”

Trade restrictions

But Europe thinks differently and wants to take tough action against the import of those very cheap electric cars. Since last year, the European Union has been investigating the Chinese government’s export subsidies.

Bouman: “Brussels is not only concerned about electric cars. They are also investigating trains, wind turbines and biofuels from China, which are said to be offered too cheaply in Europe. The trade relationship is clearly under pressure.”

Eskelund even warns of a “collision in slow motion” between Beijing and Brussels. “China cannot shield large parts of the economy without expecting Europe not to do the same,” he said, referring to the car industry. He does not want trade restrictions. “Free trade is deeply ingrained in our DNA, but it must be fair.”