China's Influence on European Politics
China's Equity Indices
Chinese equity indices have shown contrasting performance, depending on the reference. After a weeklong national holiday, China returned to work with a 4.4% gain for the Shenzhen CSI 300 index. However, this was less than half of the opening gains. The CSI 300 had opened the day with a 10.8% increase. This discrepancy might be due to investors selling some of their holdings to secure a profit.
Divergence in Indices
This could explain the stark difference between the green digits on China's mainland exchange and the 7.8% drop in the Hang Seng index. The Hong Kong exchange remained open last week, and the HSI had gradually continued to rise until today's open. The drop in the HSI index arguably better reflects the latest sentiment. The government had scheduled another press conference for today, leading to expectations of further stimulus measures. However, the press briefing concluded with no additional measures being announced.
German Industry Performance
With a fairly thin data calendar this week, there is little distraction for German industry to hide behind. Industrial output wasn't as bad as expected: production was down 'only' 2.7% y/y. That’s an improvement from the previous month (-5.3%) and it beat market expectations. However, this probably does not mark an improving trend for the manufacturing sector. Production in the automobile industry, which was the main reason for the output jump, fluctuates considerably from month to month.
Decline in New Orders
Yesterday’s data also flag a sharp decline in new orders. Order books shrank 3.9% y/y, despite an increase in demand from non-Eurozone countries. Particularly demand in Germany itself is abysmal, indicating that German companies are still very reluctant to invest in capacity or more efficient production.
Germany's Stance on Tariffs
Given the importance of export orders for German growth, and particularly the export of cars to China, it is not surprising that Germany was amongst the countries that voted against Brussels’ plans to impose punitive tariffs on Chinese electric vehicles. Reuters headlined that this highlights “Berlin’s waning influence” in Europe.
China's Influence on European Politicians
One way to interpret the split decision to impose additional tariffs is that China is successfully exploiting the different national interests to drive a wedge between the European politicians. There might have been some backroom coordination in Europe, in order to limit the fallout of the EV tariffs. What if European politicians secretly agreed to vote in such a way that a) the tariffs would be passed; and b) those countries with a big reliance on exports to China can vote against, so that any retaliation will focus on less-vulnerable sectors?
Retaliation Focus
Whether it was discord or coordination, the vote will probably focus Beijing’s attention on the agriculture sector, not cars. Germany and Slovakia –who both have a substantial car industry– voted against. Meanwhile, France, the Netherlands, Ireland and Denmark are amongst those countries that voted in favor of the tariffs. To retaliate against these countries specifically, China will have to focus on agricultural exports such as pork, dairy and (French) wines. Speaking of which, China has just announced provisional tariffs on French brandy.
Bottom Line
The influence of China on European politics is evident, as seen in the split decision to impose additional tariffs. It raises the question of whether China is successfully exploiting the different national interests to drive a wedge between the European politicians. What are your thoughts on this matter? Share this article with your friends and discuss it. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.
