China's latest 'shock', German auto pain and the euro/yuan pressure cooker: Mike Dolan

Even as attention stays fixed on Wall Street, Silicon Valley and disruption in Washington, China's "mercantilism" remains one of the century's most powerful global economic forces. Driven by tight regulations and currency controls, this export-led model is now delivering what Peterson Institute economist Arvind Subramanian calls a third China shock that is eroding the prospects of so-called Middle Powers. "Single-handedly consigning the global hegemon, America, to self-doubt and reduced potency, while also devastating Europe’s largest power, Germany, economically, is an 'accomplishment' with few parallels in history," Subramanian said in an op-ed for the Project Syndicate site. "Chinese mercantilism has done more than US economic developments or Fed policies to change the world in this millennium." That may seem much too big an issue for simple exchange rates to affect, but they may still be seen as part of the solution. On that score, at least, Europe may find itself — unusually these days — on the same page as U.S. President Donald Trump. One potential remedy is the exchange rate, a critical point of contention in Europe. German Chancellor Friedrich Merz raised the issue during a visit to Beijing in February and reiterated this week that a deeply undervalued yuan CNY= distorts the playing field. He argued that yuan appreciation would help China avoid more draconian trade retaliation. "We are now trying to steer the dialogue with China toward a solution ... an attempt to persuade China to allow its own currency to float freely, including in the context of competition in the capital markets," Merz said on Monday. To be sure, the yuan has gained some ground against both the euro EUR= and the dollar this year. But the euro/yuan rate EURCNY= remains higher than it was a decade ago, even as Europe's trade deficit with mainland China has more than doubled. And partly due to post-pandemic differences in producer price inflation, some economists estimate the euro has appreciated by as much as 40% in real terms since COVID. Research by Deutsche Bank strategist Shreyas Gopal this week indicates Europe is experiencing "China Shock 2.0". Using multiple valuation models, he concluded that the yuan remains 15% undervalued against the euro despite this year's 5% appreciation — at levels seen during the extremes of the 2005-2008 period, leaving Germany bearing the brunt. "Nearly all our models suggest that the undervaluation of the yuan is more pronounced against a hypothetical Deutschmark than that of the euro," he added. China's export engine is on track to post another trillion-dollar-plus trade surplus this year, shrugging off tariff tensions and an energy squeeze, while turning a spotlight on a still undervalued yuan. While attention remains fixed on the U.S., the world's second-biggest economy is expanding rapidly, and its global impact is proving just as pervasive as anything emanating from Washington. Since the pandemic, and amid geopolitical tensions, China's housing crisis, demographic decline and bilateral trade wars with Washington have overshadowed what some still see as the century's biggest economic shock — even as China's economy continues to post impressive numbers that reverberate far and wide. Chinese customs data released on Tuesday showed that June exports climbed 27% from a year earlier in dollar terms, their best performance in four months and a sharp acceleration from May. Reflecting the AI boom's impact on trade in chips and tech equipment, imports also beat estimates, rising 36% on the year — a five-year high. China's trade surplus came in at $126 billion in June, up from $105 billion the previous month. The year-to-date gap now stands at $576 billion, compared with $586 billion last June, even though imports have grown faster than exports for several months. That puts last year's record $1.19 trillion surplus in the crosshairs. And it's not all about the AI frenzy and tech arms race, where China is racing to develop its own technology ecosystem to sidestep U.S. restrictions on critical components. China also exported more than 1 million automobiles in a single month for the first time, as electric vehicle sales surged. That is almost double its monthly car-export level at the start of last year, with much of the increase absorbed by Europe, Latin America and the Middle East. But those surging auto exports will hit Europe's carmakers hardest. This week, German auto giant Volkswagen VOWG.DE said it may need to cut about 50,000 more jobs to keep pace with fierce competition and transatlantic trade tensions, effectively confirming reports it's looking to reduce its workforce by 100,000 over the coming years. German carmakers are also struggling to sell into China's subdued domestic car market, with BMW BMWG.DE only last month issuing a surprise profit warning on exports there. This creates enormous pressure on the euro zone and Germany in particular, with U.S. tariffs to the west and Chinese imports from the east, while energy prices build again more generally due to the smouldering Iran war. The problem is both economically and politically complex with no easy solution. Europe needs Chinese battery technology, for example, but belatedly wants to protect its higher-tech industries and is clearly worried about the impact on its auto sector. European policymakers are only now starting to look at exchange rates as an integral part of the problem and solution.

China's latest 'shock', German auto pain and the euro/yuan pressure cooker: Mike Dolan

A third China shock

Merz presses Beijing on the yuan

China's trade surplus and export surge

Pressure on European carmakers and the euro zone

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