Last week the European Union announced its decision to impose massive tariffs on Chinese car imports. China is a rising star on the global car market and uses heavy subsidies to steer its economy away from housing towards sectors such as car manufacturing. However, it remains highly questionable whether such measures will have any effect other than sparking retaliation from China – most notably one of the largest car markets.
German car stocks and China tariffs
We ran the numbers and admit that the impact of a 25% increase in tariffs on German cars would only cost the BMWs and Mercedes-Benzes of the world a low-single-digit share of their annual earnings. However, once again, such news hardly helps build global investors’ confidence in Europe. While this is primarily a negative for German car manufacturers, the financial impact is likely to be rather moderate.
As part of its ongoing investigation, the European Commission has provisionally concluded that the battery electric vehicle (BEV) value chain in China currently benefits from unfair subsidies. If discussions with the Chinese authorities do not lead to an effective solution, the European Union (EU) will impose additional duties to the existing 10% import tariff on Chinese BEVs.
The additional duties will range from 17% to 38% depending on the individual manufacturer’s level of cooperation in the investigation. China is expected to retaliate with higher import duties on European car imports. Recent press reports have mentioned an increase in import duties from the current 15% to 25% for internal combustion engine vehicles with engines larger than 2.5 litres. German car manufacturers would be the most impacted by a Chinese retaliation. However, the impact on profits is likely to be less than some investors fear.
China: Growth remains muted
As China works to steer its economy away from housing, the latest credit and activity data points to continued weakness in domestic demand, which will likely remain hampered by the property crisis for longer. Improving foreign demand is expected to stabilise economic growth in the second half of the year.
Activity data showed a surprising – but still low – improvement in retail sales growth, while industrial production remained more elevated but below expectations and fixed-asset investments were largely stable. Moreover, in absolute terms, loans to households and corporates are still considerably below previous years’ levels and suggest no improvement in domestic demand.
Exports will likely remain the growth driver in China
Improving export demand could keep industrial production growth at resilient levels going forward. Moreover, it has helped keep fixed-asset investments stable via increased manufacturing investments, while property investments remain strongly negative and have not shown any signs of improvement. On the contrary, house prices have once again shown large declines. The easing of housing policies and the support provided to the sector in May are likely not large enough to bring about a change any time soon.
What does this mean for investors?
Given the recent negative share price reaction, this first step in an EU-China trade dispute is already reflected in share prices. Nevertheless, European auto stocks are likely to remain under pressure in the near term due to weak Q2 earnings before a significant earnings improvement materialises in the second half of the year.
For China, we expect a weak second quarter, followed by a stabilisation in the second half of 2024 thanks to growing export demand. We continue to expect 4.8% economic growth in 2024.