China’s Chance to Rein in its Surplus — or Double Down

FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo
FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo
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China’s Chance to Rein in its Surplus — or Double Down

FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo
FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo

Two clashing narratives have emerged over China’s heady manufacturing expansion led by electric vehicles, renewable energy and high-tech goods. One says it’s benefiting from comparative advantages, including a giant workforce and domestic market. Another says Beijing’s surging exports are a byproduct of distorting policies that threaten the rest of the world.

Regardless of which is right, Chinese President Xi Jinping and his leadership team have an opportunity next week to either double down on their claim China’s manufacturing prowess is a reflection of normal competition, or tilt toward accommodating economic concerns in foreign capitals from Washington to Brussels, Bloomberg reported on Saturday.

The so-called Third Plenum gathering of the Chinese Communist Party, culminating with an expected readout after the confab concludes July 18, takes place against a backdrop of deepening angst over Chinese industrial growth that notably exceeds the nation’s domestic demand. The objections were on full display in a detailed speech this week by the US Treasury’s top international official, Undersecretary for International Affairs Jay Shambaugh.

Failure to embrace new steps to bolster domestic spending and reduce reliance on exports would put China at increasing risk of trade protectionism—regardless of whether US President Joe Biden wins in November, or if Donald Trump—who launched a trade war against China—prevails.

Data out on Friday offered a fresh reminder of the imbalance between China’s productive capacity and its domestic demand, with its monthly trade surplus hitting an all-time high of $99 billion in June.

China’s leadership and its supporters insist that this commercial prowess is thanks to pure economics. Premier Li Qiang last month put it down to the country’s skill in science and technology, and building “a broad stage for enterprises to pursue innovation and upgrade their products.”

Years of investment in STEM (science, technology, engineering and mathematics) subjects and churning out engineers has bolstered research and development, strengthening China’s advantage, says Zhao Zhongxiu, president of the University of International Business and Economics in Beijing.

The improved quality and reduced cost of Chinese-made goods appeal to consumers around the world, and it’s not a question of subsidies but the fruit of organic industrial development, he argued in a recent Bloomberg Television interview. “China’s industry has benefited from this comparative advantage.”

But that’s not how Shambaugh sees it. In a speech this week before the Council on Foreign Relations, he cited analysis from the Center for Strategic and International Studies showing that China spends 5% of its GDP on industrial subsidies—a share that’s ten times bigger than that of the US. It also dwarfs subsidies by Germany, Japan and fellow emerging market Brazil.

“In sectors like semiconductors, steel and aluminum, China alone accounts for between 80% and 90% of global subsidies provided to those industries,” Shambaugh said.

That’s contributed to China racking up a manufacturing-goods trade surplus that’s approaching 2% of world GDP, or roughly twice the share of the famous Japanese surplus in the early 1990s that roiled US-Japan relations, according to data cited by Shambaugh.

The Treasury undersecretary ran through figures illustrating falling rates of capacity utilization and rising numbers of unprofitable companies, all suggesting overcapacity. In areas including the solar energy sector, Chinese firms themselves have expressed concerns about a supply glut.

“Emerging patterns suggest the size of subsidies in China is only increasing, especially at local and provincial levels,” he also said.

That observation puts a premium on the policy signals that Xi and his lieutenants send out at the Third Plenum, which will chart the over-arching course for the next five years.



Honda, Nissan Move to Deepen Ties, Sources say, Including Possible Merger

FILE - Nissan Chief Executive Makoto Uchida, left, and Honda President Toshihiro Mibe attend a joint news conference in Tokyo, Friday, March 15, 2024. (Kyodo News via AP, File)
FILE - Nissan Chief Executive Makoto Uchida, left, and Honda President Toshihiro Mibe attend a joint news conference in Tokyo, Friday, March 15, 2024. (Kyodo News via AP, File)
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Honda, Nissan Move to Deepen Ties, Sources say, Including Possible Merger

FILE - Nissan Chief Executive Makoto Uchida, left, and Honda President Toshihiro Mibe attend a joint news conference in Tokyo, Friday, March 15, 2024. (Kyodo News via AP, File)
FILE - Nissan Chief Executive Makoto Uchida, left, and Honda President Toshihiro Mibe attend a joint news conference in Tokyo, Friday, March 15, 2024. (Kyodo News via AP, File)

Honda and Nissan are in talks to deepen ties, two people said on Wednesday, including a possible merger, the clearest sign yet of how Japan's once seemingly unbeatable auto industry is being reshaped by challenges from Tesla and Chinese rivals.
A combined Honda and Nissan would create a $54 billion company with annual output of 7.4 million vehicles, making it the world's third-largest auto group by vehicle sales after Toyota and Volkswagen, Reuters reported.
The two firms already forged a strategic partnership in March to cooperate in electric vehicle development, but Nissan's deepening financial and strategic trouble in recent months has added more urgency for closer cooperation with larger rival Honda.
Nissan announced a $2.6 billion cost savings plan last month that includes cutting 9,000 jobs and 20% of its global production capacity, as slumping sales in China and the United States led to an 85% plunge in second-quarter profit.
"This deal appears to be more about bailing out Nissan, but Honda itself is not resting on its laurels," said Sanshiro Fukao, executive fellow at Itochu Research Institute. "Honda's cash flow is set to deteriorate next year and its EVs haven't been going so well."
Shares of Nissan closed nearly 24% higher in Tokyo trade on Wednesday, while shares of Honda, whose market value of $43 billion is more than four times bigger than that of Nissan, declined 3%. Shares of Mitsubishi Motors, in which Nissan is the top shareholder with a 24% stake, gained nearly 20%.
The automakers have been grappling with challenges from EV makers, particularly in China, where BYD and others have surged ahead.
The talks between Honda and Nissan, first reported by the Nikkei newspaper, could allow the companies to cooperate more on technology and help them create a more formidable domestic rival to Toyota.
The discussions are focused on finding ways to bolster collaboration and include the possibility of setting up a holding company, said the people, who declined to be identified because the information has not been made public.
The companies are also discussing the possibility of a full merger, according to one of the people, as well as looking at ways to cooperate with Mitsubishi.
Honda, Nissan and Mitsubishi said no deal had been announced by any of the companies, though Nissan and Mitsubishi noted the three automakers had said previously they were considering opportunities for future collaboration.
French automaker Renault, a major Nissan shareholder, said it had no information and declined to comment.
Renault shares jumped 6.5%.
The three Japanese automakers are expected to hold a joint news conference in Tokyo on Monday, according to a source familiar with the matter.
Taiwan's Foxconn, which manufactures Apple's iPhones and has been seeking to expand its nascent EV contract manufacturing business, approached Nissan about a bid but it was rejected by the Japanese firm, two separate sources familiar with the matter said.
Bloomberg News reported earlier on Wednesday that Foxconn had approached Nissan to take a controlling stake.
Foxconn did not immediately respond to a request for comment, while a Nissan spokesperson declined to comment on Foxconn.
CHANGING LANDSCAPE
Over the past year, an EV price war launched by Tesla and BYD has intensified pressure on any automakers losing money on the next-generation vehicles. That has put pushed companies like Honda and Nissan to seek ways to cut costs and speed vehicle development, and mergers are a major step in that direction.
"In the mid- to long-term, this is good for the Japanese car industry as it creates a second axis against Toyota," said Seiji Sugiura, a senior analyst at Tokai Tokyo Intelligence Laboratory.
"Constructive rivalry with Toyota is a positive for the rather stagnating Japanese car industry when it must compete with Chinese automakers, Tesla and others."
Any merger would face significant US scrutiny and President-elect Donald Trump has vowed to take a hard line on imported vehicles, including threatening 25% tariffs on vehicles shipped from Canada and Mexico. He could seek concessions from Honda and Nissan to approve any deal, auto industry officials said.
Honda and Nissan both produce cars in Mexico for export to the US
Honda and Nissan would also have to work out how to integrate their different corporate cultures if they proceed with a merger, analysts said.
"Honda has a unique, technology-centric culture with strengths in powertrains, so there should be some internal resistance to the merger with Nissan, a competitor with a different culture that is now faltering," said Tang Jin, a senior researcher at Mizuho Bank.