Admittedly, the saying is not new, but it is always in vogue – especially now. “China is coughing and Germany is catching a cold,” it is said and was changed from a linguistic image to a real one at the latest with the outbreak of the corona crisis – also, and above all, in terms of the economic situation. To date, little has changed. China is still in a growth crisis, although a V-shaped return from the Corona era was predicted for the country. Instead, interest in Chinese goods is waning, and Chinese people are buying fewer goods abroad.
The crisis is also increasingly becoming a problem for Germany, which is closely linked to the country. According to the latest data from the Federal Statistical Office, Germany’s trade volume with China last year was only 253 billion euros. Deliveries to China fell by almost nine percent to a good 97 billion euros, largely driven by weak sales of cars and chemical products – but also by Chinese efforts to manufacture products in their own country. On the import side, the slump was even more pronounced. 20 percent or 39 billion euros fewer goods were imported into Germany from the People’s Republic. There was particularly less demand for machines and data processing devices. The total volume was 156 billion euros.
China remains Germany’s most important trading partner for the eighth time in a row. But there are already signs of a geopolitical turning point. The trade volume with the USA, Germany’s second most important partner, rose to 252.3 billion euros last year – only 700 million euros below that with China. “If last year’s trade developments continue, the USA will overtake China as Germany’s most important trading partner by 2025 at the latest,” said the head of foreign trade at the German Chamber of Commerce and Industry (DIHK), Volker Treier, to the Reuters news agency.
Economists like Klaus-Jürgen Gern from IfW Kiel do not necessarily consider this development to be dramatic: “The trade figures are nominal, so shifts are often caused by price changes and conclusions about real developments can only be drawn with caution,” said Gern Capital. The decline is primarily due to Germany’s imports because special demand is declining due to Corona.
The Chinese economy is primarily a loser from global normalization. During Corona, demand for tradable goods such as clothing, bicycles or furniture was particularly high. Now there is a shift back in favor of services. World trade as a whole and demand for Chinese goods in particular are suffering as a result. The trade balance between Germany and the USA is less affected by this, as both sides have always exchanged many services and at the same time large amounts of energy have been sold to Europe.
An important reason for China’s weakness is consumer prices, which have been developing negatively for four months. In other words: there is deflation in China. In January, prices fell 0.8 percent year-on-year – the sharpest decline in 15 years. Analysts polled by Reuters had expected just 0.5 percent, after prices had already fallen by 0.3 percent in December. Core inflation, excluding energy and food, was still slightly positive at 0.3 percent. But this was also below the expectations of analysts, who had expected an increase of 0.4 percent.
Deflation is dangerous for an economy because it reduces incentives to invest and consume. If money is worth more in the future, people will postpone spending in the certainty that prices will fall. Overall, this leads to lower growth and ultimately to distribution conflicts within a society. Therefore, it cannot be in the interests of the Chinese government to allow deflation to take its course.
There are numerous reasons for deflation. First and foremost, it has to do with the crisis in the Chinese real estate market. In addition, there is a weakening stock market that is slipping deeper and deeper into the red due to deflation. China has already ordered support purchases and fired the head of the stock exchange regulator, Yi Huiman, on Wednesday. But none of this has really helped so far.
“China’s ongoing deflation and weak stock markets suggest that household demand and private sector confidence remain weak, posing significant risks to the economy’s growth prospects,” Eswar Prasad, an economist at Cornell University, said the Financial Times. “As deflation takes hold in China, increasingly difficult policy efforts will be required to restore confidence and pull the economy out of the mire.”
IfW economist Gern sees it similarly. “Deflation is leading to increased pressure on the world markets. Chinese producers are currently trying with all their might to sell their excess production. However, this will probably increase trade policy tensions.” An example of this is the market for solar modules, which is currently flooded with cheap Chinese products in Europe. There are therefore already considerations within the EU about introducing punitive tariffs. “This is unlikely to be a sustainable way to stabilize the economy,” says Gern.
After monetary policy measures recently came to nothing, Gern is now expecting an economic stimulus package from the Chinese government. In the past, this led to overheating and structural failures. But the pressure for the Chinese government to act is obvious.
In China itself, people are trying to see the situation as an opportunity. Yu Yongding, former president of the Chinese Society for World Economy and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, paints the development beautifully in a guest article at Project Syndicate. “The quasi-deflationary phase allows policymakers to provide significant fiscal stimulus to boost economic growth without having to worry about inflation, at least in the short term,” writes Yongding.
He advocates interest rate cuts and infrastructure investments to stimulate the economy. “Contrary to the claims of some economists, China is not struggling with excessive infrastructure investment. In fact, the country still has a large infrastructure gap that it needs to close, particularly in critical areas such as healthcare, elderly care, education, research, urban development and transport ” said Yongding.
Regardless of the reaction, the development for Germany is clear, says IfW economist Gern. “The times of strong growth in foreign trade with China are initially over.” Both sides want to reduce dependencies. The USA is currently building up manufacturing capacities in many areas that could also meet demand from Europe. “The USA could therefore soon regain its (actually traditional) role as Germany’s largest trading partner,” says Gern.
This article first appeared in the business magazine “Capital”, which, like stern, is part of RTL Deutschland.
