Bundeskanzler Friedrich Merz signalisierte am Freitag einen großen Wandel in den Wirtschaftsbeziehungen Berlins mit Peking und sagte, die chinesische Währung sei um 30 Prozent unterbewertet, was weit über der Schätzung des Internationalen Währungsfonds von „etwa 16 Prozent“ liege.
https://www.scmp.com/news/china/diplomacy/article/3357742/germany-hews-eus-tough-china-line-call-plaza-accord-talks-yuan?utm_source=rss_feed
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German Chancellor Friedrich Merz signalled a major shift in Berlin’s economic relations with Beijing on Friday, saying the Chinese currency was undervalued by 30 per cent, well above the International Monetary Fund’s estimate of “about 16 per cent”.
Speaking in Brussels after a European Council summit, Merz said China was “flooding markets” through the use of “high subsidies”, adding that “subsidising overcapacities” along with a “currency that isn’t convertible freely … is not acceptable”.
Merz’s comments are some of his most forceful remarks on Beijing since becoming chancellor last year and address one of the major factors in the debate over industrial overcapacity.
In Europe, the yuan’s rate against the euro is seen as one of the major reasons for a surge in Chinese shipments, making Chinese goods cheaper for overseas buyers.
This, in turn, has led to a gaping trade deficit, much to the chagrin of European leaders, who are concerned that local manufacturers are in peril.
Merz pointed to the Plaza Accords as an example of how such matters could be addressed.
P.s. More about Plaza Accords
https://en.wikipedia.org/wiki/Plaza_Accord
In a different timeline, the US, EU, and partners could have convened a new trading body to synchronise measures against Chinese dumping and profligate state subsidies to the point of involution (nei-juan in China).
I wanted to see this done during the Obama-era during the Pivot to Asia but that sputtered out. Then Trump came in and by the time Biden entered, multi-lateral trade frameworks became a thing of the past.
Still, it is encouraging to see Europe finally waking up as the continent is undergoing what the US went through from the 1970’s. Should the bloc fail to strengthen its resolve, I fear we will see Rust Belts in the major regions.
Merz etc want China to have the largest nominal GDP. China wants to leave that honor to the USA.
Unlikely for China to concede. They are also in severe structural economic crisis. Their real estate market is dead, unemployment is rising, their factories are at overcapacity. They have to constantly depress the yuan to export inventory.
Since both Germany and China are feeling severe economic pressures, none of them will relent and things will likely maintain status quo. EU will tariff China and set limits on member states to limit imports from China. China will continue to funnel exports to ASEAN, Africa, South America as backdoor entries into Western consumer markets.
The world is fracturing….
I am a bit worried that even if they do a Plaza accord, it doesn’t drastically change the situation.
Japan was able to largely absorb the Plaza Accords, even if it led the the eventual popping of their bubble. But at that time its property value was extremely overvalued and it had entrenched players who largely captured the legislature and caused several zombie firms. This, followed by a stubborn refusal to switch towards networked services and software (despite having the talent), partially driven by the same entrenched players largely being hardware companies meant that they just missed the growth train. They still grew post the Plaza Accords, just the US grew much faster (which is why it looks flat in USD).
The issue is China actively stopped both of the core issues from occurring, at great cost to its economy. It prevented the ANT group IPO, which both signaled that the state was always above the entrenched players. Furthermore, it actively (either accidentally or not) legislates against a profit-matrix that encourages rent seeking from companies (killing tutoring, or internet-based rent extraction). It also deflated it’s own property bubble on its own volition, killing a lot of property speculation. These were costly – it chilled VC funding into Tech and decimated household wealth (and might lead to a generation of underconsumption, though that could also be due to how fast they rose and how poor they are). But these prevent the same pattern from occuring in China that occurred in Japan. Even if this isn’t a concerted plan to give them resilience, the end result is that they seem more resilient than Japan was.
On top of this, China is not beholden to the U.S. for security. On the contrary, it is contained by the U.S. security-wise, and so it has more options to maneuver geopolitically than Plaza-accord Japan did. The better comparison might be to Germany (also hit with a plaza-accord, but did not have a lost decade) due to not making a lot of strategic errors and still continuing to run an export-driven economy.
Furthermore, even if Chinese currency increased by 30%, it doesn’t fix structural competitiveness caused by internal supply chains and vertical integration. To stop that you’d need to ban exports where China makes a large portion of it, but then that’s a massive increase in cost for your own economy. It might handle some very low-margin industry (and that might help the global south) but China also is already owning factories in the Global South, and so it seems to have hedged against that too. And finally, China still has Rare Earths export controls on the horizon, as it is delayed until November of this year.
China is asking for what seems to be an easing of the export ban of advanced semiconductor manufacturing materials in exchange (at least according to [other reporting (Aggregation?)](https://www.vespernews.com/en/news/4da3c55f-3e97-4af1-92b2-28f344632a22) I could find). It doesn’t sound like this comes from a position of desperation.