Welcome back!
This month’s episode digs into how China suddenly became a massive exporter of motor vehicles, swinging from a persistent pre-2021 trade deficit of around $40 billion in finished passenger cars and trucks to an annualized surplus of more than $30 billion.
As in many other societies, China’s motor vehicle sector is a microcosm of the broader economy. In the Chinese case, abundant subsidies for producers have collided with weak income growth and diminished confidence among consumers, generating a surplus that is attributable to weak domestic demand rather than higher output. That has big implications for the other major motor vehicle manufacturing hubs, particularly Europe.
But as we discuss, the flood of cheap Chinese electric vehicles could actually be a salutary shock if it forces Europeans to do what they should do anyway to increase their own investment and consumer spending.
Hope you enjoy! Full edited transcript below the fold.
Remember, subscribers cover our cost of production. Paying listeners get to listen to the full recording and read the full transcript.
Related links:
Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms — The Overshoot
In Green Tech, Overcapacity is a Boon — Martin Sandbu, FT
EU Must Choose Between Cheaper Power or Protecting Wind Industry — Bloomberg
Matthew Klein: Hello, and welcome back to UN/BALANCED, a listener-supported podcast about the global economy and financial system. I’m Matt Klein.
Michael Pettis: And I’m Michael Pettis. Today we’re going to look at China’s sudden emergence as a global exporter of cars, trucks, buses, EVs, and what that means for the rest of the world.
Matthew Klein: This is a really striking development, because it’s really just in the past couple of years that China went from exporting essentially no finished vehicles at all—there was a bit of an auto parts export industry, but not for finished vehicles—to exporting, at current rates, about $75 billion annualized over the past few months. It’s now the biggest exporter, in terms of units, not in terms of dollars, but in terms of units, the biggest exporter of finished cars and trucks in the world, surpassing Germany and Japan.
As a result of this, China’s trade balance in finished vehicles went from negative $40 billion a year as recently as 2021, pretty consistently from 2015 to 2021, now it has a surplus of over $30 billion annualized.
This is a huge change.
It’s a change that I think a lot of people—at least in the United States—have probably missed, because those vehicles are not coming here for various reasons. But there’s a lot of those exports are showing up in places like the rest of EM Asia, Africa, Russia, Latin America, and recently, Europe. Europe has been getting a huge influx of electric vehicles, which is a sector where, even though European car manufacturing has been traditionally a major part of the European economy, for electric vehicles, their producers have generally been a little slower on the uptake.
A lot of Chinese cars, which are coming in at much lower price points, have been extremely competitive. People are still wrapping their heads around this, because you don’t normally see a transformation this rapid. The idea that you can go from exporting essentially nothing to being the largest exporter by volume in the world in two years is really striking.
A little bit of that is Tesla opened that big factory in Shanghai a couple of years ago, but a lot of this has to do with the local Chinese brands, such as BYD and others. You see some BYD buses in the United States, but for passenger cars and trucks, you don’t see that so much. It’s a really striking development and it has a lot of big implications. It is causing a lot of angst for automakers, particularly, I think, in Europe, and to a lesser extent in Japan and Korea.
What’s really striking though—and this is I think a microcosm of China’s economic situation in general over the past few years—is that overall production of new vehicles in China is not actually higher now than the prior peak, which was in 2018.
They made about 28 million finished vehicles in 2018. This year, so far, they are only producing at that same annualized rate. That’s a really striking fact here. Which raises some questions about this export surge. It is obviously not a function of higher production in total, but something else. It must be that the domestic market is relatively weak.
First of all, why is it that the Chinese domestic auto market has been weak for so long?
This downturn actually preceded COVID and all of that. It really started in 2018-2019. Michael, you’ve been in China this whole time. What is your sense of what’s been driving some of those trends? Was there just a lot of excess capacity or manufacturers anticipating more Chinese demand domestically than made sense? Or was it always the assumption that they would have to be going big on exports? What is your sense of how the industry evolved?
Michael Pettis: Well, I’m not really an automobile industry expert, Matt, but there are a couple of things that seem to have mattered. One is that the rate at which Chinese were buying cars wasn’t really sustainable. You have to remember that the Chinese entered the century with extremely low car ownership. Part of the rapid growth was simply going from zero to whatever the equilibrium level is. And once everyone had their cars, the amount of car purchasing was going to drop significantly.
The other thing that’s mattered a lot is that there were really heavy subsidies given to buyers of cars by local governments and by the central government. The perception, at least within the press here in China, has been that a lot of people bought cars because of these subsidies. Now these subsidies are no longer being paid out. Beijing is reluctant to do so, and local governments seem like they can’t really afford to do so. And so a lot of that heavily-subsidized purchasing seems to have dried up.
The other thing that matters, in a more general way, is that, as you know, consumption has been generally down. It’s been down for two reasons. One is that during the COVID period, wage growth slowed significantly. Then more recently with the collapse in real estate sales and the decline in property prices, plus rising unemployment among the young.
And there is increasing uncertainty, because one of the big problems with the unemployment data is that there’s a lot of hidden unemployment.
Many local governments are not firing workers, they’re simply not paying them. And that doesn’t show up in the unemployment statistics, but it’s really a form of unemployment because, of course, if you’re not getting paid you’ve got to cut back on your spending.
It’s always like, “we’ll pay you in six months, we’ll pay you in six months.” So between all of those things, it’s probably not a surprise that car purchases have come down a lot.
Matthew Klein: That makes sense, with durable goods consumption generally being more cyclically sensitive, you have to be confident about your income prospects. I know very little about how the domestic car market dynamics work in China. Are they financed typically, the way they are in the U.S., where either you lease or you put down some money and then you mostly pay it out over, say like the next five, six years? How does that work usually?
Michael Pettis: Yes, they are financed, but I don’t think the financing is as long. I haven’t bought a car here, so I can’t tell you from a personal experience. But my closest friend bought a Tesla recently, and I know he paid full cash. I don’t really know what the financing terms are, but obviously they weren’t good enough to justify borrowing
Matthew Klein: I wonder if that’s something that’s changed one way or another, by becoming tighter. I guess the subsidy removal is probably the most important point, as you mentioned, but I wonder if that was another potential factor.
Michael Pettis: The subsidy removal was a big thing. And I think there was always a sense here in China that there were not only subsidies for buying, but there are tremendous subsidies for the production of automobiles, particularly electric vehicles, but automobiles more generally. And I don’t know how many major car manufacturers there are in China, but there are a lot. And there was always the sense that at some point there was going to be ferocious competition and winnowing down.
Now, you know, there’s two ways you can deal with an oversupply of production relative to domestic consumption. One is to cut back on production. That involves closing down factories, rising unemployment, et cetera. And the other is to increase exports.
And it seems clearly China is doing the other, which is what Japan did in the 1980s and a number of other countries, too. They’re really focusing on the export market.
Matthew Klein: It’s interesting because you were talking about electric vehicles, and I think it’s maybe important to drill into this a little more. It’s very reasonable to make the point, as you did, that if China goes from a society where almost no one owned cars 20 years ago to a society where many households do own cars, and the rate of car ownership is not necessarily comparable to say like, you know, Europe and United States per person, but pretty high relative to China’s level of development, then car buying should slow down.
But at the same time, we’re in a situation where there’s a global push, and also a push, at least officially from the Chinese government, to change the mix of the motor vehicle fleet very quickly; to turn it over from essentially all internal combustion engines as recently as a couple of years ago to being all electric. China’s official policy, which Xi Jinping has committed to, is for China to have essentially net zero carbon emissions by 2060. Maybe it’s challenging given the manufacturing capacity that had been built up, but I can imagine a situation where Chinese auto sales would still have to be very high—even if everyone already had a car they wanted—just because you’re trying to turn over the fleet from one set of engines to another. And yet that doesn’t seem to be happening.
Michael Pettis: We had two big surges in car buying. One was, until quite recently, everyone bought a car. When I came to China 20 years ago, you didn’t have traffic jams. Now you’ve got massive traffic jams in all the major cities. Epic traffic jams at times. The other thing is in the last four or five years, it seems more and more people are shifting away from gasoline cars to electric cars. You see them all over.
Matthew Klein: If you look at the aggregate—Beijing may or may not be representative here—but if you look at like the aggregate data that the China Association of Automobile Manufacturers put out, for example, you can see that the new production and new sales of electric vehicles is relatively high; it’s about a third. But still, as a share of the total stock of vehicles on the road, electric cars must still be quite low, I would think.
If there’s a concern about getting transition to be on track, then it it’s not obvious to me that demand saturation itself is the problem.
It seems more likely that the other issues you’re pointing out—there just isn’t the money available, either because incomes are too low or because it was only possible with a subsidy that’s since been withdrawn, or things like that—are responsible. Do you have a sense of how officials, and academia, and think tanks are looking at that?
Michael Pettis: Not really. I’m a confirmed bike rider.
Matthew Klein: Fair enough! I guess the public transit in Beijing is a reasonably good alternative.
Michael Pettis: Yes, the subway system is very good.
Matthew Klein: It’s also interesting because if you look at the mix of exports—I remember when I was first looking into this, and you see some people saying, “oh, well it’s fine because if China is producing lots of cheap electric vehicles and selling them the rest of the world, that’s actually good for the, the energy transition.”
And yet, while China does export a fair amount of electric vehicles, the bulk of the exports are conventional internal combustion engine vehicles, because that still represents the bulk of what Chinese manufacturers are producing. Maybe I’m going too much into the details of this particular industry, but I wonder: given the subsidies that had existed for making electric vehicles and the subsidies for batteries, which partly explain the competitiveness of China’s electric vehicle sector, it seems like the total aggregate productive potential of the Chinese motor vehicle industry is still heavily geared towards internal combustion engine cars. Is that your sense as well?
What do you think has happened there?
Michael Pettis: I’ve been told—and again, I’m not an expert on the automobile industry—but I’ve been told that China completely dominates internationally in the sale of cars for under $12,000. A lot of their cars are going to developing countries much more so than to the U.S. and Europe.
Matthew Klein: Some of those are electric vehicles. I guess a lot of them are also conventional—
Michael Pettis: I think most of them are conventional gas engine cars. The big electric vehicle sales are domestic. The problem with electric vehicles, of course, is that you need the charging stations. China has a very good network of charging stations, but I think if you go to other developing countries, they don’t, so it becomes very impractical to buy an electric vehicle.
Matthew Klein: That makes a lot of sense. The subsidies may have been withdrawn, but there was a period of time when it seemed like the government was very focused on promoting the development of the electric vehicle sector and creating a lot of incentives, both for consumers and producers.
Michael Pettis: Subsidies on the manufacturing side haven’t been withdrawn. It’s the subsidies on the purchasing side that have been withdrawn.
Matthew Klein: What was the rationale for that? Especially given all the discourse now about how consumption is too low anyway. It seems like an easy thing to do. One might think it would be a straightforward thing to put back.
Michael Pettis: I think it had reached the point where subsidies were no longer causing a significant increase in purchases. There was a sense that the amount of purchases wasn’t sustainable to the relative to the amount of supply and that at some point they were just going to have to back away. But honestly, I can’t really tell you, Matt. I don’t really know.
Matthew Klein: Ironically that turned out not to be correct insofar as supply has now come back to where it was and purchases of domestically-made vehicles have not, and that’s why the export surge has manifested the way it has.
Moving on to the impact on the rest of the world. Obviously, if you’re looking at places that don’t have their own domestic car industries, which are poor and historically have not been able to afford motor vehicles—as you said, a lot of China’s exports are so dominant in the under $12,000 per unit set—that seems like a pure win for the world, because places that were not able to have transportation now can afford it.
At the same time, Chinese exports are also making really remarkable headways in European auto markets because in Europe you have lots of strong incentives for people to buy electric vehicles. Chinese electric vehicles are much cheaper than the ones that are made in Europe—to the extent that Europe makes any—and Europe has no real restrictions on imports of anything from China, or at least vehicles from China, and that’s led to the very rapid and sudden emergence of a trade deficit in Europe with China on vehicles. They are importing a lot of electric vehicles from China, and there is concern among a lot of European policymakers and business leaders about what that means for the future of the European auto industry.
Historically, if you go back over the past 10-15 years, the view was that European businesses had adapted a lot better to the rise of China’s market because they were able to sell things to Chinese consumers and businesses better than American ones had. Now it seems like the situation is a little bit flipped, where you don’t see Americans particularly concerned about China’s auto exports—at least not yet—whereas Europeans are now very afraid of this.
I know you talk to a lot of Europeans coming through Beijing. What are they telling you about how they’re feeling about all this?
Michael Pettis: Within Europe, as you can imagine, perceptions are sort of split. The biggest concern about Chinese car exports is Germany, obviously, because Germany relied very heavily on its own manufacturing industry. I would assume that countries like Spain are also fairly concerned about that.
But it seems to me that it’s caused a change in the perception within Europe—or at least within parts of Europe—about the whole issue of trade. For a long time, the Europeans had been arguing that the current trading system worked perfectly fine. When I say Europeans, I really mean a group of Europeans, including Germany. They said that there was really no need for deficit countries to intervene in any way with the existing trading patterns. That seems to have changed pretty dramatically.
Listen to this episode with a 7-day free trial
Subscribe to UN/BALANCED to listen to this post and get 7 days of free access to the full post archives.
