News
According to a Bloomberg report on September 12, the Chinese government is encouraging local carmakers to export knock-down kits to their overseas factories, where key car components are produced in China and then shipped to the destination markets for final assembly. This strategy aims to avoid punitive tariffs on Chinese cars, while ensuring that advanced EV technologies remain within China.
In recent months, Chinese electric vehicles have faced tariff barriers in Europe and the U.S. On May 14, the White House announced an increase in tariffs on Chinese EV imports to 100%. The European Union imposed additional tariffs on pure electric vehicles from China starting July 4. On August 26, per a report from Reuters, Canada also announced a 100% tariff on Chinese electric vehicles.
To avoid these tariffs, Chinese car manufacturers are setting up production facilities abroad. For instance, BYD signed a USD 1 billion investment agreement with the Turkish government on July 8 to build a factory in Turkey with an annual production capacity of 150,000 electric vehicles, expected to start operations by the end of 2026.
Reportedly, it’s hinted that the new factory may facilitate BYD’s entry into the European market, given Turkey’s customs union agreement with the EU. Turkey also imposed a 40% tariff on Chinese cars in June. Regarding this matter, BYD declined to comment.
The report from Bloomberg also claims that, in July, China’s Ministry of Commerce held a meeting with several car manufacturers.
During this meeting, the Ministry suggested keeping key EV technologies within China and instructed that car manufacturers should avoid making any automotive-related investments in India.
Additionally, companies planning to invest in Turkey were advised to notify both the Ministry of Industry and Information Technology, which oversees China’s EV industry, and the Chinese embassy in Turkey.
The Ministry of Commerce indicated that countries inviting Chinese car manufacturers to set up factories are typically those considering or implementing trade barriers against Chinese vehicles. Officials reportedly advised attendees not to blindly follow trends or trust investment offers from foreign governments.
The Ministry’s guidance to keep critical production within China may hinder the global expansion efforts of these manufacturers, who are seeking new customers to offset intense competition and sluggish domestic sales, factors that are impacting their profitability.
This measure could also affect European countries that have been courting Chinese manufacturers, hoping to attract job opportunities and boost their local economies.
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(Photo credit: BYD)
Insights
Last week, a series of U.S. employment data fueled concerns about a potential economic recession, causing the S&P 500 to drop 4.2%, marking its worst weekly performance since January 2022. U.S. 2-year and 10-year Treasury yields fell, reflecting market expectations of a more aggressive rate cut path for the rest of the year, with the 10-year/2-year Treasury yield spread turning positive. The U.S. dollar index also declined as expectations for more significant Federal Reserve rate cuts rose. Below is a recap of key economic data from last week:
Press Releases
The Bank of Canada (BoC) announced a 25 basis point rate cut on September 4, in line with market expectations, marking the BoC’s third consecutive rate cut since June. The BoC noted that CPI growth across its components has returned to historical range, with core inflation nearing the target range. Although housing and service inflation remains elevated, it has begun to slow down, and there are currently few signs of significant inflationary pressure in Canada.
The BoC is now placing greater emphasis on signs of economic weakness. Recent data indicate that economic growth is slowing, and the unemployment rate has risen due to an increase in labor supply and a slowdown in hiring, which is easing inflationary pressures and introducing downside risks to inflation.
When asked about the pace of future rate cuts, BoC Governor Tiff Macklem stated that if inflationary pressure exceeds expectations, the central bank will maintain its current pace of rate cuts (25 basis points). However, if the economic condition worsens and inflation falls more rapidly, the BoC may accelerate the pace of rate cuts (50 basis points).
According to a report by Reuters, some economists predict that economic weakness could prompt the BoC to implement a 50 basis point rate cut in October or December.
Insights
As the unwinding of yen carry trades came to an end, the market returned to a more stable state, though it remains highly sensitive to economic data. The S&P 500’s gains narrowed due to underperformance in some tech stocks, while it also faced the challenge of reaching new highs. Meanwhile, U.S. 2-year and 10-year Treasury yields edged higher due to shifting expectations around rate cuts, though the overall yield spread narrowed to a range of -10 to 0 basis points. The U.S. Dollar Index also saw a slight increase, driven by reduced expectations of rate cuts from the Federal Reserve.