Mike Dolan: The euro/yuan, German auto problems and the latest shock in China.

China's export engine will post another trillion-dollar trade surplus in this year. It is ignoring tariff tensions and energy shortages, while focusing on the still undervalued Yuan.

While the focus is on Washington, the second-largest economy in the world is growing rapidly. Its?global influence is just as strong as that of Washington.

China's housing crises, demographic decline, and bilateral trade conflicts with Washington, which have occurred amid the geopolitical tensions since the pandemic and amidst the geopolitical tensions that followed, have?overshadowed the biggest economic shock of the century, according to some -- even though China's economy is still posting impressive numbers.

Chinese customs data released on Tuesday revealed that exports in June rose 27% in dollar terms from a year ago, their best performance for four months. This was a significant acceleration from May. Imports, which reflect the impact of the AI boom on trade in tech equipment and chips, also exceeded estimates. They rose 36% over the past year, a five-year record.

China's surplus trade in June was $126 billion, a significant increase from the $105 billion of the previous month. The gap for the year to date is now $576 billion compared to $586 billion in June last year, even though exports and imports have been growing faster over several months. This puts the record surplus of $1.19 trillion from last year in danger.

China's race to create its own tech ecosystem is not just about the AI frenzy or the tech arms races. It also involves developing its own technology to bypass U.S. restrictions on key components. China exported over 1 million cars in one month for the very first time as sales of electric vehicles surged. This is almost twice the monthly level of car exports China had at the beginning of last year. Most of the increase was absorbed by Europe and Latin America. These booming auto exports are likely to hit Europe's automakers the hardest. Volkswagen, the German automaker, said this week that it might need to cut 50,000 jobs more to keep up with the fierce competition and tensions in transatlantic trade. This confirms reports that it was looking to reduce its workforce by 100,000 within the next few years.

German automakers also struggle to sell in China's subdued car market. BMW issued a profit warning only last month on its exports.

The euro zone, and Germany specifically, are under enormous pressure, with U.S. Tariffs in the West and Chinese Imports from the East, and energy prices rising again due to the simmering Iran War.

There is no simple solution to this problem, which is complex both politically and economically. Europe needs Chinese battery technology for example, yet it is late to protect its higher-tech industry and is clearly concerned about the impact of its auto sector. European policymakers have only recently begun to consider exchange rates in the context of both the problem and its solution.

Persuading China to Float

The exchange rate is a potential remedy. It's a major point of contention for Europeans. Friedrich Merz, the German opposition leader who visited Beijing in February, raised the issue and said this week that the yuan's undervaluation distorts competition. He said that an appreciation of the yuan would allow China to avoid more severe trade retaliation.

Merz stated on Monday that "we are now trying steer the dialog with China towards a solution... an effort to persuade China's currency to be allowed to float free, including within the context of the competition in the capital market."

The yuan is gaining ground this year against the euro and dollar. The euro/yuan exchange rate is still higher than a decade ago despite the fact that Europe's trade surplus with mainland China more than doubled. Some economists believe that the euro's real value has increased by up to 40% since COVID, partly because of differences in producer prices inflation following the pandemic.

According to a study by Deutsche Bank's Shreyas gopal, Europe is currently experiencing "China Shock 2. He concluded, using multiple valuation models that the yuan is still 15% undervalued compared to the euro, despite this year's 5% increase. This puts it at the extremes seen in the period 2005-2008, with Germany being the biggest victim.

He added: "Nearly our models suggest the undervaluation is more pronounced for the yuan against a hypothetical Deutschmark rather than the euro."

China's "mercantilism", despite the attention being focused on Wall Street and Silicon Valley, remains one of the most powerful economic forces in history. Export-led models are now being driven by currency controls and tight regulations, causing a third China shock that is eroding prospects for so-called Middle Powers.

Subramanian wrote in an op ed on the Project Syndicate website that "consigning America to self-doubt, and a diminished power, while also destroying Europe's biggest power, Germany economically, is a 'accomplishment.' There are few precedents in history." "Chinese economic developments and Fed policies have done more to change the world than US mercantilism in this millennium."

It may seem that simple exchange rates are not able to solve the problem, but they can still be seen as a part of it. In this regard, Europe could find itself -- for the first time in recent memory -- on the same side as U.S. president Donald Trump. The opinions expressed are those of Mike Dolan a columnist at.

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(source: Reuters)