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Analysis
German exports to Beijing leapfrogging traditional partners

German exports to Beijing leapfrogging traditional partners

Weaker euro helps Germany’s sales to China, central Europe 

by David Marsh

Tue 25 Nov 2014

Russia is trying moving its economic focus away from Europe and towards the east, as a reaction to western sanctions imposed after the hostilities over Ukraine. The attempt to reposition Russia’s gas industry, heavily concentrated in the western third of the country, away from dependence on exports to Europe, and to open up pipelines to China and other Asian customers, will take decades to realise. Meanwhile, another pivotal country is reorienting to the east a lot more quickly: Germany.

Germany is using its status as a vital industrial pivot in a series of high-tech supply chains – whether in automobiles, machinery, chemicals, logistics or other areas of capital goods and specialised manufacturing – to extend its reach to higher-growth areas of central and eastern Europe and China, leapfrogging its traditional partner countries in the slow-moving euro bloc.

According to the Bundesbank’s balance of payments data, Germany ran a foreign trade surplus with China of €3.3bn for the first half of 2014, up from €639m in the first six months of 2013, on exports of €37.7bn and imports of €34.4bn, against exports of €34.0bn and imports of €33.4bn in the same 2013 period.

Although Germany’s main export markets are still the traditional big trade partners France, Britain and the US, exports to China in the first half were only around €8bn behind sales to front-runner France, Bundesbank data show. Germany’s exports to China are now bigger than sales to the Netherlands, Switzerland and Austria, and more than double exports to Spain.

The reorientation to China is just one part of Germany’s eastwards shift. Non-euro central and east European Union countries have become increasingly important. Germany sells more to Poland than to Belgium, and more to the Czech Republic than to Spain, while German sales to Hungary alone are equivalent to combined exports to Portugal, Ireland and Greece.

The eastwards move is likely to gain further momentum. This represents an attempt by German industry to compensate for Russian business that will naturally be lost as sanctions bite (an outcome that many German business people view with increasing distaste) and President Vladimir Putin unveils further efforts to develop Russian self-sufficiency.

Germany’s overall foreign trade with Russia, combining exports and imports, was only around half that with China in the first half of 2014. It lags well behind Germany’s overall export and import volumes with Switzerland, Italy or Austria – and the data refer to a period before western trade and investment restrictions on links with Russia started to hit home.

One reason why German exports to China are booming – and imports from China are growing at a less heady pace – is because the euro is rapidly weakening, while the Chinese authorities for the time being are keeping the renminbi relatively strong. According to real (inflation-adjusted) exchange rate indices assembled by the Bank for International Settlements, Germany (as of October 2014) has become roughly 25% more competitive against China since 2010, as a result of a real revaluation of the renminbi of about 22% over that time and a real devaluation of the euro’s exchange rate in Germany of 3%.

After latest announcements of further monetary easing and postponement of tax increases in Japan following the country’s re-entry into recession, the yen is likely to slide further in coming weeks. The renminbi’s real revaluation against the yen since 2010 is now close to 50%, according to the BIS figures. So it’s not surprising that many market observers expect renminbi weakness in the New Year – even though a substantial renminbi decline against the dollar would awkwardly conflict with Beijing’s desire to turn its currency into a much more accepted international reserve asset over the next two years.

The euro, meanwhile, looks set to continue its downward path, propelled by the strong desire of the weaker governments in monetary union to see a further devaluation to aid Europe’s very patchy growth prospects. Mario Draghi, European Central Bank president, has been doing his best to weaken the euro in recent months. He repeated the mantra, although in coded form, in a speech in Frankfurt on Friday when he once again held out the possibility (without hinting at anything most observers didn’t know) of stepped-up ECB asset purchases should inflation remain on a sustained downward path.

Speaking of European investors who sell assets to the ECB moving into other, more risky, assets that would help accelerate the euro area’s growth, Draghi said that higher prices for European assets might encourage some foreign holders to switch away from the euro, with ‘investors rebalancing portfolios away from euro-denominated assets towards other jurisdictions and currencies providing higher yields.’ Just to make sure that listeners got the message, he added there was evidence that the asset purchase programmes of the US Federal Reserve and the Bank of Japan ‘led to a significant depreciation of their respective exchange rates, even in a situation in which long-term yields were already very low, as in Japan.’

The message from Draghi is that the euro, like the yen, is heading lower. This could prove increasingly irksome for China in 2015.

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