Analysis-China draws ‘red lines’ around its economic model ahead of EU, US trade talks

“China’s heavy dependence on ​exports ​to power its own growth in light of weak domestic demand is going to make it difficult to argue ​that Chinese exports are a gift to consumers worldwide.”

Washington’s effort to boost pressure ‌on China through tariffs of more than 100% last year floundered as Beijing used its dominant position in production of rare earths, key for a wide range of global industries, to regain strategic ground.

Now the European Union, whose trade deficit with China averaged $1 billion a day last year, is pursuing its own industrial and domestic procurement policies to defend its market.

This month, German Chancellor Friedrich Merz criticised Beijing for keeping its currency undervalued.

But the latest statements from China suggest Beijing’s confidence is growing that it can soften trade disputes without making significant concessions.

“The U.S. tariff episode appears to have supplied a template of managed engagement that Beijing is also applying to Europe —essentially buying time,” said Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis.

“Beijing’s messaging on its economic model does come across as more confident and tightly framed than a ‌year or two ago,” she added.

MOVING SLOWLY AGAINST FAST ‘EVIDENCE’

To be sure, Beijing has slowed investment this year, primarily by ​tightening scrutiny on local government spending, which economists blame for driving overcapacity in manufacturing and infrastructure.

Officials publicly recognise a supply-demand “contradiction” ​and pledge to end deflationary price wars among producers battling for market share at the ​expense of profits.

They often promise to boost consumer demand, even without major structural reform plans.

“Historical justification does not mean long-term justification” of weak consumption, the Qiushi article ‌said, adding that a change in the model was “necessary”.

Analysts say this means China ​recognises imbalances but wants to move carefully, fearing disruptive ​changes.

But a growing body of international research warns Beijing’s policies threaten both the global economy and its own.

For nearly 60% of Chinese firms, their “market share gains can be explained by subsidies received”, the Organisation for Economic Cooperation and Development said in a recent report.

A Bank of Italy paper estimated that domestic factors, such as weak consumption and overcapacity, have driven about 75% ​of Chinese export growth.

A McKinsey Global Institute report said China is adding ‌three times more productive assets each year than Europe and the United States combined, while its capital returns are roughly 40% lower.

“Chinese arguments are more frequent and formal now ​because the evidence of systemic domestic economic problems leading to spillovers on the rest of the world is mounting even faster,” said Daniel Rosen, co-founder of researcher Rhodium ​Group.

(Reporting by Claire Fu in Singapore, Kevin Yao and Liangping Gao in Beijing; Editing by Clarence Fernandez)