China signs U.S. trade deal as EU tensions rise
As Beijing and Washington strike a deal, EU-China tensions over trade and geopolitics deepen ahead of July's summit
Welcome back to What’s Happening in China, your weekly China brief.
Jumping straight in this week.
— PC
Through the Lens
In Focus
I. U.S. and China trade deal
The U.S. and China have confirmed details of a trade framework that seeks to allow rare earth exports and easing of tech restrictions, according to a statement released by China’s Ministry of Commerce on Friday afternoon.
China will review and approve export applications for items subject to export control rules, while the U.S. will correspondingly cancel a range of existing restrictive measures imposed against Beijing, a spokesperson for the ministry said in the statement, without elaborating.
The statement comes after U.S. President Donald Trump said Thursday at an event in the White House that “we just signed with China yesterday.” A White House official later clarified that the administration and China had agreed to “an additional understanding of a framework to implement the Geneva agreement.”
Read: China confirms details of U.S. trade deal (CNBC)
Related:
The world wants China’s rare earth elements – what is life like in the city that produces them? (The Guardian)
II. What’s that smell?
A month out from a crunch summit between Chinese President Xi Jinping and the leaders of the European Union, senior EU officials have landed on an unsavoury term to describe their trade ties with China: “the stinking fish.”
The analogy, used when briefing member state diplomats on progress in trade talks with China, refers to the European Commission’s frustration that each of its top demands from Beijing is around the removal of measures that were introduced to punish Europe or the US.
Brussels wants China to permanently remove requirements for licences to export rare earth elements and magnets put in place to punish the United States, but which caught European firms in the crossfire.
It is also asking for the removal of Chinese tariffs on EU brandy imports, slapped in place as punishment for Brussels’ own duties on electric vehicles, and to end retaliatory probes on dairy and pork products.
“You put a stinking fish on the table, and then you want me to pay you to take it away,” was how one of multiple diplomatic sources explained it this week when describing how the EC has framed testy ties with Beijing.
In Brussels and beyond, the stinking fish is beginning to catch on.
The phrase helps to explain the parlous nature of the trading relationship, which halfway through the year feels a million miles from the softer words exchanged as recently as February, when Brussels was cowering from the return of US President Donald Trump.
It also shows how far expectations have fallen ahead of a summit previously seen as an opportunity to cement some progress in the relationship between Beijing and Brussels after years of tumult.
The EU’s leaders – European Commission President Ursula von der Leyen, European Council President Antonio Costa and top diplomat Kaja Kallas – decided to fly to China for the meeting, even though it was Europe’s turn to host.
Read: Ahead of a crunch summit with China, the EU is complaining of ‘stinking fish’ (SCMP)
Related: China's top diplomat to visit Europe for talks with EU, Germany, France next week (HKFP)
III. Industrial overcapacity, auto price war, and “zero-mileage” cars
China's auto industry has inflated car sales for years through a burgeoning government-backed grey market that registers new cars right off the assembly line and then ships them overseas as "used" vehicles.
These so-called "zero-mileage" cars have never been driven but they are being exported as used to markets like Russia, Central Asia and the Middle East, allowing Chinese automakers to show growth and to dispose of cars that it would be difficult to sell domestically, according to a Reuters review of government documents and interviews with five auto dealers and car traders.
"This is the outcome of an almost-four-year price war that has made companies desperate to book any sales possible," said Tu Le, Michigan-based founder of consultancy Sino Auto Insights.
The practice only gained national attention after the boss of Chinese automaker Great Wall Motor criticized the sale of zero-mileage used cars within China in May. On June 10 the People's Daily newspaper condemned the sale of zero-mileage used cars domestically.
The paper, which often signals the positions of China's top Communist Party leaders, blamed these fake used cars for driving down prices amid a withering domestic price war and called for "tough regulatory action" to restore order.
But the export and sale of fake used cars is actively encouraged by regional governments in China, according to a Reuters review of state media reports and government documents.
Local governments have embraced the practice as vital to meeting ambitious targets for economic growth set by Beijing, according to a Reuters review of local policy documents and state media articles.
Reuters has identified 20 local governments in China - including major export hubs like Guangdong and Sichuan - that have described their support for the export of zero-mileage used cars in publicly available government documents.
The tactics include creating extra licenses for the export of zero-mileage used cars, fast-tracking tax rebate claims, investing in export infrastructure, and funding networking events to encourage zero-mileage used-car exports, the government documents showed.
The zero-mileage used car export market works like this: as a fresh car emerges from the assembly line, an exporter buys the car either directly from the automaker or from a dealer, registers it with a Chinese license plate, and then immediately marks it as a second-hand car for shipping abroad. Along the way, the automaker books the car as sold and logs the revenue.
The support for the practice from local governments would make little sense anywhere outside China's centrally planned economy. But here, showing rapid growth in sales and employment can bring about promotion or unlock new funding while missing economic targets that trickle down from Beijing can lead to demotions of local officials.
Because these export firms both purchase and sell a single car, the transaction value is double that of new or used-car purchases, so local governments court them to set up shop on their turf to quickly and artificially boost their GDP statistics, two Chinese auto industry executives said.
The tactic is only one sign that China's car industry – the world's largest – is allowing production to outpace demand, driving a protracted domestic price war and spurring accusations of automotive "dumping" abroad.
Read: China auto industry inflates sales by exporting new cars as 'used' (Reuters)
Related:
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