Letter To Shanghai No 1165 - To recapture international market share

US inflation came in at three point something, the same as it has all year, and the US financial markets moved to fresh highs, anticipating one cut in US interest rates this year, which, considering the dot plot last time it was published in March indicated 3 cuts in 2024, is a miracle of self-deception. But, hey, who cares? I abandoned logic years ago.

But it does throw out another question: What is the natural or neutral level of interest rates in the US now? To answer my question, shall we say it's US GDP growth plus a little bit for inflation? Which would lead us to around 4.5%, perhaps 4.75%. And let's face it, anything below 4.5% could weaken the dollar and import inflation. Of course, China's biggest export to the US is no longer available; by reorienting away from Chinese production, Chinese deflation will go elsewhere, and without it, arguably, US domestic prices will remain firm to steady. ?

Of course, the Fed could always declare the 2% inflation target is dead and long live the new inflation target of 3%, and why not, inflating away the spiralling US debt is perhaps the only policy choice available.

So, looking at China, I doubt my commentary has changed in almost a year; no significant policy change will emerge unless exports start to falter, which will prompt Beijing to roll out the big safety net. But, considering China's focus is to innovate and export to the developing nations of the Global South, free of transportation and tariff issues, it is possible to argue the loss of market share in Europe and the US would cause limited disruption.

As in the way of these things, from tomorrow until Tuesday, there will be a huge dump of Chinese data, including House Prices, Industrial Production, New Yuan Loans, Total Social Financing, and the list goes on, but it is reasonable to expect the levers of control in Beijing will remain untouched.

This week, aiming to protect European car makers, the European Commission said it would impose up to 38.1% additional duties on Chinese EV producers. But, surely, they miss the point. A Chinese $10,000 EV car will be welcomed in Abidjan, Ahmadabad, Ankara etc. direct from Zhangjiagang, Zhengzhou and Zhuhai.

Commercially, it is an unstoppable tide, and in the years ahead, protected behind their tariff walls, it's unlikely US and European car producers will ever get down to the appropriate price point to recapture international market share.

Have a good day,

John