Beijing is – still – driving up prices: Is China more important for the DAX than Germany?

For a long time now, there has been mainly bad and even catastrophic news about the German economy. This has little impact on the leading index of the local stock exchange. Recently there were reports of Chinese economic stimulus measures that drove the DAX to a new record high. Capital market strategist Philipp Vorndran from the asset manager Flossbach von Storch explains in an interview with ntv.de why China, unlike Germany, is a “swing factor” for the economy. However, the China expert does not have much hope for the economic stimulus package recently announced by Beijing.

ntv.de: In stock market reporting you sometimes get the impression that China as an economy is not only particularly important for Germany. The news from China, such as the recent economic stimulus package from the People’s Republic, appears to be even more influential than the German economic development for companies in the German leading index DAX. Is that true?

Philipp Vorndran: China is the “swing factor” for the global economy, not just for the German one. However, it is viewed more closely in Germany than elsewhere because our economy is extremely dependent on exports. Many German companies, especially car and mechanical engineering companies, have focused heavily on China as a sales market. So it hits them even harder when China’s economy weakens – and not just since yesterday, but for many quarters. China has structural problems: youth unemployment, the real estate market, the increasingly planned economic organization. All of these issues, plus demographic developments, are slowing down the growth dynamic. Despite everything, neither the government nor the central bank had yet stimulated the economy. The recently announced package, although quite small, made people sit up and take notice: Aha, perhaps the leadership in Beijing is now thinking more strategically, more macro-oriented. That was certainly the reason for the jump in the DAX. Will that help in the long term? Probably not. The package is not enough to solve the country’s structural problems.

The German government’s latest economic stimulus measures, on the other hand, seemed to have no impact at all on the DAX. Germany’s economy is not a “swing factor”?

Germany also has problems that can hardly be solved with money in the short term. Even if we wanted to invest 50 billion euros in infrastructure projects, we would lack workers and companies that would then use them to build railway lines, highways and new bridges. That is why investors are cautious about the effects of economic stimulus measures in Germany.

Is it different with economic stimulus measures in China?

That would be different if domestic consumption in China were boosted again. But Chinese consumers have only one issue at the moment: saving! Because they are worried about their jobs and their income. Youth unemployment has reached gigantic proportions. The government is even demanding pay cuts from civil servants, whose jobs were always considered particularly secure. That’s why consumers are sitting on their money. And we see this in the profit development of Louis Vuitton as well as that of BMW.

The attention that China’s economic and economic policy receives in this country compared to Germany’s is therefore based not only on China’s size as a sales market, but also on the fact that more movement and a different dynamic are possible there?

If China were to achieve a change in consumer sentiment among the population, that would be very, very positive for the global economy in general and for the German export industry in particular. But in my opinion the concrete measures that have now been announced are not suitable for this. And I don’t see any corresponding economic stimulus measures coming. I fear that for the next few years and decades we will have to say goodbye to the growth rates of six, seven or eight percent that we were used to in China. In perspective, there will be more like two to three percent growth. And that won’t come from consumption, but primarily from exports, especially of cars. This creates a double challenge, especially for German industry: on the one hand, the important market in China is losing momentum, and on the other hand, this export growth comes from areas that we have also defined as our export fields: above all, automobile manufacturing. This is exactly what is reflected in the profit warnings that Mercedes and BMW have issued in recent weeks.

Given the importance of China for these companies and the developments you have described there, are these profit warnings a foretaste of what DAX investors can expect in the medium term?

Things are indeed not looking good for the DAX companies. But it’s much worse for medium-sized businesses. DAX companies are usually large enough to diversify production locations. Mercedes, BMW, Volkswagen – of course they have production facilities in China, Europe and also in the USA. SAP benefits from growth in India as well as on the Arabian Peninsula. Many medium-sized German companies cannot do that, as their market is in Germany and perhaps in Europe. That’s why the DAX, with its globally oriented large companies, is still the sunny side of the German economy. But it is logical: If China, the most important growth market of the past four decades, loses momentum, the DAX companies will also be affected.

Does that mean the times in which the growth market of China enabled German companies to achieve dream profits and the DAX to record records – despite stagnation in the domestic economy – are over?

Definitely! Life for German companies in China is becoming more difficult. And it won’t be any easier with the next US presidential election, no matter who is elected: both candidates are seeking the trade conflict with China. We as Europeans will probably choose one side or the other in the medium term, which means we will have to give up one of the two sales markets.

Then will the importance of China for German companies decrease and that of the USA increase again?

I am convinced of that. Hopefully we will be able to diversify our supply chains beyond the US and China further than we have done so far. The trade agreement with the Mercosur economic area in South America, which has been on the table for around 20 years, would be one possibility. However, we Europeans do not sign this because our standards are not guaranteed when it comes to issues such as climate protection and labor law. This means that the Chinese will snatch this market away from us too! Opening up new markets is impossible if we only want to play by our rules. The alternative would be to only produce for Germany. Unfortunately, Germany doesn’t have much growth to offer. Our economy has always thrived on international trade.

Max Borowski spoke to Philipp Vorndran

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