Within 40 years, China has developed from a country shaped by agriculture into an economic world power (1, 2). One measure of a country’s economic power is its gross domestic product – GDP for short. GDP measures the value of domestically produced goods and services (3). As recently as 1980, China’s GDP was only about one-fifth of Germany’s (USD 950 billion in Germany vs. USD 191 billion in China) (4). A lot has happened since then: Last year, China was the second largest economy (in terms of GDP) behind the US and ahead of Japan and Germany. In 2021, China reached a new GDP record of around USD 17.7 trillion (5). And the growth forecasts point in only one direction: upwards.
The figures emphasize the importance of China now for the global economy. But it’s also of huge relevance for our domestic economy and our lives in Europe.
Why is China so important to us?
China is a very important trading partner for Switzerland. In 2019, the bilateral goods trade volume of Switzerland and China (the value of goods traded with each other) was over CHF 36 billion. Thus, China is the third most important trading partner for Switzerland (6).
Imports from China are crucial for every European economic and industrial sector. However, the mechanical engineering, automotive and automotive parts, electrical engineering and chemicals sectors are particularly dependent on Chinese imports (7). Semiconductor technologies (computers, broadcasting technology, smartphones) and transport equipment play a key role: in these product categories alone, China exported goods worth USD 1.26 trillion around the world in 2020 (8). The global economy’s dependence on China is huge – and comes with certain risks.
If there are supply bottlenecks or even failures in the supply chains, this has an immediate impact on producers worldwide. In April this year, for example, there were capacity bottlenecks in ports, and the port of Hong Kong, among others, was severely affected. As a result, production in Europe and the world had to be severely curtailed. According to the principle of supply and demand, higher prices could be called for the available products. This had a direct impact on production costs and companies’ sales and contributed to the overall negative outlook for the global economy. Supply chains are still not at pre-crisis levels. The Corona pandemic is also further exacerbating the situation in China.
What role does Corona and the Chinese government’s Covid strategy play in the global economy?
China is reporting record numbers of new Corona infections. Already eight out of ten Chinese cities are severely affected (9). China’s zero-covid strategy worked very well in 2020 and 2021. However, the highly contagious Omicron variant, dwindling vaccinations and overall low vaccination rates (especially in high-risk groups) are a cause for concern.
In this context, China was in a dilemma: sticking to the zero-covid strategy would probably have led to more and more protests. As a consequence, a serious uprising of the Chinese people against their leader Xi Jinping could not have been excluded (9). The Chinese government has therefore opted for an alternative path and is now deviating from the previous zero-covid strategy. Infection figures are already skyrocketing (10). As a result, the lack of much-needed workers on China’s assembly lines could affect production (11). However, the Chinese government is sticking to the easing measures in order to boost the economy. These developments have a direct impact on the global economy. Of course, producers in the renewable energy sector are also affected by the supply bottlenecks.
What influence does China have on the renewable energy sector and the global wind energy industry?
In recent decades, China has become a major player in the renewable energy sector. While already the market leader in the solar sector, the country is now increasing its market share in the manufacture of wind turbines and the production of batteries for electric vehicles , putting pressure on European producers (12). Chinese companies now produce and sell five times more wind turbines per year than EU producers (13).
Despite the current energy crisis, turbine manufacturers in Europe are under financial pressure. Jobs are being cut and companies are in danger of losing part of their market share to Chinese competitors. The main reasons for this development are the ongoing bottlenecks in the supply chains (also due to the former zero-covid policy and now sharply rising corona case numbers), the Russian war of aggression in Ukraine and increased costs for raw materials such as steel and copper. But the strict and lengthy procurement and approval procedures are also causing problems for manufacturers. In addition, the financial resilience of Chinese producers gives them a competitive advantage over their European rivals – while Chinese turbine prices have been falling since 2020 despite commodity inflation, prices globally have risen on average since then. This advantage is based on the fact that Chinese producers have built the most efficient, concentrated and cost-effective supply chain. Chinese producers are also not currently reliant on international expansion due to domestic demand (12, 14).
What does this mean for your Inyova investment?
The developments in China are part of the global market turmoil and also have an impact on your Inyova portfolio. Of course, the companies in the Inyova universe are also affected by the supply bottlenecks and the Chinese Covid strategy – some more and some less. However, Chinese companies are basically not part of the Inyova universe. Overall, the equity part of your Inyova investment is subject to the same volatility as the global markets, although it is built to withstand short-term fluctuations. Your portfolio is well diversified, with stocks and bonds covering numerous sectors, regions, currencies and countries. It includes large, medium and smaller companies. It’s designed for the long term. In addition, your portfolio is monitored by our Investment Office at all times – if there are companies that no longer meet our strict risk and impact criteria, we will remove them from your portfolio.
19 out of 20 Inyova Impact investors added renewable energy as a handprint theme to their strategy in the third quarter of 2022. Also, two companies from the wind energy sector made it to the wish list top 10 (15). You may also have wind power stocks in your Inyova portfolio. Despite pressure from Chinese turbine manufacturers, European producers are well positioned for the future. This is partly due to technological advances and partly because people and governments in Europe are becoming more aware of the need for green energy. Want to learn more about investing in wind power stocks with Inyova? Read our article “Investing in wind energy stocks – a growing industry“.
If you have any questions about your portfolio, please reach out to our Customer Success team. You can email us at [email protected] or call 044 271 50 00. We’re here to help!
Sources
(1) Deutschlandfunk (2018). Vor 40 Jahren – Als China seine Wirtschaft öffnete. https://www.deutschlandfunk.de/vor-40-jahren-als-china-seine-wirtschaft-oeffnete-100.html
(2) Bundeszentrale für politische Bildung (2019). Vor 70 Jahren: Gründung der Volksrepublik China. https://www.bpb.de/kurz-knapp/hintergrund-aktuell/297717/vor-70-jahren-gruendung-der-volksrepublik-china/
(3) Destatis (2022). Volkswirtschaftliche Gesamtrechnungen – Bruttoinlandsprodukt (BIP). https://www.destatis.de/DE/Themen/Wirtschaft/Volkswirtschaftliche-Gesamtrechnungen-Inlandsprodukt/Methoden/bip.html
(4) The World Bank (2022). World Development Indicators. https://datacatalog.worldbank.org/search/dataset/0037712
(5) Statista (2022). Ranking der 20 Länder mit dem größten Bruttoinlandsprodukt (BIP) im Jahr 2021. https://de.statista.com/statistik/daten/studie/157841/umfrage/ranking-der-20-laender-mit-dem-groessten-bruttoinlandsprodukt/
(6) Schweizerische Eidgenossenschaft (2021). China Strategie 2021–2024.
(7) Deutsche Vertretung in China (2022). Deutsch-chinesische Wirtschaftsbeziehungen. https://china.diplo.de/cn-de/themen/wirtschaft/wirtschaft-bilateral
(8) Statista (2022). Value of export of goods from China from 2011 to 2021. https://www.statista.com/statistics/263661/export-of-goods-from-china/
(9) The Economist (2022). Xi Jinping’s zero-covid policy has turned a health crisis into a political one. https://www.economist.com/leaders/2022/12/01/xi-jinpings-zero-covid-policy-has-turned-a-health-crisis-into-a-political-one
(10) Neue Zürcher Zeitung (2022). Chinas Blindflug durch die Covid-19-Pandemie – erste Spitäler erreichen Kapazitätsgrenzen. https://www.nzz.ch/international/chinas-blindflug-durch-die-covid-pandemie-ld.1717665
11) Forbes (2022). China’s Zero-Covid Exit And The Potential For 2023 Supply Chain Disruptions. https://www.forbes.com/sites/willyshih/2022/12/13/chinas-covid-zero-exit-and-the-potential-for-2023-supply-chain-impacts/?sh=38ceb1c3103f
(12) S&P Global (2022). China’s increasingly cheap wind turbines could open new markets. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/china-s-increasingly-cheap-wind-turbines-could-open-new-markets-72152297
(13) Mobility Foresight (2021). Europe Wind Energy Market 2021-2026. https://mobilityforesights.com/product/europe-wind-energy-market/
(14) Financial Times (2021). European wind industry ‘struggling’ with rising costs. https://www.ft.com/content/0e747284-64da-4690-b416-3acabaaf4943
(15) Inyova (2022). Inyova Impact Index Q3.
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