China is one of the countries to which Europe has been losing global market share, not least due to significant losses of eurozone exports' price competitiveness compared with Chinese exports, wrote the bank in a note to clients. With eurozone exports to China on a declining trajectory since 2021, Europe appears to have been losing market share in China, too.
At the same time, European imports from China have been on the rise. As a result of falling exports and rising imports, the eurozone trade deficit with China has been widening, stated UBS.
While weaker demand for eurozone exports, to some extent, captures weaker domestic demand in China amid the property sector downturn, this could also be a reflection of the recent trends of rising competitiveness of Chinese products, not just in terms of price but also quality, and a shift in Chinese consumer preferences towards domestic brands, pointed out the bank.
Volumes of eurozone imports from China show a clear pick-up, particularly in Q1 2025. However, at this stage it's difficult to disentangle how much of this pick-up is temporary -- potentially related to exports of goods eventually are destined for the United States, to circumvent tariffs -- and, so, likely to unwind, and how much is due to a genuine pick-up in eurozone demand for Chinese imports, which could be more permanent.
On the price side, extra-eurozone import price dynamics, and more specifically import prices from China, have been largely driven by energy prices, with import prices excluding energy being much less volatile. This points to so far limited evidence of disinflationary spillovers from China to the eurozone, added UBS.
A 'back-of-the-envelope' calculation suggests every one percentage point increase in China import prices adds only about 1bp-2bps to eurozone headline inflation. According to the European Central Bank, China's weight in the eurozone manufactured goods imports is 21% and import content of non-energy industrial goods (NEIG) is 29%; the weight of NEIG is 25.6%.
This also suggests that only a relatively large shock to China's import prices would have a material impact on eurozone inflation. However, the bank acknowledges that this approach likely underestimates the sensitivity of eurozone inflation to Chinese producer prices, as it doesn't account for the third country impact -- disinflationary spillovers from China into other Southeast Asia countries also exporting to Europe at lower prices.
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