Completely lifting interaction restrictions: Breaking through exports to Europe

Report Summary On May 6, General Secretary Xi Jinping exchanged congratulatory messages with European Council President Costa and European Commission President Ursula von der Leyen on the 50th anniversary of diplomatic relations between China and Europe. The General Secretary emphasized: "A healthy and stable China-Europe relationship not only benefits each other but also illuminates the world." He expressed a "high regard for the development of China-Europe relations and a willingness to work with President Costa and President von der Leyen to take the 50th anniversary of diplomatic relations as an opportunity to summarize the development experience of China-Europe relations, deepen strategic communication, enhance mutual understanding and trust, consolidate partnership positioning, expand mutual openness, properly handle friction and differences, and open up a brighter future for China-Europe relations." On the same day, a spokesperson for the Ministry of Foreign Affairs stated: "China and the European Parliament have decided to simultaneously and comprehensively lift restrictions on mutual exchanges." As the prospects for improving China-Europe relations accelerate, we suggest exploring investment opportunities in the export chain to Europe. I. The trade war is strengthening the relationship between China and the EU, and the China-Europe industrial chain has complementary advantages. There is a mutually beneficial foundation for the China-Europe economy. Europe is entering a rate-cutting cycle, and concerns about inflation in Europe are exacerbated by high energy prices due to the Russia-Ukraine conflict and Germany's fiscal shift. China holds $1.55 trillion in U.S. Treasury bonds; if it sells dollars and U.S. bonds to buy euros and German bonds, the European Central Bank can maintain low interest rates and low inflation. The China-Europe industrial chain has complementary advantages. (1) China has formed a complete industrial chain layout in traditional manufacturing, new energy vehicles, and photovoltaics. Europe maintains a leading position in high-end manufacturing fields such as precision instruments, aerospace, and industrial services. (2) The EU's dependence on imports from China is increasing, while China's dependence on exports to the EU is decreasing. II. Increasing rifts between the U.S. and Europe: Systemic shocks from U.S. unilateralism, and Europe begins to awaken strategically. Trump continued and strengthened the "America First" strategy, demanding that Europe bear more defense spending in the security field while expanding the weaponization of tariffs in the economic and trade field, putting economic and military pressure on Europe. In addition, survey results show that most Europeans no longer trust the U.S., and the volatility of U.S. security commitments has directly catalyzed the process of European defense integration. III. Marginal changes in 25 years: The European Parliament lifts restrictions on meetings with Chinese officials, European leaders visit China intensively, and European countries actively seek change. Tariff pressures have forced the EU to actively seek external cooperation, with recent intensive visits to China by European leaders and corporate executives. Although most leaders have a hawkish attitude towards China, when external pressures break through a critical point, institutional differences will give way to survival rationality. The improvement of China-Europe relations is essentially an inevitable result of the spillover of structural contradictions between the U.S. and Europe. Europe is also actively seeking change. For example, Germany's fiscal policy is beginning to shift, and a €100 billion fiscal stimulus plan has been introduced. The French government is increasing military spending and nuclear deterrence to provide security for Europe Spain hopes to promote the EU's shift towards China to respond to the trade war. IV. At the industry level, how to assess the progress of various industries in expanding into the European market? Which industries are expected to benefit first from potential improvements in exports to Europe this year? Based on the dimensions of export exposure to Europe and market share in Europe, we can roughly position the progress of China's exports to Europe by industry: (1) First tier: Europe is currently a major export market, and there is already a certain share in Europe: power batteries, vacuum cleaners, inverters, new energy buses, wind power components, etc. (2) Second tier: Europe is currently a major export market, but the current share in Europe is still low, and market competitiveness still needs to be improved: new energy passenger vehicles, electric forklifts. (3) Third tier: Current export exposure to Europe is low, mainly still in the US or Asia, Africa, and Latin America: motorcycles, home furnishings, construction machinery, auto parts, etc. For the first tier, it is mainly linked to the demand side. We can explore categories with marginal changes in European demand this year, focusing on offshore wind and inverters. For the second and third tiers, it is mainly linked to the supply side. We should look for categories that may achieve European exposure and share expansion this year, focusing on motorcycles and new energy passenger vehicles. In addition, the recent easing of restrictions on Chinese communication equipment in Germany also presents opportunities for domestic communication equipment to re-enter the European market. Report Body I. The trade war is strengthening the relationship between China and the EU (1) The industrial chain has complementary advantages, and there is a basis for cooperation between China and Europe China and Europe have complementary advantages in their industrial chains, and there is potential for cooperation: 1. Concerns about inflation in Europe. As Europe enters a rate-cutting cycle, the high energy prices caused by the Russia-Ukraine conflict, and Germany's "fiscal bazooka" may lead to ongoing concerns about inflation in Europe. Considering Belgium (through Euroclear) and Luxembourg (through Clearstream) as custodians, China still holds about $1.55 trillion in U.S. Treasury bonds. If it subsequently sells dollars and U.S. bonds to buy euros and German government bonds, the European Central Bank can maintain low interest rates and low inflation. 2. Concerns about dumping of Chinese goods by the EU. (1) From the statements of European leaders, the main concern is that the reduction of channels for China to enter the U.S. consumer market may prompt Chinese companies to export more cheap metals, chemical products, and other goods to Europe, exacerbating Europe's concerns about dumping. (2) According to a survey conducted by Grand Continent from March 11 to March 14, 2025, regarding the question "Should the EU approach China to respond to Russia and the U.S.?", Europeans who somewhat disagreed were mainly concentrated in countries with a significant trade surplus with China, such as the Netherlands, Italy, Belgium, and Germany, which may also reflect Europe's concerns about Chinese dumping. (3) However, there are still countries with a large trade surplus that are relatively pro-China, such as Spain. In recent years, Spain has received billions of euros in electric vehicle factories, battery factories, and renewable energy investments from Chinese companies, with CATL, Desay SV, and other new energy industry chains successively establishing factories in Spain. (4) There is a complementary industrial chain between China and Europe: China has formed a complete industrial chain layout in traditional manufacturing sectors, such as textiles, mid-to-low-end machinery, as well as emerging fields like new energy vehicles and photovoltaics, possessing significant competitive advantages. Meanwhile, Europe maintains a leading position in high-end manufacturing sectors, such as precision instruments and aerospace, as well as in industrial services, including R&D design and intellectual property services. (5) As companies intensively expand into Europe, China's trade surplus with European countries has decreased, but on one hand, there may indeed be a need to increase imports of pharmaceuticals, luxury goods, and high-end machinery from Europe to reduce the surplus. On the other hand, it is necessary to encourage some companies to actively expand overseas, strengthen cooperation with other EU countries through joint ventures and factory establishment. 3. The EU's dependence on imports from China is increasing, while China's dependence on exports to the EU is decreasing. (1) The amount of China's exports to the EU as a percentage of China's total exports has decreased from 20.2% in early 2008 to 14.4% in March 2025, indicating a reduction in China's export dependence on the EU; (2) The amount of the EU's imports from China as a percentage of the EU's total imports has increased from 14.0% in early 2008 to 21.5% in February 2025, indicating a growing dependence of the EU on imports from China. (2) Increasing Rift in US-Europe Relations: Systemic Impact of US Unilateralism, Europe Begins Strategic Awakening 1. Trump's second term continues and strengthens the "America First" strategy, with its policy mix showing two new characteristics, putting economic and military pressure on Europe: (1) Reducing commitments to NATO in the security domain, requiring Europe to bear more defense spending. Trump's "conditional protection" policy for NATO: on one hand, he threatened to demand member countries increase military spending to 5% of GDP, leading to a surge in defense budgets in Germany, France, and other countries by 2024; on the other hand, the US unilaterally adjusted its military aid strategy to Ukraine, suspending the delivery of "Patriot" missile systems, forcing the EU to urgently activate the "European Peace Fund" to fill the gap. (2) Expanding the weaponization of tariffs in the economic and trade domain. The US Inflation Reduction Act, through $369 billion in green subsidies, attracts European companies to relocate, increasing the risk of deindustrialization in Europe. The German automotive industry faces shrinking profit margins due to increased tariff costs on exports to the US, forcing companies like Volkswagen and BMW to accelerate their factory setups in the US. After imposing a 25% tariff on EU steel and aluminum in March 2025, there are further threats of imposing 200% punitive tariffs on products like wine. 2. This wavering of security commitments has directly catalyzed the process of European defense integration—In June 2024, the EU passed the "European Defense Industrial Strategy," and Germany officially launched its first permanent overseas military deployment plan since World War II on April 1, 2025—deploying a 5,000-strong armored brigade in Lithuania. 3. According to public opinion polls, most Europeans no longer trust the US, viewing Trump as an enemy of Europe, and believe the EU needs its own military. According to a survey conducted by Grand Continent from March 11 to March 14, 2025, using the CAWI method on 10,572 people across nine EU countries, the main conclusions are as follows: (1) War on EU territory is imminent, but the US is no longer reliable, and military reliance on the US is no longer feasible. Most Europeans (55%) believe there is a high risk of armed conflict occurring on EU territory in the coming years; however, the majority do not trust the US, with only 10% believing that the EU can rely on the US under Donald Trump's leadership for security and defense, while 70% believe the EU should rely solely on its own strength for security and defense. (2) NATO is no longer credible, and Europeans need to defend themselves, having their own military in EU countries. Europeans have more confidence in a European joint military (60%) than in their national armies (19%) to ensure the security of their countries. Only 14% agree with international alliances like NATO that enjoy US protection (3) Trump is Europe's "Enemy": Most Europeans consider Donald Trump to be an "enemy of Europe" (51%), 63% believe that Trump's election has made the world less safe, 43% think the U.S. president has authoritarian tendencies, and 39% believe his behavior resembles that of a dictator. (4) Europeans Want to Boycott Musk and Tesla: Nearly 80% of Europeans find him untrustworthy, and 58% of respondents express support for boycotting Tesla. (3) Marginal Changes in 2025: European Parliament Lifts Restrictions on Meetings with Chinese Officials, European Leaders Intensively Visit China, Germany's Fiscal Policy Begins to Shift One of the largest marginal changes in 2025 is Trump's implementation of "reciprocal tariffs" globally starting April 2, imposing the highest tariffs on Southeast Asian countries that have a high proportion of re-exports to China; on the other hand, he also imposes significant tariffs on traditional allies like the EU (20%) and Japan (24%). Under the pressure of tariffs, market risk premiums have rapidly increased. Tariff pressures have forced the EU to actively seek external cooperation, with recent intensive visits to China by European leaders and corporate executives. (1) On April 2, Trump announced a 20% tariff on the EU, after which EU member states voted to approve the first round of countermeasures against U.S. tariffs. Although the U.S. has suspended tariffs on Europe for 90 days, the tariff pressure has compelled the EU to actively seek external cooperation. (2) In March 2025, the European Parliament lifted restrictions on meetings with Chinese officials, seen as a key signal to break the "sanctions deadlock." European leaders and corporate executives have recently visited China intensively, and if the previously shelved China-EU investment agreement can resume negotiations, breakthroughs may be achieved in areas such as market access (e.g., China lifting restrictions on EU automotive joint venture shareholding) and fair competition (the EU commits not to impose discriminatory clauses on state-owned enterprises). Although most EU leaders have a hawkish attitude towards China, when external pressures reach a critical point, institutional differences will yield to survival rationality. The improvement of China-Europe relations is essentially an inevitable result of the spillover of structural contradictions between Europe and the United States. (1) Although most leaders have a hawkish attitude towards China, expressing past risks and reducing dependence on China, with the rise of American unilateralism, the intention to use China to alleviate the increasing strategic pressure from the U.S. on Europe has become increasingly evident. (2) European leaders, including European Council President Antonio Costa and European Commission President Ursula von der Leyen, will also visit China in July this year to discuss the current state of China-Europe relations, and the talks will involve the impact of U.S. tariffs. European countries are also actively seeking change: (1) Germany's fiscal policy is beginning to shift, with a €100 billion fiscal stimulus plan introduced. Germany has introduced a €500 billion fiscal plan, to be invested over 12 years (approximately equal to 1% of Germany's annual GDP), which is expected to be invested in modernizing transportation networks, digital infrastructure, renewable energy development, and housing construction. On March 21, Germany's "fiscal rocket launcher" was finally approved by parliament, and the landmark spending bill passed its final legislative hurdle. (2) The French government is increasing military spending and nuclear deterrence to provide security for Europe. France is considering imposing differentiated tax rates on high-income groups to increase the defense budget in response to von der Leyen's proposed €800 billion military spending plan, while also considering that France's nuclear deterrent capability provides security for all of Europe. (3) Spain hopes to push the EU towards China to respond to the trade war. Spanish Prime Minister Sanchez became the first European leader to visit China since President Trump imposed tariffs on most countries, and hopes that Spain can push the EU towards China to respond to Trump's tariffs. II. Focus on Investment Opportunities in the 25-Year Export Chain to Europe Geopolitical risks exceed expectations In terms of industry, how to assess the progress of various industries in expanding into the European market? Which industries are expected to benefit first from potential improvements in exports to Europe this year? We recommend focusing on offshore wind, inverters, new energy passenger vehicles, motorcycles, and communication equipment. The following will provide a detailed analysis. First, we assess the progress of various industries in the European market. The following chart provides an overview of the export regional exposure distribution of major export chain industries in 2024. We find that, in addition to typical home goods, textiles, tools, and other exports to the U.S., some industries also exhibit a characteristic of country diversification, with exposure mainly in Europe and Asia, Africa, and Latin America Next, we focus on Europe, looking for industries that currently have a large export exposure to Europe and a small exposure to the United States. These industries are expected to be less affected by the current China-U.S. trade friction and are more likely to benefit from potential improvements in exports to Europe. We are looking for industries with an exposure to Europe of over 30% and an exposure to the U.S. of less than 10%, mainly concentrated in the new energy sector, including new energy buses, new energy passenger vehicles, inverters, wind power, etc. From the perspective of market share: Currently, industries that are rapidly expanding their share in Europe and have a high import market share are mainly concentrated in China's advantageous sectors such as solar storage, lithium batteries, and home appliances. For example, photovoltaic battery modules, power batteries, vacuum cleaners, and inverters currently have an import share of over 30% in Europe, while most other industries still have a share of less than 20%. Based on the two dimensions of overall exposure and market share, we can roughly position the current expansion process of various industries in the European market, which can be divided into three tiers— First tier: Europe is currently the main export market, and there is already a certain market share in Europe (red circle in the chart below, first quadrant): power batteries, vacuum cleaners, inverters, new energy buses, wind power components, etc. Second tier: Europe is currently the main export market, but the market share in Europe is still low, and market competitiveness still needs to be improved (yellow circle in the chart below, fourth quadrant): new energy passenger vehicles, electric forklifts. Third tier: Limited expansion in the European market. Currently, the export exposure to Europe is not high, mainly still in the U.S. or Asia, Africa, and Latin America, and the market share in Europe is also low (blue circle in the chart below, third quadrant): motorcycles, home furnishings, construction machinery, automotive parts, etc. Among them, for the first category, it is mainly linked to the demand side. We can explore categories that have marginal changes on the demand side in Europe this year, focusing on offshore wind and inverters. Regarding offshore wind, according to a report by GF Securities, European installations are expected to recover with over 50% growth by 2025, focusing on the growth elasticity of the high value-added European market. According to the report, some companies have already shown signs of recovery in their business in Europe. Daikin Heavy Industries' offshore engineering export volume doubled year-on-year in the first quarter, reaching a historical high, with orders already scheduled until 2027. Currently, Daikin Heavy Industries' offshore wind single pile order volume has accounted for over 30% of the European market. Attention should be paid to the profit recovery brought by offshore wind construction in the second quarter In terms of inverters, the inventory adjustment in European channels has ended, returning to normalization, and demand is potentially set to recover. According to the first-quarter performance forecasts and public investor research meeting minutes from some inverter companies: "Europe has recently reached inventory normalization after two years of high inventory, and demand is expected to return to normal," and "In some European markets, demand continues to grow driven by policy guidance, energy transition, and economic factors." Among them, the second and third categories are mainly linked to the supply side. Look for potential categories to achieve European exposure and market share expansion this year, focusing on motorcycles and new energy passenger vehicles. For motorcycles, pay attention to the expansion of Chinese large-displacement independent brands in the European market. For new energy vehicles, focus on the opportunities for domestic brands' expansion after the framework agreement on minimum export price commitments is established and the additional tariff exemptions. In addition, the recent easing of restrictions on communication equipment from China by Germany also presents opportunities for domestic 5G/6G equipment to re-enter the European market. In 2020, Germany initiated a "trusted country" review, restricting Chinese equipment. Subsequently, in 2021, it announced a gradual removal of Huawei equipment over five years. However, in April of this year, media outlets such as WirtschaftsWoche reported that the new German government coalition agreement removed the "trusted country" restrictions on Huawei, opting instead for "trusted technology standards." If the policy can be implemented, it is expected to reopen the European market for Chinese equipment manufacturers and supply chains. This article is authored by Liu Chenming, Zheng Kai, Yu Kecheng, and Yang Zezhen, sourced from Chenming's Strategic Deep Thinking, original title: "【GF Strategy】Comprehensive Lifting of Interaction Restrictions: Breakthrough in Exports to Europe" Risk Warning and Disclaimer The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk