INTERVIEW: China’s weak economy bigger worry than Trump’s trade war, say EU firms

European firms in China are primarily concerned by the country's economic slowdown, marked by overcapacity, weak demand, and deflation, which has pushed the business outlook to its lowest point since the early 2000s, according to the EU Chamber of Commerce. While the economic malaise is the top challenge, China's rare earth export controls, a consequence of broader trade tensions, are causing acute supply chain disruptions and production stoppages for EU companies, contributing to an increasingly unpredictable operating environment amid rising EU-China political disputes and retaliatory tariffs.

Analysis

The primary concern for European companies operating in China has shifted from trade disputes to the country's severe domestic economic slowdown, which has driven the business outlook to its lowest point since the early 2000s. According to the EU Chamber of Commerce in China, 71% of its members identify the Chinese economy as their main challenge, citing structural issues such as 'huge overcapacity' in manufacturing, persistent deflation from intense price wars, and weak consumer demand. This environment is eroding profitability and amplifies the burden of long-standing regulatory hurdles. The International Monetary Fund's forecast of 4% growth for China, falling short of Beijing's 5% target and well below the historical 9% average, corroborates these concerns. Compounding this economic malaise is a dramatic increase in operational unpredictability stemming from geopolitical tensions. China's export controls on rare earths—where it dominates 70% of mining and 90% of refining—are causing 'acute' supply chain disruptions and 'production stoppages' for EU firms. This situation persists despite diplomatic efforts and highlights the tangible impact of 'de-risking' policies and retaliatory measures, such as the EU's tariffs on Chinese EVs and Beijing's subsequent action against EU agricultural products, creating a volatile environment where firms can be unexpectedly impacted by political disputes.

Key Decisions for Investors

• Investors should rigorously assess the China revenue and margin exposure of European industrials and consumer discretionary firms, as the combination of deflation, overcapacity, and weak demand is directly compressing profitability.
• Monitor companies in high-tech manufacturing, automotive (especially EVs), and defense for supply chain vulnerabilities, given that China's export controls on rare earths are now causing tangible production stoppages.
• Factor in a higher risk premium for European assets with significant China-related operations, as the unpredictable nature of retaliatory tariffs means any sector could be targeted in response to political disputes, diminishing operational stability.
• Re-evaluate long-term valuation models predicated on the 'China growth story', as the current environment of 4% forecast growth and declining business sentiment represents a structural shift from the high-growth era.