Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China Is Exporting Deflation Through Steel and Solar
Transcript
- Lucas: So last week I was pricing a small solar setup for my roof — nothing fancy, just enough to offset the AC in summer. And the quote I got was almost thirty percent lower than what a neighbor paid for the same system two years ago. Luna: That's a huge drop. Is that just technology getting cheaper, or is there something else going on? Lucas: Technology plays a role, sure. But the main driver is that China is exporting deflation. And I don't mean that as a metaphor — I mean literally, the price of industrial goods globally is being pushed down by Chinese overcapacity in steel, solar panels, and lithium batteries. Luna: Let's talk about that. When you say 'exporting deflation,' you're saying China's surplus production is lowering prices for everyone else? Lucas: Exactly. Take solar modules. The global price per watt has fallen from about twenty-five cents in early 2024 to around fifteen cents today. Chinese manufacturers account for more than eighty percent of global production, and they're operating at huge scale with state-backed financing. So they can produce at a loss for longer than any competitor. Luna: And that's where the anti-dumping investigations come in. The EU just opened a case on Chinese solar glass, and India has had tariffs on Chinese solar cells for a while. Lucas: Right. But here's the thing — even with tariffs, the landed price of Chinese solar panels in Europe is still below what European manufacturers can produce. The European Solar Manufacturing Council says its members are running at about twenty percent capacity because they can't compete. Luna: So it's not just solar. Steel is the other big one. Lucas: Steel is massive. China produces more than half the world's steel — about one billion metric tons a year. But domestic demand has been declining since 2021 as the property market collapsed. So that surplus steel has to go somewhere. Chinese steel exports hit a record in 2025, and they're on pace to break that again in 2026. Luna: And that depresses steel prices everywhere. I've seen data that hot-rolled coil prices in Europe are down about twenty-five percent year-over-year. Lucas: Which is great if you're a buyer — automakers, construction firms. But it's devastating for steel mills in Europe, the U.S., and even in India. The Indian Steel Association has been lobbying for safeguard duties because Chinese steel is flooding their market too. Luna: Is this a deliberate strategy from Beijing? Or is it just a side effect of overinvestment? Lucas: I think it's mostly a side effect. The Chinese government has been trying to rein in overcapacity in steel and solar for years — they've set capacity swap rules, closed inefficient mills. But local governments have their own incentives. They want jobs and tax revenue, so they keep subsidizing production. Luna: So it's a coordination problem within China itself. Lucas: Exactly. And then you add the yuan factor. The yuan has been stable around 6.8 per dollar for months. That makes Chinese exports cheaper in dollar terms compared to if the yuan had appreciated. It's not a deliberate devaluation — but the stability itself is a policy choice that supports export volumes. Luna: Let's talk about lithium batteries, because that's the third big category. I've read that battery cell prices have fallen below fifty dollars per kilowatt-hour, which is a threshold that makes EVs cheaper than ICE cars without subsidies. Lucas: That's the headline, and it's real. But the margins for Chinese battery makers are razor thin. CATL and BYD are essentially competing on volume, and they're driving down prices so fast that smaller manufacturers in South Korea and Japan are struggling. Luna: So the countries that benefit from cheap solar panels and cheap EVs might still lose in the long run if they become dependent on Chinese supply. Lucas: That's exactly the policy debate right now. Do you accept cheap imports to meet your climate goals, even if it means hollowing out your own industrial base? The U.S. Inflation Reduction Act tries to do both — subsidize domestic production while still allowing some Chinese content. But the tension is real. Luna: And let's not forget that China itself is dealing with deflationary pressures. Consumer prices are basically flat, and producer prices have been negative for almost two years. Lucas: Right. So China is exporting the deflation it can't get rid of at home. The trade balance data we saw this morning — exports of goods and services are up year-over-year, but the surplus is shrinking because imports are growing even faster. That actually tells you domestic demand might be recovering a bit, but the overcapacity problem remains. Luna: It's a strange position for the world's second-largest economy. Normally you'd expect a big economy to import inflation or export it. But China is exporting falling prices. Lucas: And that has real consequences. If you're a manufacturer in Vietnam or Mexico, you can't compete with Chinese pricing. So you either move up the value chain or you get squeezed out. The World Bank has flagged this as a risk for emerging markets that rely on light manufacturing. Luna: One thing we haven't mentioned is how the euro plays into this. With the euro stronger against the dollar, European buyers get even cheaper Chinese goods in euro terms. Lucas: That's a good point. The euro is around 1.14 to the dollar, which is about where it's been. But if the euro strengthens further, it amplifies the deflationary impact on European industry. You could see more protectionist measures as a result. Luna: So what's the bottom line for someone listening? If you're buying solar panels or a steel-intensive product, you're benefiting right now. But if you work in manufacturing that competes with China, the pressure isn't letting up. Lucas: Exactly. And I think the key takeaway is that this isn't a temporary blip. China's overcapacity is structural — it's built into the incentive system of local government financing and state-owned enterprise goals. It's going to take years to work through. Luna: That's the kind of macro context we try to bring every episode. And it's one reason we keep this show free and ad-free — we want people to have access to this analysis without paywalls or sponsored segments. Lucas: Yeah, we deliberately don't run ads. If you find value in walking through the economy with us, the best way to support that choice is a small contribution at buy me a coffee dot com slash fexingo. It helps us keep the lights on and the content open. Luna: And we appreciate every bit of support. Now, back to the deflation story — I want to ask about the response from other countries. India just raised tariffs on Chinese steel, but is that enough? Lucas: Tariffs help domestic producers in the short term, but they raise costs for downstream industries. India's solar developers, for instance, are struggling because tariffs on Chinese cells make their projects more expensive. It's a trade-off between protecting industry and meeting renewable energy targets. Luna: So there's no easy answer. Lucas: No, and that's why this debate is going to dominate trade policy for the next few years. The question is whether countries can coordinate a response — maybe through the WTO or through minilateral agreements — or whether we'll see a patchwork of tariffs and subsidies that fragment global supply chains. Luna: And in the meantime, consumers get cheaper solar panels, cheaper EVs, and cheaper steel. But at what cost to industrial resilience? Lucas: That's the trillion-dollar question. And it's one we'll keep tracking as the data comes in. Thanks for listening to China Economy with Fexingo.