November 20, 2023
I have been chronicling China’s real estate debacle for over a year, initially as an accident developing in slow motion, accelerating in the spring and occurring in full speed this summer. It became front page news in August and now many are wondering if China is about to implode.
The real (estate) facts:
- This is a major issue. By most accounts, real estate accounts for 20-25% of China’s economy when related industries such as construction, steel, cement, lumber and glass are considered. Combined with falling exports, that’s nearly 40% of GDP currently in recession.
- More importantly, real estate accounts for nearly 70% of Chinese household savings; many of the 790 million apartments and other properties were bought as investments to rent out and accumulate wealth. With a thin and unreliable social safety net, Chinese created their own personal financial cushion.
- There is no property tax in China. The low carrying cost supported a buy-borrow-hold strategy amid a fast rising economy.
- As more and more apartments were built, their value as rentals declined. Investors were left with apartments whose rent wouldn’t pay for their mortgages. In many cities, annual rent has been 2.0% or less of an apartment’s purchase price, while mortgage interest costs have been 5-6%.
- Demand for housing has cratered. Real estate sales have declined some 50% from their 2020 peak levels, partly due to short term economic reasons but partly because the number of births and marriages has been steadily declining, causing the total population to peak out last year amid a very overbuilt market.
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Home values are dropping, and in all likelihood much more than the modest, single-digit figures in official data.
- In reality, prices for existing homes have fallen 15% in the past 24 months. Prices of new homes have not fallen as much, but only because local governments prevented developers to cut prices drastically. Sales of new homes have plunged as a result.
- But new home prices fell 0.4% in October after -0.3% in September, the most in 8 years, signaling the property slump is worsening.
- Existing home prices sank 0.6% in October, the most since October 2014.
- The contraction has shaken household confidence. Not only hurting demand but also questioning the wisdom of such investments. By some estimates, Chinese cities now have between 65 and 80 million empty apartments, a scary amount of potential supply if people lose confidence.
- The pandemic exacerbated the confidence problem. Costly mass testing and quarantines left local governments with little money, contributing to a new stinginess this year in social policies, as well as cuts in civil servants’ pay.
- The hit to wealth is leaving households feeling poorer, reducing their consumption appetite right when China needs it. And as companies lower their expectations for profits and scale back investment and hiring plans, the impact mushrooms. “Companies are laying people off or even shutting down. My boyfriend and I are too afraid to buy.”
- Since late 2021, more than 50 Chinese developers have defaulted on their debt.
- Evergrande’s debacle was largely expected given its reckless management but the failure of Country Garden and Sino-Ocean Group, both relatively conservative developers, indicates that “the stress has become systemic”.
- In China, most new properties are pre-sold: homebuyers have to actually pay the full price before construction. Developers are thus incentivized to pre-sell more apartments to get more interest-free funds with which to further grow their businesses.
- At the end of 2022, 40% of homes bought over the last several years remained incomplete.
- This Ponzi-like time bomb needs immediate attention and the government has helped developers get additional financing, but conditional on their quickening housing completion and deliveries amid fears that unfinished buildings would lead to broader social unrest among homebuyers.
- So, completions rose sharply, but new sales remained depressed, “leading to further bleeding of financial resources among developers. Making matters worse, many local governments have forbidden developers from cutting prices to liquidate inventories, further hindering their sales and exaggerating funding difficulties.”
Contagion?
- Bloomberg Intelligence says that the amount of soured real estate loans at the 10 biggest lenders will likely soar to $120 billion next year assuming the rate of nonperforming loans triples from 2022.
- Developers accounting for 40% of Chinese home sales have defaulted on their debt obligations since 2021, according to JPMorgan. Those defaulted companies, mostly private, have issued around $110 billion worth of high-yield offshore bonds.
- JPMorgan expects 10% of all Chinese high-yield corporate debt to default – up from a previous estimate of 4%.
- The recent restructuring offers will see offshore creditors taking haircuts of up to 70% to 80% according to six Reuters sources.
- But all major banks are state owned in China and the state will always act as a solid backstop. A banking contagion is not possible.
Aggravating circumstances:
China’s fiscal policy is administered largely by local governments, as dictated by leaders in Beijing. Local governments meet their infrastructure and other investment growth targets by relying heavily on land sales to real-estate developers, on construction activity and on massive bond issuance.
Pre-Covid, regional governments got about 33% of their revenues from land sales. That dropped to 23% in 2022.
Cash-strapped local governments have limited resources for new stimulus. Some are having trouble servicing their debt and now need financial support from Beijing.
The Financial Times:
The enormous amount of borrowing accumulated by China’s provinces, much of it through opaque local government financing vehicles [LGFV] has become a huge problem for the world’s second-largest economy. Increased tension between local and central governments over the debt comes as Beijing searches for new models of regional economic growth. (…)
Banks saw LGFVs — implicitly backed by local governments — as safe clients, and by the end of 2022, China’s official local government debt totalled Rmb94tn [USD$12.9tn], according to an estimate from Goldman Sachs.
Local government finances collapsed during the coronavirus pandemic, in part because of a surge in Covid-related public spending and a drop in land sales on which they relied for revenue. With a massive pile of onshore debt repayments due in 2023 and 2024, the stress on local governments, already struggling during an economic slowdown, has intensified.
(…) “Local governments’ reliance on central government, and on debt issuance, is getting worse and worse in a very rapid way.”
The housing boom, with both buyers and builders heavily leveraged, funded leveraged local governments which leveraged themselves further using leveraged LGFVs, all to helped Beijing achieve its growth objectives.
The ensuing oversupplied housing market was the weak link that could not break if the growth engine was to keep delivering.
For years, China’s debt-fueled property boom underpinned one of the world’s great economic miracles. Even though it was bound to be unsustainable, the speed at which it now seems to be unraveling has been startling, compounding challenges for a Chinese economy already beset by weak consumer demand, slumping exports and growing tensions with the US.
In 2020, President Xi tried to stop the real estate debt buildup with his Three Red Lines but the pandemic quickly brought the issue to the fore. After Evergrande’s liquidity problems erupted in broad daylight, buyers and lenders quickly got cold feet.
In effect, two huge problems need to be effectively and simultaneously addressed: housing and local government finances.
Local government finances
The China Securities Regulatory Commission vowed to prevent LGFV bond defaults. There are thousands of these LGFVs spread out across the country.
Various estimates suggest the companies funded anything from a fifth to more than half of China’s total infrastructure spending.
A record amount of LGFV debt is soon maturing. Meanwhile, local governments, especially in poorer areas, are seeing revenues drop due to a two-year slump in home sales.
As Bloomberg explains, if the central government avoids a bailout of LGFVs, the burden of repayment will fall increasingly on local governments or on banks tasked with lowering interest rates and extending maturities on the debt. Both options will limit the capacity of local governments and banks to subsequently support economic growth.
In a statement directed at local authorities, the Ministry of Finance in February said: “If it’s your baby, you should hold it yourself . . . The central government won’t bail [you] out.”
But, locals say, “bridges and roads are built in response to [Beijing] calls for economic growth and poverty alleviation. Why should the localities now shoulder all the cost on behalf of the central government?”
Seeking solutions, Beijing goes the simple way, allowing provinces to raise about 1 trillion yuan ($137 billion) from bond sales, which can be used to pay-off LGFV debt. It is also considering using the central bank to provide liquidity to the most-strained LGFVs, local media Caixin reported. But the overall debt remains the same, at best.
Reuters reports that a central bank-backed fund might issue 1 trillion yuan ($148.2 billion) in loans to cash-strapped developers, a life-saver with a slowly sinking weight, if you will.
Another idea is to scrap the practice of pre-selling properties at their full price and require property developers to bear more risk for delayed construction times. Obvious, but untimely. How will builders finance their activities?
Chinese authorities could consider how the U.S. dealt with its Savings and Loans problem in the 1990s and create a Chinese Resolution Trust to take care of the bad debt and allow the economy to function normally while the “CRT” gradually works the problem off.
The Resolution Trust Corporation was a U.S. government-owned asset management company charged with liquidating assets, primarily real estate-related assets such as mortgage loans, that had been assets of savings and loan associations declared insolvent by the Office of Thrift Supervision as a consequence of the savings and loan crisis of the 1980s. It also took over the insurance functions of the former Federal Home Loan Bank Board. (Wikipedia)
Whatever the solutions, Beijing needs to cleanup the LGFVs and provide local governments with more stable and predictable revenue streams such as a property tax.
Obvious, but also untimely given weak domestic demand.
On September 7, 2023, the “Legislative Plan of the 14th National People’s Congress Standing Committee” (the “Plan” that outlines and prioritizes the legislative tasks during its five-year term) was released to the public.
However, the revision of the real estate tax legislation and the Personal Income Tax Law did not appear in this legislation, suggesting that the Party is very concerned with the economic situation. A reform of personal taxation is inevitable, but only when conditions are favorable.
Housing
So far, Beijing has announced modest piecemeal measures essentially aiming at reducing carrying costs for both buyers and lenders.
The moves highlight a dilemma facing Beijing as it seeks to boost borrowing by cutting interests rates while at the same time needing to preserve financial stability. Lower lending rates would reduce banks’ revenue and profitability, with the PBOC highlighting those risks in a report last month.
“Protecting banks’ net interest margins is the main motivation behind the smaller-than-expected cuts to LPR in our view,” Goldman Sachs Group Inc. economists including Maggie Wei wrote in a note. (…)
Banks need to maintain “reasonable profits and net interest margins” so they can serve the real economy and prevent financial risks, the PBOC said.
Meanwhile, the consumer is hunkering down, bruised by the pandemic and the government actions, or lack thereof. Faced with a slower economy, a weak housing market, a very thin and unreliable social safety net, little understanding of what’s really going on and low overall confidence levels, people are paying down debt and boosting their already high savings, further aggravating the slowdown.
The central government has remained wedded to a fiscal deficit target of 3% of GDP [U.S. = ~6%] and Xi in the past has warned against the trap of “welfarism,” which senior officials say can lead to “laziness.” (…)
While Xi hasn’t abandoned the party’s longstanding interest in top-line economic growth, he’s added a host of other objectives for officials to work towards. Along with controlling financial leverage, he’s repeatedly told party members and bureaucrats that national security, risk preparation and lower pollution shouldn’t be sacrificed for the sake of higher growth. It’s a distinction he’s struggled to ram home.
“Most cadres can actively adapt to the new development requirements, but some cadres cannot keep up,” Xi said in remarks released earlier this summer. “Some think that development is about launching projects, doing investments, and expanding scale.”
Michael Hirson, a former US Treasury attaché in Beijing, notes that “Xi has emphasized at several key points this year that local officials should stay disciplined against financial risks and not chase short-term goals.” But “now they are also being told to support growth. Many officials are thus likely to see the safe course of actions as taking modest efforts at stimulus but nothing particularly bold.”
That leaves many observers concluding China will muddle through with targeted help for companies and limited measures to boost sentiment rather than an all-out stimulus plan.
But bold moves can’t be ruled out — particularly if the political risks get too high. After all, Xi allowed a sudden dismantling of Covid-era mobility restrictions late last year following spontaneous protests against lockdowns that included calls for his ouster.
“The bottom line is whether they’re willing to increase fiscal deficit,” Zhu said. “At the moment policymakers are still reluctant, but then maybe the economic reality may change their minds.” (Bloomberg)
The FT adds:
Parts of the economy are booming: electric vehicles, solar and wind power, and batteries. In those areas, investment and exports are growing at double-digit rates, exactly the kind of hi-tech, green growth that Xi wants. Even amid its austerity in some areas, the state is devoting resources to foster this form of growth, issuing bonds to fund high-speed rail and renewable energy infrastructure on a scale unmatched anywhere in the world, cheap loans for businesses, and generous support for consumer demand through tax breaks for EV buyers.
Trouble is, those new growth engines aren’t making up for the massive drag from the real estate slump.
Beijing estimates what it calls the “new economy” — its name for those green manufacturing sectors, plus other hi-tech areas like microchips — grew 6.5% on-year in the first half and accounted for a little more than 17% of GDP.
The WSJ:
China benefits from highly efficient manufacturing and advanced high-tech industries—witness its world-leading surge in production and exports of electric vehicles. China’s total debt levels, however, are higher than Japan’s. Remember, it took years and a financial crisis for the U.S. to overcome its debt-financed housing bubble and reliance on complex derivatives of the early 2000s.
China’s potential growth and productivity are significantly diminished. Estimates of a nation’s potential growth are framed by expansion of its labor force, capital and productivity. China’s population and labor force are falling owing to its one-child policy. Its capital stock may continue to rise rapidly, but under the current regime it will be driven by low-productivity government investment, including allocating resources to state-owned enterprises. Leaders in Beijing and the nation’s sprawling regulatory apparatus suppress the innovative and productive private sector.
The top leader’s apparent reluctance to embrace bold fiscal moves, which people familiar with the matter say is partly rooted in his ideological preference for austerity, is alarming a public that was already growing worried that Beijing might have shifted its overarching priority away from economic growth toward other matters such as national security.
If no bold fiscal moves, how to restore confidence, make consumers spend and invest in new housing?
Measures like reduced financing costs and lower down payments are like pushing on a string if there is little confidence that home values will not fall, that the economy will hold and that jobs and wages will be maintained.
At its core, China’s problems can essentially be boiled down to two – a mountain of debt and horrendous demographics as Absolute Returns Partners explain:
In the early stages of all debt supercycles, GDP and debt grows roughly 1:1; however, as the supercycle matures, it takes more and more debt to grow GDP. When the ratio reaches about 1:4, i.e. it takes $4 of additional debt to grow GDP by $1, the party is effectively over.
In the past 2-300 years, every single time ΔGDP-to-ΔDebt has reached 0.25 (+/-), the supercycle has collapsed – every single time, and that is where China is now!
The 2 issues, local governments’ debt and housing demand, are intertwined and the solutions must tackle both simultaneously. Tall order for a slow moving, centralised government.
So far, Chinese leaders have only been in reaction mode. In reality, a bold fiscal thrust that many believe is inevitable, is unlikely. Throwing money out to anxious consumers would only boost savings even more.
But Beijing is getting worried and wants to speed things up.
- The Shanghai Securities News last month: The issuance of new special bonds has entered the sprint stage and local governments have launched special bond project reserves for next year
The issuance of new special bonds has entered the sprint stage. Data show that the cumulative issuance of new special bonds nationwide has accounted for nearly 90% of the annual new special bond limit. At the same time, some regions have recently issued notices requiring the submission of special bond reserve projects in 2024.
September may be the highest monthly issuance of new special bonds during the year, and the remaining new special bonds may be basically issued in October. In addition, the probability of restarting the issuance of special refinancing bonds in the fourth quarter is increasing, and the amount is expected to be more than 1 trillion yuan. (…)
- And on October 24, China’s legislature allowed the deficit to exceed the traditional limit of 3% of GDP.
- This coincided with Xi’s first ever visit to the POBC:
Xi, along with vice premier He Lifeng and other government officials, visited the People’s Bank of China and the State Administration of Foreign Exchange in Beijing on Tuesday afternoon, said the people, asking not to be identified discussing private information. The vice premier also visited the nation’s sovereign wealth fund, the people added. (…)
Xi’s latest visit may prompt officials to dig further into their policy toolboxes to support the world’s second-largest economy and safeguard financial stability. Policymakers have so far refrained from using massive stimulus and outsized intervention in the markets.
More than impromptu courtesy visits… Something is being orchestrated.
Greg Ip reminds us that “In China’s last bout of banking trouble 20 years ago, bad loans were transferred at par value to state asset-management companies.”
Longer term, debt restructuring, stabilization of the over-extended housing market, local government reforms and a massive overhaul of personal taxation and the social safety net are likely to occupy Chinese leaders over the next several years.
That said, financially healthy Chinese consumers are part of the solution, if and when confidence returns.
China is not imploding, but it faces significantly slower growth going forward. Housing, for one, will be a slow growth sector for many years after confidence returns:
- Vacant apartments are 8-10% of all apartments and other properties.
- Economists at Nomura International HK Ltd. estimated in mid-July that Chinese developers had delivered only about 60% of the homes they pre-sold from 2013 to 2020. Of Country Garden Holdings’s $200 billion of debt, close to half is contract liabilities, or pre-sale deposits from homebuyers.
- Natural demand is tepid: China’s population is declining and aging, and family formation is very low.
- Homeownership is also high in China, with over 80% of households owning a home per Nomura.
- Immigration in China is almost non-existent.
Greg Ip on October 19:
The IMF sees the country’s growth averaging just 4% over the next four years, down from its projection of 4.6% a year ago.
The IMF has also boosted projections of Chinese government deficits, which they now see swelling from 7.1% of gross domestic product this year to 7.8% in 2028. Among major economies only the U.S. comes close. (…)
Local governments’ liabilities now equal 45% of GDP and including them in China’s government debt would vault the total to 149% of GDP by 2027, above Italy’s at 141%.
(…) the IMF estimates 30% of local government financing vehicles are “non viable without government support.”
This is a big problem for China’s banks, who hold roughly 80% of that debt. Just half the cost of restructuring that debt would saddle them with impairment charges of $465 billion—chopping 1.7 percentage points off the ratio of loss-absorbing capital to assets, the IMF estimates.
Chinese banks, relative to their global peers, aren’t that well capitalized to start with. And a recession would deplete that capital significantly, as stress tests the IMF conducted on banks around the world illustrate.
For China, the IMF simulated an adverse scenario in which growth averages 1% instead of 5% for three years and property values decline. The result: Chinese banks’ capital ratios would plummet from 11% last year to 7.1% in 2025, the worst of any region under the stress tests.
(…) the debts are too large and growth too slow for China to sweep bad loans under the rug as it did 20 years ago, said Martin Chorzempa, a China expert at the Peterson Institute for International Economics. He also worries that under Xi, the quality of governance has deteriorated.
Bloomberg:
China’s regional banks could incur a capital hit of 2.2 trillion yuan ($301 billion) from a growing debt crisis in the nation’s local governments, according to S&P Global Ratings.
In a downside scenario, about one fifth of the regional banks, which hold about $15.6 trillion of assets as of the end of 2022, could sink below the minimum regulatory capital adequacy ratio of 8% and require recapitalization, S&P analyst Michael Huang wrote in a report dated Wednesday.
What’s at stake for Western economies and financial markets?
Not much, listening to most economists focused on static statistics showing very limited exports to China.
(Wells Fargo) (Bloomberg)
But the potential effect goes well beyond these low export numbers given that China contributes more than 22% of total world growth.
Slower growth in China, particularly if because of real estate, infrastructure and trade, could negatively impact all commodities (China is the world’s dominant commodity importer) and be disinflationary, mitigating demand stemming from the worldwide environmental drive.
It could also likely boost the U.S. dollar, weakening U.S. debtors, potentially destabilizing many countries in the process.
A Chinese growth/financial shock could lead to tightening financial conditions but lower inflation would also incite Western central banks to quickly loosen monetary policies.
Fortunately, foreign bank exposure to China is rather low. Also, Chinese banks’ mortgage lending practices have always been very conservative and, given that the government controls most major banks in China, a serious contagion is very unlikely.
In all, a marked China slowdown would upset equity markets if only for the effect on multinationals’ profits (foreign revenues, USD). But it would likely boost the bond market thanks to slower growth and reduced inflation.
The Chinese are coming!
On the other hand, the Chinese government and Chinese entrepreneurs are not standing still. The real estate and LGFV issues are now well understood. So is the need to react to the tech war with the U.S.. Chinese decision makers are now urgently focused on impact mitigation (higher budget deficits) and new growth alternatives.
In addition to rapidly increasing its self-sufficiency on microchips technology and production, China will accelerate its macro rebalancing process, focusing on the service economy, its Belt & Road investments, high-value-added exports, and “New Manufacturing”, what Goldman Sachs calls “The New Three”: NEVs, battery and wind/solar power generation.
In effect, China will be resolving its domestic problems with massive growth initiatives aimed at boosting it exports of high value-added products.
Outside China, this will create significant economic challenges and exacerbate trade tensions.
China already has overcapacity in NEVs and its largest manufacturers are aggressively pushing their brands across the world (ex-USA), even building new manufacturing plants abroad.
Shipments of NEVs to the EU jumped 360% in 2022 and another 112% in the first 7 months of 2023. USB expects Chinese brands to grab 20% of the EU market by 2030. It was 3% in 2022 but exploded to 8% this year.
In fact, China has likely exported more cars than Japan in 2023, a true seismic shift that will certainly create major political and financial waves in 2024. Consultants at AlixPartners forecast that overseas car sales of Chinese companies will hit 9 million by 2030, boosting their global market share to 30%, up from 16% in 2022.
The battery market looks very similar given Chinese technological and cost advantages as the WSJ explains:
Having charged up in their massive home market, Chinese electric-vehicle-battery firms are becoming major export players, too. The West’s efforts to protect its own markets might prove too little, too late.
Chinese firms are also eyeing big new factory expansions in Europe itself, and in U.S. free trade partners, as a way to sidestep current and future import restrictions—much like Japanese carmakers did in the U.S. in the 1980s. (…)
Contemporary Amperex Technology, or CATL, and carmaker BYD are already the top two producers of EV batteries in the world. Outside China, Chinese battery manufacturers still lag behind South Korean rivals—the top three have nearly half the market. But if CATL keeps logging growth numbers as it did this year, that could change fast.
Meanwhile, American auto makers recently celebrated the signing a new labor contract:
The contract will add about $1.5 billion to Ford’s annual labor costs, equal to roughly 13% of its global operating profit based on the company’s most recent earnings guidance, according to J.P. Morgan
Ford’s per-hour labor cost, including benefits, would be around $67 this year and rise to about $88 by the final full year of the contract, in 2027, according to Wells Fargo. That is significantly higher than the labor costs of the foreign automakers, estimated in the mid-$50s per hour, and Tesla at $45 to $50. (WSJ)
A Reuters analysis of the estimated income included in recent job adverts from 30 Chinese auto firms showed hourly salaries of 14 yuan ($1.93) to 31 yuan ($4.27), with Tesla, SAIC-GM, Li Auto and Xpeng at the higher end.
Reuters:
While the average price of electric cars has risen in Europe since 2015 from 48,942 euros to 55,821 euros and 53,038-to-63,864 in the United States, it has dropped in China to 31,829 from 66,819 euros, taking it below the price of gasoline cars, according to a study by JATO Dynamics, which provides analysis on industry trends.
Europe is relatively open to vehicles imported from China, and Chinese vehicle makers as well as global manufacturers such as Tesla Inc are rushing to step up shipments.
Countering perceptions Chinese goods are lower quality, they have earned five-star safety ratings from European regulators. (…)
By contrast, high duties [27.5% vs 10% in the EU] in the United States on Chinese-made vehicles have so far kept China’s share of the U.S. auto market negligible.
But for how long?
At the recent Munich auto show, there were about 50 Chinese companies presenting their products.
Electric cars sold in China are roughly 40% cheaper than those sold in Europe, and 50% cheaper than in the US, according to research firm Jato Dynamics.
The average price of an EV in China was €31,829 ($34,096) in the first half of 2022, compared with €55,821 ($59,797) in Europe and €63,864 ($68,429) in the United States, the firm said in a report last year. (CNN)
Motor Trend last October 11:
Chinese cars are closer to the U.S. market than most people know. MotorTrend traveled to Mexico City, where there are Chinese-branded, Chinese-manufactured vehicles in North America—and they’re making a big impact.
Over the past three years, nine Chinese automakers have set up shop in Mexico, and today their wares represent 9 percent of all passenger vehicles sold there. That’s remarkable when you consider that just four years ago, Chinese vehicles weren’t represented in Mexico’s market share at all. But Chinese giants like BYD, Chery, and SAIC Motors have established themselves south of our border, offering quality products at attractive prices. (…)
Chinese manufacturers have expanded around the world, but choosing Mexico as a place to build and sell cars is a notably strategic move. Mexico has seen steady annual economic growth, and its residents purchase more than 1 million new cars each year.
But Mexico’s geopolitical landscape is especially attractive. Being a neighbor to the U.S., the world’s second-largest automotive market, has lured many foreign car companies to set up production plants in Mexico over the years. The North American Free Trade Agreement (NAFTA), which went into effect on January 1, 1994, between the U.S., Mexico, and Canada, made it easier to export cars from Mexico into the U.S., and car companies used this opportunity to invest billions of dollars in the nation.
NAFTA was replaced on July 1, 2020, by the United States-Mexico-Canada Agreement (USMCA), which changed the rules for exporting cars around the region. Under the present deal, 75 percent of a vehicle must be built in North America for its maker to avoid paying import tariffs, and 70 percent of its steel and aluminum must be sourced from the region. The agreement also has provisions aimed at improving wages, such as stipulating that 40 to 45 percent of a vehicle must be made by workers earning at least $16 per hour.
What’s more, the U.S. Inflation Reduction Act of 2022 allows certain electric vehicles and batteries made in North America to qualify for the full $7,500 federal tax credit, a lifeline for Mexico’s auto production, as some U.S. car companies already produced or planned to produce EVs south of the border.
Some Chinese car companies such as Chery, SAIC Motors, and BYD are looking to build plants in Mexico. For now, BYD says it doesn’t intend to enter the U.S. market, but Bryan Wu, Chery Mexico’s executive vice president, told MotorTrend the automaker does plan to do so, but he declined to specify when.
California and 10 other states (107 million people, 32% of the U.S. population) currently have legislations banning the sale of new gasoline cars by 2035.
President Biden’s Executive Order 14057 mandates that all new light duty vehicles added to the government fleet be 100% zero emissions by 2027, and that the entire fleet of government-owned vehicles with ICE engines be phased-out and replaced with 100% all-electric vehicles by 2035-2040.
Will Americans accept to buy cars and trucks at twice what most other people in the world pay. Can America afford that?
According to the Bureau of Labor Statistics, “Transportation equipment manufacturing” employs 1.8 million people, 1.1% of the U.S. labor force.
It’s not only vehicles. Most gas-powered equipment and tools will soon be battery-powered, mostly using Chinese batteries.
Political fights ahead: costs/competitiveness vs American jobs vs climate change…
Explosive!
It will be electric!