China's Auto Sector Struggles Under Weight of Price Wars and Overcapacity

Economic

Summary:

China’s automotive industry faces mounting financial stress as aggressive price competition and overcapacity drive down profitability, inflate debt, and delay supplier payments, prompting regulators to intervene...

Overcapacity and Price War Erode Financial Stability

China’s auto industry is showing clear signs of financial strain, with a sustained price war and production overcapacity triggering a broad deterioration in performance metrics. According to data from LSEG covering 33 listed Chinese automakers, the average time to pay suppliers has lengthened considerably from 99 days in 2019 to 108 days in 2024. This trend underscores how manufacturers have increasingly relied on delaying payments to conserve liquidity, effectively treating suppliers as de facto lenders.

Among major automakers, BYD extended its payment period to 127 days in 2024. While the company noted a marginal improvement from 139 days in 2019, this still places it significantly above international standards, where European firms typically settle within 40–50 days. Geely Automobile’s average payment time rose sharply to 193 days, with no official comment provided. In contrast, Great Wall Motor reduced its cycle to 94 days, bucking the sector trend.

New Regulations Target Unfair Credit Practices

To address growing supplier vulnerability, China implemented a new regulation on June 1, 2025, mandating that large enterprises must settle payments for goods and services within 60 days. The rule is designed to create a fairer ecosystem and prevent dominant automakers from squeezing smaller suppliers, a practice described by Joerg Wuttke of DGA-Albright Stonebridge Group as “turning suppliers into bankers.” The shift aims to enforce accountability across the supply chain and restore liquidity at the vendor level, which is vital for production continuity and innovation investment.

Companies like Nio and Xpeng, both still operating at a net loss, recorded extreme payment cycles of 223 and 237 days, respectively. Despite their prolonged deficits, both companies pledged compliance with the new rules, highlighting rising regulatory pressure to conform.

Inventory and Debt Balloon as Profitability Deteriorates

The financial burden is also reflected in inventory and debt metrics. Combined inventory levels more than doubled to 370 billion yuan in 2024 compared to 2019, as manufacturers flooded dealers with unsold vehicles to meet inflated sales targets. This behavior exacerbates financial stress across the value chain, contributing to stagnation and operational inefficiencies.

Total sector debt jumped 56% to 959 billion yuan, while the median debt-to-equity ratio climbed to 51.3%, up 21 percentage points from 2019. These figures signal deteriorating balance sheet health, with rising leverage putting pressure on future borrowing capacity.

Profitability has also been squeezed. The sector’s median net profit margin fell to just 0.83% in 2024, compared to 2.7% five years earlier. The exception is BYD, which expanded its margin to 5.4% thanks to a successful shift in its revenue mix raising automotive contributions from 49.5% to 79.4%. This pivot helped the company remain resilient amid sector-wide stress, even as its payment timelines remain extended.

Regulatory Oversight Set to Intensify

China’s leadership is increasingly vocal about the risks of unchecked competition and excess capacity. In early July, top policymakers pledged to tighten supervision over predatory pricing and accelerate the phasing out of outdated production facilities, with an eye toward rebalancing supply and restoring industry viability. These moves reflect a coordinated policy effort to shift from short-term volume growth to long-term sustainability.

The broader concern lies in systemic risk. With automakers burdened by weak margins, elevated inventories, and overreliance on supplier credit, there’s an increased chance of supply chain disruptions or insolvency events that could ripple across the economy. The enforcement of the new payment regulation is an early step toward stabilization, but a structural recalibration possibly including consolidation is likely necessary to restore healthy market dynamics.

China’s automotive industry, long a symbol of rapid industrial expansion, is now confronting the limits of volume-driven competition. The combination of overcapacity, debt, delayed payments, and razor-thin margins has triggered a policy response aimed at reform. As regulatory oversight deepens and credit terms tighten, automakers will need to adapt by focusing on efficiency, profitability, and supply chain responsibility. Without meaningful restructuring, the sector risks deeper instability in the years ahead.

Source: Reuters

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Economic

Tariff Threat Highlights Political Undertone in Trade Talks

President Donald Trump’s recent comments targeting India’s participation in the BRICS forum have injected fresh uncertainty into what had appeared to be nearing a resolution in India-U.S. trade negotiations. Trump warned that India could face a 10% tariff, grouping it with other BRICS nations he described as “anti-American.” This follows an earlier announcement of a 50% tariff on Brazilian goods, which dramatically escalated his confrontational trade stance after the BRICS summit in Rio.

While this shift appears to be a reaction to BRICS’ growing alignment on reducing U.S. dollar dominance, Indian officials emphasized that their engagement in the bloc is rooted in pragmatic financial hedging not geopolitical antagonism. They reiterated that India does not support a unified BRICS currency and views local currency trade as a tool to mitigate transaction risk, not challenge dollar hegemony.

India Balances Geopolitical Pragmatism with Economic Stakes

Behind the scenes, Indian negotiators remain cautiously optimistic. They recognize that the August 1 tariff deadline and Trump’s rhetoric may serve more as a negotiation tactic than a firm policy shift. According to insiders, New Delhi has already presented its final offer to Washington, which includes expanded market access for American goods and services and significant concessions to lower reciprocal duties. India is now awaiting a formal U.S. response.

In return, New Delhi hopes for relief from the current 26% reciprocal tariffs and confirmation of a broader trade agreement. Analysts suggest that Trump’s latest warning may be calibrated to extract additional trade concessions, rather than outright derail talks. As Mohan Kumar, a former Indian trade envoy, explained, the U.S. likely distinguishes between India’s economic motives and those of more assertive BRICS members like China or Russia.

Strategic Alignment Still Anchors Bilateral Ties

India’s position as a regional counterbalance to China continues to underpin its importance to U.S. strategic planning. The Biden and Trump administrations alike have viewed India as an indispensable partner in Indo-Pacific security. Earlier this year, U.S. Vice President JD Vance underscored this partnership by calling the U.S.–India alliance central to the 21st century’s geopolitical balance.

This strategic value may help India avoid harsher trade penalties, especially as New Delhi takes over the BRICS chairmanship in 2026, where it will likely aim to moderate the bloc’s anti-Western leanings. India’s neutral stance on reserve currency reform and its refusal to endorse de-dollarization offers Washington a diplomatic off-ramp to differentiate its response from how it treats Brazil or Russia.

Domestic Politics and South Asia Tensions Add Complexity

Tensions have recently surfaced on other fronts. Trump’s claim that trade was used to broker a ceasefire between India and Pakistan in May has not been well received in New Delhi. Prime Minister Narendra Modi publicly distanced himself from that narrative, especially as Washington has resumed outreach to Pakistan’s military leadership. This undercurrent of mistrust may influence how Indian leaders assess the durability of any trade guarantees offered by the Trump administration.

Nonetheless, Indian officials and opposition figures, including Shashi Tharoor, remain hopeful. Tharoor emphasized that a finalized trade agreement would signal “very, very healthy” bilateral ties and could restore confidence in the partnership’s economic track, especially after months of friction.

Trump’s renewed tariff threats have placed India in a difficult diplomatic position, especially as it balances BRICS engagement with its deepening ties to the U.S. However, India’s non-aligned currency stance, strategic economic offers, and geopolitical value are likely to temper Washington’s final decision. The trade talks remain on track, and if both sides can navigate the political theater, a mutually beneficial agreement is still within reach. What unfolds between now and the extended August 1 deadline may determine whether narrative overtakes substance or whether strategic pragmatism prevails.

Source: Bloomberg

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Positive Momentum Emerges From Washington Talks

Indonesia’s trade negotiations with the United States gained traction this week after a key meeting in Washington between Indonesian Economic Minister Airlangga Hartarto and top U.S. officials, including Commerce Secretary Howard Lutnick and U.S. Trade Representative Jamieson Greer. The talks addressed the looming 32% U.S. tariff on Indonesian exports, which is scheduled to take effect on August 1, and provided a platform to explore expanded cooperation beyond short-term tariff issues.

Minister Airlangga characterized the discussions as “positive” and reaffirmed that both parties shared a mutual understanding of the broader stakes. Over the next three weeks, negotiations will intensify, with a shared commitment to achieving a resolution based on the principle of mutual benefit, his ministry stated.

Critical Minerals Partnership May Reframe Economic Ties

A key development from the meeting was the emerging focus on critical minerals. Indonesia, home to some of the world’s largest reserves of nickel, copper, and cobalt, is positioning itself as a key partner in the U.S. strategy to secure supply chains for clean energy technologies, including electric vehicles and battery storage. Discussions suggest the two nations are exploring a strategic partnership framework that could offer the U.S. privileged access to Indonesia’s mining sector while potentially exempting Indonesia from punitive tariffs in return.

This marks a shift from transactional trade relations toward structural alignment, where strategic resources and long-term investment cooperation may carry more weight than immediate trade deficits. As Indonesia plays a growing role in the global energy transition, a bilateral mineral partnership could serve both geopolitical and economic objectives for Washington.

Indonesia Offers Trade Concessions and Investment Incentives

To bolster its negotiating position, Indonesia has proposed reducing tariffs on U.S. imports to near zero, and pledged to boost purchases of American goods. According to Airlangga’s ministry, this expanded cooperation could amount to approximately $34 billion in new trade and investment activity. These commitments would involve increased imports of energy products, wheat, corn, and cotton, with several preliminary commercial agreements already signed between Indonesian and U.S. companies.

This strategy reflects a calculated trade-off: by offering greater access to its domestic market and investment channels, Indonesia aims to preserve its export competitiveness in key sectors such as palm oil, metals, and textiles.

Geopolitical Relevance and Economic Stakes

Indonesia’s status as a G20 economy and a regional manufacturing hub adds weight to the discussions. The country’s resource endowment and demographic scale make it a central player in the Indo-Pacific economic landscape. The evolving negotiation also comes at a time when the U.S. is actively recalibrating its trade relationships in Asia to reduce dependency on China and secure critical raw materials.

For Indonesia, avoiding the 32% tariff is crucial not only to preserve export volume but also to maintain investor confidence, particularly in the mining and manufacturing sectors. A favorable agreement could insulate its industries from rising global protectionism while enhancing its profile as a key trade partner in Washington’s Asia strategy.

The current negotiations between Indonesia and the U.S. signal more than just a tariff adjustment they suggest the potential emergence of a strategic economic partnership centered on critical minerals. As both sides push to finalize a deal before the August 1 deadline, the outcome could redefine bilateral ties and set a precedent for resource-based diplomacy in the new trade era. If successful, Indonesia may secure not only tariff relief but also a more influential role in global supply chains critical to clean energy and high-tech manufacturing.

Source: Reuters

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Wall Street Tech Surge Lifts Asia-Pacific Sentiment

Asian stock markets broadly tracked overnight gains on Wall Street, where major U.S. indexes rebounded following a tech-fueled surge. The Nasdaq Composite rose 0.9% to a new record, led by Nvidia’s 1.8% rally, which temporarily pushed its market capitalization beyond $4 trillion. The broader S&P 500 and Dow Jones added 0.6% and 0.5% respectively, with renewed optimism surrounding artificial intelligence continuing to outweigh policy risks from President Trump’s escalating trade threats.

The positive spillover was evident in South Korea’s Kospi, which climbed 1% to 3,164.26, boosted by semiconductor gains and the Bank of Korea’s decision to hold interest rates steady. Nvidia’s strong performance lifted sentiment around chipmakers, many of which are major components of Korea’s export-heavy economy.

Regional Markets Mixed but Firmly Anchored

Australia’s S&P/ASX 200 rose 0.6%, supported by strength in mining and financial sectors, while China’s Shanghai Composite added 0.4% as investors weighed cautious optimism against ongoing warnings from regulators about crypto-linked fundraising risks. The Hang Seng Index in Hong Kong edged up 0.1%, although gains were limited by lingering concerns over local property stocks and weak capital inflows.

In contrast, Japan’s Nikkei 225 declined 0.6% to 39,583.78, underperforming regional peers despite the supportive external environment. The drop reflects growing investor caution ahead of Japan’s July 20 national election, rising bond yields, and trade uncertainties following Trump’s plan to raise tariffs on Japanese imports to 25% in the absence of a bilateral deal.

Currency and Commodity Movements Reflect Cautious Optimism

The U.S. dollar eased slightly, falling to 146.21 yen from 146.26, while the euro edged up to $1.1736, supported by expectations that the Federal Reserve will cut interest rates later this year. These movements suggest a marginal decline in safe-haven demand as risk appetite recovers, but remain within tight ranges as markets await more clarity on global trade dynamics.

Oil prices were little changed, with WTI crude slipping 6 cents to $68.32 and Brent crude losing 8 cents to $70.14. Crude remains under pressure from rising U.S. inventories and mixed signals from OPEC+ on output adjustments, though geopolitical risks in the Middle East continue to underpin a fragile price floor.

The global market rally, particularly in Asia, reflects a positive reaction to Wall Street’s tech momentum and Nvidia’s symbolic milestone. However, gains remain cautious and uneven, with underlying macroeconomic and policy risks such as Trump’s tariff strategies, volatile bond markets, and regional political developments still shaping investor behavior. As negotiations continue into the extended August 1 deadline, markets will be watching closely for signals of resolution or escalation in U.S. trade relations.

Source: AP

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Bond

Investor Caution Grows Ahead of Crucial Bond Auction

On Thursday, Japan's Ministry of Finance will auction 20-year government bonds in a test of market resilience amid growing fiscal and political uncertainty. Despite a brief pullback in yields during morning trade in Tokyo, interest rates on 10-, 20-, and 30-year debt remain elevated, reflecting persistent concerns over Japan’s expanding budget deficit and volatile global market conditions. The auction comes just ten days before a national election, with political parties promising fiscal stimulus and tax cuts raising fears of deteriorating fiscal discipline.

Investor hesitancy is particularly pronounced among large domestic institutions. According to Ryutaro Kimura of AXA Investment Managers, Japanese banks and life insurers are likely to sit on the sidelines, preferring to assess the post-election fiscal landscape before committing to super-long JGBs. This cautious stance follows similar patterns seen in earlier auctions and aligns with broader skepticism around long-term bond issuance in Japan’s current macro environment.

Yield Pressures Reflect Structural and External Forces

The sale is set against a backdrop of rising sovereign yields globally. U.S. Treasury yields recently climbed near 5% on 30-year bonds amid renewed fears of unsustainable fiscal spending. Japan is facing similar scrutiny, with concerns that additional stimulus measures such as cash handouts proposed by the ruling coalition and tax relief from opposition parties could widen the deficit and stoke inflationary expectations.

Compounding the domestic strain is uncertainty over trade policy. The U.S. has announced it will raise tariffs on Japanese goods to 25% starting August 1, unless a bilateral deal is reached. The prospect of deteriorating trade terms with the U.S., Japan’s second-largest export market, raises the risk of a technical recession, adding another layer of caution for fixed-income investors.

Auction Metrics in Focus: Bid-to-Cover Ratio and Tail Risk

Market participants are watching key indicators from the bond auction to gauge demand strength. The bid-to-cover ratio, which measures demand relative to the amount of bonds offered, will signal investor appetite, while the tail the gap between the average and lowest accepted prices will reveal how aggressively buyers are bidding. A wide tail would suggest weaker demand and could send shockwaves through the yield curve, particularly in the 10-year segment, which serves as Japan's benchmark bond.

Shoki Omori from Mizuho Securities warned that a poor auction result could spill over into other maturities, particularly if liquidity concerns in the long-end intensify. This concern is not hypothetical: May’s 20-year bond sale saw the largest tail since 1987, a sign of extreme caution, and parallels are already being drawn with that outcome.

Supply Reductions Offer Limited Relief

In response to prior auction volatility, Japan has already moved to reduce supply of long-dated bonds. The government announced a ¥3.2 trillion ($22 billion) cut in issuance of 20-, 30-, and 40-year bonds through March 2026. While this measure has supported recent 30-year bond sales, it has not reversed the overall trend of rising yields. According to Kazuya Fujiwara of Mitsubishi UFJ Morgan Stanley, the relatively stable liquidity of the 20-year sector might cushion some of the impact, but success will still hinge on market confidence and geopolitical clarity.

Major insurers remain wary. Meiji Yasuda Life Insurance recently stated it would avoid heavy exposure to long-term JGBs over the next one to two years, citing concerns about rising interest rates and uncertain supply dynamics. This withdrawal of long-horizon capital comes as the Bank of Japan, the dominant bondholder, continues to step back from aggressive bond buying, part of its slow exit from yield curve control.

This structural shift in the buyer base, combined with heightened supply risk and subdued global liquidity, has created a fragile demand environment that could be tested severely by today’s auction outcome.

The July 20-year JGB auction will be a pivotal moment for Japan’s bond market. A weak result especially one with a wide tail or low coverage ratio could reverberate across the yield curve and weaken investor confidence further. With fiscal policy in flux, U.S. trade pressure looming, and major institutional buyers stepping back, today’s auction may not just reflect investor sentiment, but also signal the bond market’s tolerance for Japan’s rising fiscal risks in the months ahead.

Source: Bloomberg

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Cryptocurrency

Rising Popularity of Stablecoins Spurs Regulatory Alarm

As the global interest in digital assets accelerates, a prominent Chinese industry body has raised alarms over fraudulent activities tied to stablecoins. In a statement released late Wednesday, the Beijing Internet Finance Association warned of rising incidents where unscrupulous individuals and institutions are promoting high-yield crypto schemes under the guise of financial innovation. These warnings come as stablecoin-related equities in China and Hong Kong have soared in recent months, with China’s concept stock index up 88% and Hong Kong’s equivalent more than doubling.

The association emphasized that many of these schemes leverage buzzwords such as “stablecoins,” “Web 3.0,” and “DeFi” to lure retail investors. In many cases, early returns are funded by capital from new joiners a classic Ponzi structure masked by crypto hype. The association stressed that such activities risk evolving into financial fraud, pyramid schemes, illegal fundraising, and money laundering, threatening market stability and public trust.

China’s Strict Stance on Crypto Remains Firm

This warning is consistent with Beijing’s longstanding ban on crypto trading, introduced in 2021 due to financial stability concerns. The new alert underscores the government’s position that crypto-related innovations, while technologically promising, carry significant risk when deployed without proper oversight. The fact that fraudulent activity is increasing despite the ban reveals how speculative sentiment in digital assets continues to penetrate informal or gray market channels within China.

The authorities are particularly concerned that speculative retail enthusiasm fueled by surging stablecoin-linked stocks is blurring the line between regulated financial products and unlicensed schemes. The popularity of these assets reflects a correlation between investor behavior and regulatory lag, where the lack of clarity invites both legitimate innovation and criminal exploitation.

Contrast Between Mainland and Hong Kong Regulatory Trajectories

While mainland China remains cautious, Hong Kong is taking a divergent path, aiming to become a regional digital asset hub. New stablecoin legislation is expected to come into effect on August 1, offering a structured legal framework for stablecoin issuance and trading. Major Chinese firms such as JD.com and Ant Group have announced their intentions to issue stablecoins in Hong Kong under this new regime.

This divergence creates a complex environment for cross-border digital finance. It illustrates how regulatory arbitrage may emerge, with firms legally operating in Hong Kong but potentially influencing investor sentiment in mainland China, where trading remains prohibited. The spillover risks reinforce Beijing’s urgency in issuing public warnings and enhancing financial literacy around digital assets.

The recent surge in crypto interest has rekindled systemic risks tied to speculative investments and weak investor protections. China's warning against stablecoin-related scams signals a preventative regulatory approach, aimed at curbing potential financial disruptions before they escalate. As Hong Kong and other jurisdictions move to formalize digital asset laws, Beijing's focus remains on shielding its domestic economy from spillover effects while maintaining strict enforcement against unauthorized crypto activities. For investors, the message is clear: innovation does not eliminate risk, and promises of high returns should be treated with caution.

Source: Reuters

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Commodity

Rising U.S. Inventories Add Downward Pressure

Oil prices steadied on Thursday after facing contrasting market forces. The U.S. Energy Information Administration reported a 7.1 million-barrel increase in crude stockpiles, marking the largest weekly build since January. Inventories at the Cushing, Oklahoma delivery hub also rose for the first time since May, signaling a possible oversupply risk in the near term. This unexpected stockpile expansion reflects a mismatch between refined product demand and domestic production trends, increasing concerns about potential softness in short-term consumption.

The accumulation of inventory typically exerts downward pressure on prices, as it indicates weakening refinery throughput or demand stagnation. However, the market reaction has been tempered by offsetting external risks and expectations for stronger seasonal demand.

Trump’s Trade Offensive Casts a Shadow on Demand Outlook

President Trump’s latest batch of tariff announcements including a 50% levy on Brazilian goods and a copper tariff under national security rationale has introduced another layer of uncertainty for global commodities. While oil itself has not yet been directly targeted, the ripple effect of deteriorating trade relations could dampen industrial activity and oil demand, particularly in emerging markets.

The tariff threat environment is now viewed as an evolving variable in oil price modeling. Traders are assessing not just the impact on supply chains but also the potential for retaliatory measures from affected countries. Although the market is not pricing in immediate demand destruction, the broader trade regime has introduced an element of macroeconomic caution.

OPEC+ Output Hike Meets Mixed Sentiment

On the supply side, OPEC+ announced a larger-than-expected production increase for August, banking on strong summer demand to absorb the added barrels. Brent and WTI have so far absorbed this news without significant price correction, implying that traders believe short-term consumption particularly for transportation fuels will remain firm through the peak travel season.

Yet concerns persist about a possible market surplus in the final quarter of 2025. As seasonal demand cools and refinery maintenance season begins, inventories could climb further unless exports increase or consumption beats expectations.

Geopolitical Risk Supports Price Floor

The Middle East remains a focal point of supply risk. Houthi rebel attacks in the Red Sea have intensified, sinking two commercial vessels and killing crew members. These events come against the backdrop of a fragile truce between Israel and Iran, which has temporarily paused broader regional conflict. The escalation of maritime hostilities could threaten oil transit routes, particularly through the Bab el-Mandeb Strait, prompting risk premiums to return if shipping security deteriorates further.

Although the current impact on oil flows is limited, the situation introduces an upside risk that may counterbalance bearish fundamentals from the U.S. inventory side. Traders are watching for signals of further Iranian involvement or a breakdown in ceasefire arrangements, which could trigger a regional shock to global supply.

Oil prices remain range-bound as traders weigh rising U.S. crude inventories against geopolitical tensions and tariff uncertainty. While strong summer demand may offer temporary support, the risk of oversupply and policy-induced demand drag keeps sentiment cautious. Brent holding near $70 and WTI around $68 suggests the market is awaiting clearer signals on inventory trajectory, global trade stability, and Middle East developments before committing to a new price direction.