China Research

Remarks by professor Hubert Fromlet at the Baltic Sea Region & Emerging Markets Day, October 15, 2026, in Kalmar, arranged by Linnaeus University (Linnéuniversitetet)

As widely expected, the American-Chinese summit headed by Presidents Trump and Xi Jinping ended without notable progress in the two countries’ trade relations. And the European Union is still looking for seizable trade improvements to tackle China’s enormous trade surpluses. It remains to be seen whether the fresh preliminary trade agreement between the EU and China will mean decisive progress for the European economy, particularly for its suffering car industry.

One billion USD daily

China achieves currently a daily trade surplus of more than one billion USD vis-à-vis the EU – partly because of given cost advantages and competitive products but also due to unfair dumping of export prices and at least temporarily of the exchange rate.

Of course, the reasons for the excessive Chinese trade surpluses have two sides. The uncomfortable Chinese dumping issue has already been mentioned. But also Western companies and politicians made decisive mistakes in their China strategies.

What went wrong from the West?

For years, I have pointed in this blog and other published articles at insufficient Western skills on China’s political and economic systems. These shortcomings explain easily many wrong political and managerial attitudes and decisions on China.

It was certainly wrong by the EU to wait such a long time for a fairer Chinese trade policy. And how could Western corporate leaders believe that previous high profit margins on Chinese markets and extremely high GDP-growth rates could be maintained forever?

It also remains a conundrum why European politicians and corporate leaders did not react sufficiently on China’s fast progress in certain technological areas. 

In other words: Europe should also to some extent blame itself for the trade problems with China. But this is no excuse for China’s unfair trade policies.

More reciprocity could be a way forward

Now, when European trade tensions with China seem to increase again and attempts to move to more fair trade between China and the EU so far obviously did not work, time has indeed come for more promising solutions.

It may hereby be a good idea to focus more on reciprocity, i.e. that visible Chinese improvements of trade policy may lead to a lowering of EU tariffs. This is certainly not an easy call because of China’s lagging transparency and difficult definitions for the EU of what a Chinese policy improvement could be. Perhaps EU evaluators will have to decide on this by (partly) using qualitative criteria. 

But such a reciprocity approach could at least mean an incentive for Chìna to loosen ongoing inflexible support of export practices.

Hopefully, improvements of this suggested kind can also be accompanied by effective positive changes that are in the pipeline since a few days ago when EU-trade commisioner Maros Sefcovic and Chinese trade minister Wang Wentao achieved a preliminary agreement which still has to be accepted at the current top summit of all EU leaders. This agreement is mainly aiming at a substantial decrease of Chinese exports of electric and plug-in-hybrid cars by „up to 50 %“ in the coming four years (https://www.theguardian.com/business/2026/oct/09/china-agrees-to-curb-hybrid-car-exports-to-eu-in-landmark-deal).

Of course, such a deal leads to hope and positive expectations – but also to doubts. One unanswered question is about control or measurement of Chinese export reduction. Apart from this statistical quality issue, one may also wonder what the definition of what „up to 50 %“ may be – certainly a very stretchable objective according to its current description. Furthermore, no details have been published how the deal will be implemented (https://www.bruegel.org/first-glance/eu-china-trade-and-investment-understanding-welcome-buying-time).

Consequently, many question marks remain unanswered.

Swedish ideas

We know that Chinese car industry currently performs very poorly. This is both a structural and a business cycle phenomenon. 

First, there is an extreme overcapacity in Chinese car industry.

Second, only a few Chinese car producers seem to make reasonable profits.

Third, the domestic Chinese economy remains very sluggish, strongly driven by skeptical consumers. This may be the main explanation for China’s offensive car exports to the EU.

In this context, it may be interesting to pay some attention to recent remarks by the CEO of Swedish Volvo Car, Håkan Samuelsson. He said the other day that it would be the right answer to the Chinese to claim the same efforts by China as Europeans had to achieve in the Middle Kingdom when coming and producing there – but now applying this policy the other way around for Chinese production in the EU (see Svenska Dagbladet from October 6, 2026). However, in my view not only by CKD production in Europe but also by a negotiated essential European share of components in these Chinese cars – a share which currently is said  to be about 80 percent for the production of European cars in China.

Such an approach may be an example of future reciprocity for the real commercial world.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University

Recently, the OECD published a new edition of its regular survey regarding the skills of 15-year-old students in reading, mathematics and science. Somewhat surprisingly for many Western analysts, China was measured as the number one country in the world.

Good conditions for future human capital formation

In 2025, around 760 000 15-year-old young students from 91 countries participated in the OECD’s regular analysis of the educational standard of this age group. China clearly topped the ranking of this PISA report.

I am not able to have an opinion on the quality of the Chinese ranking, particularly since the quality of Chinese statistics often has been lacking in the past. However, one may assume that the OECD did their very best to achieve applicable quality levels in its latest PISA report. 

For this reason, the OECD probably only wanted to include the jurisdictions of big places like Beijing, Shanghai, Jiangsu and Zhejiang (BSJZ) in its research since it certainly would have been impossible to measure school performances in even larger areas or the whole country.

Coming to the results of the PISA ranking, China has some real reason for being proud of its achievements – and countries like the U.S., Germany and Sweden rather the opposite. These latter countries did not climb higher than to number 12, 21 and 23 (when excluding Macao and Hong Kong). At the same time, Asian countries dominated clearly – with Singapore at 2, Japan at 4 and Korea at 6.

Looking at the Chinese results, the following achieved points could be noted (OECD average in brackets):

Science 597      (ranked as no 1, OECD 482)

Reading 527     (ranked as no 2, OECD 461)

Math     612      (ranked as no 1, OECD 463)

Solving IT problems  560 (no 2, OECD 500).

Time for the right conclusions in the West

Sure, Western countries do not always consider China as a fair trading partner. But they should also observe that Chinese decision-makers use to have clear long-term strategies. One of them regards education and the formation of human capital as a broad contributor to economic growth (see the research of Barro, Romer, Murphy, etc).

It is therefore high time that politicians in, for example, Germany and Sweden wake up. The PISA survey demonstrates that improvements of competitiveness not only are an issue of costs and fair trade – but also of educational ambitions, human capital and skills.  Finally: It should be reminded that individual ambitions play an important role as well. In China, 55 percent of the students were top performers according to the OECD, whereas in Germany and Sweden only 14 percent. These latter numbers tell us a lot!

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University

Western view on China remains divided. Many analysts linked to macroeconomics and to financial stability remain worried or skeptical about the state of the Chinese economy. Corporate leaders in many industrial countries outside China feel on the other hand mostly scared about Chinese progress in certain high-tech segments and discuss scarcely the macroeconomic and financial problems of the country.

The absence of good economic news during summer

Without elaborating further all shortcomings of Chinese statistical quality, not even official Chinese statistics showed encouraging macroeconomic signals. Let’s give some disappointing examples that came in more lately:

– GDP rose in Q2 by only 4.3 percent yoy, below the official objective of 4.5-5 percent for this year and below market expectations. One cannot rule out that this number in reality may have been even weaker. It may be added that 4.3 percent was the lowest annual GDP increase since Q4 in 2022.

– Retail sales increased in July by just 0.6 percent yoy, down from 1 percent in June and below market expectations as well. Very weak car sales (-17 percent) contributed strongly to this disappointing number. Building materials, furniture and petroleum products fell also considerably in the same month.

– Fixed asset investment decreased by 6.7 percent yoy during the January–July period, worsening further compared to accumulated 5.7 percent in the first half of 2026. This number confirms the sluggish activity trend in the Chinese economy, particularly in the property sector.

– Foreign Direct Investment fell in value terms to 6,2 percent in July (June -5 percent) after having been in negative territory since June 2023, reflecting (somewhat?) declining foreign interest in the Chinese market and increasing uncertainty about Chinese growth prospects.

– The RatingDog China PMI – previously known as the Caixin PMI and put together by S&P – weakened for manufacturing to 50,9 in July and to 50,4 for services in the same month. Thus, PMI for manufacturing has been moving down since April this year. PMI for services reached in July the lowest level since September 2024.  

The only important positive statistical exception could be noted for (gross) exports which in July expanded strongly yoy in USD terms by 23,9 percent, to a high extent due to high global demand for high-tech components; the AI boom and the demand for electric vehicles continued to favor Chinese exports substantially. Anticipated shipments to the U.S. for tackling potentially new American tariffs could have been another explanation for the surging Chinese exports. China’s unsatisfactory domestic growth performance may have meant some extra political push to Chinese export efforts, too.

However, imports grew by as much as 27.5 percent last month but still leading to a trade surplus of 112 billion USD in July. This is 15 billion USD more than one year earlier – a development that may induce intensified trade frictions and also tougher trade negotiations by the U.S. and the EU with China this coming fall.

The unknown dimensions of fiscal and financial imbalances

It cannot be questioned that weakening or declining economic growth has a negative impact on China’s fiscal and financial stability. Certain concerns about this issue have been expressed in Western media more recently but without illuminating  details. These shortcomings can mainly be related to insufficient Chinese transparency both when it comes to the rapidly increasing central/local government debt (https://tradingeconomics.com/china/government-debt-to-gdp)  and the real state of all the insecure or bad loans of the financial system. More exact dimensions of these two – partly interlinked – issues remain therefore unknown but should cause worries, at least in the medium or the longer run.

A conundrum are also the potential volumes of future politically based growth support. Fiscal constraints are certainly considered by the political leadership -but also the urgent need of certain growth-supporting measures. I would guess that China’s political leaders prefer to go for quite cautious fiscal stimuli instead of really expansionary budgetary action. But who knows?

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University