Last month, the European Central Bank said that China has been dumping surplus goods on European markets at bargain prices for several years to the detriment of local producers.
This statement comes amid growing pressure on European officials to take action against a sharp increase in imports from China to the region. Faced with massive U.S. tariffs and a prolonged period of weak consumer demand, Chinese companies have been forced to look for buyers outside the United States and their borders.
However, according to the ECB, the current trend of supplying cheap Chinese goods to Europe is not only related to increased US duties, but also dates back to 2021, when the downturn in the Chinese real estate market hit local demand in the world's second largest economy for the first time.
At the same time, government investments in manufacturing, designed to help restore growth, have instead led to oversupply and intense price wars in China, which has increased the attractiveness of overseas markets such as Europe, the ECB said.
To be competitive and make these products more attractive abroad, companies usually try to reduce short-term marginal costs and prices, and in some cases settle for narrower profit margins and even losses.
In a note to clients, Goldman Sachs analysts noted that increased competition could have "mixed consequences" for the ECB's monetary policy.
"Although China's increased exports are likely to put pressure on import prices, the overall impact on inflation will depend on how domestic demand adapts to the persistently lower level of domestic supply, and whether price pressures will arise as a result," analysts including Alexander Stott said.
"The optimal response of the central bank to increased foreign competition is therefore limited, as monetary policy can do little against a permanent decline in output and a temporary decrease in inflation if inflation expectations remain stable."
The analysts added that internal research shows that historically, the ECB has left policy largely unchanged when lower domestic growth and inflation were associated with higher growth abroad.
As a result, they expect the ECB to leave its key interest rate unchanged for the "foreseeable future," although policymakers are likely to continue to closely monitor labor market tensions, wage growth, and core inflation.
"In general, the risks for our baseline scenario of unchanged rates are shifted towards a resumption of declines next year," the analysts said.