China's President Xi Jinping made a congratulatory call on Thursday to incoming European Council President Antonio Costa, Chinese state media said, a few hours before European Commission curbs on Chinese electric cars are scheduled to take effect.

The Commission is set to confirm provisional import tariffs of up to 37.6% on Chinese-manufactured electric vehicles (EVs), after the bloc accused the world's No.2 economy of providing its firms with heavy state subsidies.

Xi said he "attaches great importance to the development of China-EU relations" as Europe braces for retaliatory measures from Beijing and the possible opening up of a new front in the West's tariff war with the $18.6 trillion economy.

EU trade policy has turned increasingly protective over concerns that China's production-focused development model could see it flooded with cheap goods as Chinese firms look to step up exports amid weak domestic demand.

China and the European Commission have been in negotiations since last week over the curbs that Beijing and some European automakers want scrapped. Beijing rejects accusations that Chinese EVs are unfairly subsidised.

Xi said China "is committed to developing the China-EU comprehensive strategic partnership," according to the report. "China has always regarded Europe as an important pole in the multipolar order," he added.

It will fall to Costa, a former Portuguese prime minister, to find common cause among the Council's 27 member states, as they waver over whether to back the Commission on the EV tariffs in an advisory vote in coming weeks.

Germany, whose carmakers made a third of their sales last year in China, reportedly wants to stop the tariffs, while France has been among the firmest backers.

China is currently undertaking an anti-dumping probe into European brandy imports. Almost all EU brandy exports to China came from France last year, Chinese customs data shows.

Beijing has also opened an anti-dumping investigation into imports of European pork and its by-products, which analysts say is aimed at pressuring Spain, the Netherlands and Denmark to break with the Commission over the curbs.

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China EV makers brace for tariffs as Beijing, EU engage in talks

With the clock ticking for the European Commission to impose provisional tariffs on electric vehicles made in China, automakers are bracing for billions of dollars in new costs that analysts expect will slow their European expansion.

The bloc is set to confirm on Thursday extra duties of up to 37.6% aimed to prevent a flood of subsidised China-built EVs into the European market, despite last-ditch efforts to strike a deal.

"The Chinese EV brands' march into Europe will continue on," said Lei Xing, founder of consultancy AutoXing.

"It's like going from 80 km/h to 60 km/h or even slower, but it's not going to stop."

China and the European Commission have been in negotiations since last week over the curbs that Beijing and some European automakers want scrapped. Beijing rejects accusations that Chinese EVs are unfairly subsidised.

BYD, the world's largest EV maker, faces the lowest tariff hike of 17.4% on top of the current 10% tariff. State-owned SAIC's MG Motors, the most popular Chinese-branded EV in Europe, faces the highest hike.

"For someone like BYD, 17.4%, they can absorb it," Xing said. "It's a slight bump on the road. But for MG - for SAIC Motor - it's a major bump."

EU countries are wavering over whether to back additional tariffs on Chinese-built electric vehicles, highlighting the bloc's challenge in building support for its largest trade case yet as Beijing threatens wide-ranging retaliation.

The tariffs, set to be finalized in November, would be blocked if a "qualified majority" of at least 15 countries representing 65% of the EU population votes against them.

Industry insiders say both Europe and China have reasons to push for a deal to avoid the addition of billions of dollars in new costs for Chinese EV makers.

"I think the incentive right now that Europe is inviting to occur is for Chinese companies to consider avoiding the tariff by locating some of their productive capacities closer to the European region," said Bill Russo, founder and CEO of consultancy Automobility Ltd.

"The immediate impact is it will force companies that are using made-in-China exports as their business model to reconsider that strategy and to localize more or to push some of that capacity outside of China in the direction of the markets that they're serving."

Chinese carmakers, which command a 30% or more cost edge over European rivals, took 19% of Europe's EV market last year, up from 16% in 2022, according to research firm Rhodium Group.

Some are already shifting manufacturing to Europe. Chery Auto, China's largest automaker by export volume, has signed a joint venture with Spain's EV Motors to open its first European manufacturing site in Catalonia.

BYD, the biggest rival to Tesla, is also building its first European EV production base in Hungary.

However, there may not be a strong business case for some Chinese EV makers to set up production in Europe, given their cheaper, more efficient supply chains back home and sales volumes too low to justify the cost of a factory.

The simplest response for Chinese automakers is to increase the European sticker price for their EVs, said Yale Zhang, founder of Shanghai-based Automotive Foresight.

"If you don't raise the price, I'm afraid the profit will be negative," Zhang said, referring to companies that produce EVs set to be hit with the highest tariff.

"You have to reposition the pricing, and that will definitely impact sales," he said.

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EU report details widespread Chinese interference in economy

 In the run up to announcing provisional tariffs on Chinese-made electric vehicles, the European Commission in April released a 712-page report on the many layers of subsidies it argues the Chinese government provides to domestic firms.

The report is designed for anti-dumping cases, but trade experts see it as a supporting document for its anti-subsidy investigation into EVs and as a signal to both China and reluctant European Union member states that it means business.

It also leaves the door open to future cases.

Here are some of the key findings from the report:

Support for state-owned enterprises

The Chinese government funnels both indirect and direct support to state-owned enterprises, or ones it effectively controls even with minority ownership. That includes low-cost financing via state-owned banks for state-owned firms regardless of profitability. Provincial and local governments also provide financial assistance.

For instance, in 2020 Anhui province bailed out Nio when the EV maker was experiencing a "financial reverse." Nio moved its headquarters to the province and the local branches of six state-owned banks agreed to extend 10.4 billion yuan ($1.6 billion) in credit lines to the loss-making company.

Communist Party control of state-owned firms

The Communist Party exercises a great level of control at state-owned firms - including those where it holds a minority stake - and is intertwined with management of those firms.

At SAIC, which via its ownership of the former British car brand MG accounted for around two-thirds of the Chinese-made cars sold in Europe last year, company chairman Chen Hong is also head of the automaker's Communist Party committee.

The State owns four big traditional automakers, dubbed the "Big Four": SAIC, Dongfeng, FAW Group and Changan. It also owns some important EV makers, including Nio, Brilliance, Chery, GAC and JAC Motors.

EV support

Since 2005, the Chinese government has focused support for its EV makers, through subsequent five-year plans, including EV production targets, the "Made in China 2025" initiative and various subsidies at the national and local level. Direct subsidies for EVs began in 2010 and are still in effect.

The purchase tax exemption on EVs, which the Chinese government extended last year through to 2027, amount to $11.9 billion in 2022 alone.

"The further prolongation of the purchase tax exemption shows that the Government keeps intervening into the NEV market with a view to ensuring its economic viability," the report says.

The government's 2017 Automobile Plan sets ambitious global targets, including having several Chinese automakers among the world's top ten EV makers by 2020, and having several Chinese companies among the world's top automakers by 2025.

Rating agencies

Most of China's credit rating agencies are state-owned, which means that most ratings are "heavily skewed towards the highest end of the rating scale".

By the end of 2020, 96% of Chinese bonds were rated 'AA' or better, with 38% of credit bonds carrying an 'AAA' rating. By contrast less than 10% of firms receive such high ratings in the U.S. market. "Consequently, the information on credit risk ... derived from a rating by Chinese credit rating is not directly comparable to the ratings in other markets."

Better credit ratings help companies obtain financing.

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