Recently, there has been a noticeable shift in the stance of the Federal Reserve.

From the perspective of European countries, the Federal Reserve's claim to continue raising interest rates is nothing more than a move in coordination with substantial subsidies, with the hope of undermining Europe's economic foundation.

The European Central Bank has responded, but the ultimate outcome may surprise all parties, and it is possible that China could end up benefiting from the situation.

01, The Dollar's Pivot

At the beginning of this year, the market was in consensus that the Federal Reserve would gradually halt interest rate hikes and might even start cutting rates by mid-year.

However, now the Federal Reserve has indicated that not only will there be no rate cuts this year, but there might even be a resumption of significant rate hikes starting from March, with a continuous increase in the expected terminal interest rate.

Prior to the change in the Federal Reserve's stance, the European Central Bank had already hinted at a 50 basis point rate hike in the next move.

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At that time, it was predicted that the Federal Reserve would only raise rates by 25 basis points, which would be beneficial in narrowing the gap between the euro and the dollar, thus boosting the euro's exchange rate.

For Europe, the continuous decline in the euro exchange rate has already led to many businesses bearing increasingly higher raw material costs. The depreciation of the euro, resulting in higher payments for energy imports, was already evident in the fact that in 2022, the import growth ratio of European countries was much higher than the export growth ratio.

Under various pressures, the European Central Bank urgently needs to fight back and enhance the euro exchange rate.02, Europe's Economic Challenges

It must be acknowledged that the European economy is currently facing too many difficulties.

Recently, various European countries have released their latest manufacturing Purchasing Managers' Index (PMI), with almost all major economies in contraction.

Germany, France, and even the entire eurozone have PMIs below 50, with Germany, which has been the locomotive of the eurozone, having a PMI slightly above 46.

Of course, the UK, which has already left the eurozone, is not in a much better position, with its February PMI only slightly above 49%.

At the same time, just as there were signs of slowing inflation, the latest data unexpectedly show that inflation is rising again.

Take Germany as an example, the preliminary CPI for February reached 8.7%, which is 0.2 percentage points higher than the market's estimated 8.5%.

Previously, France had relatively better inflation control, but now inflation has also risen by 6% year-on-year.

Overall, the rise in energy and food prices continues to be an important factor affecting inflation in European countries.

And it just so happens that the energy crisis is a vulnerability that the United States hopes to exploit well, using this opportunity to lure away Europe's high-end manufacturing enterprises.03, High-end Manufacturing Outmigration

It can be said that the energy issue is a pressing concern for many European companies.

Germany has just released a survey targeting over 2,400 businesses, revealing that at least 10% of German companies are planning to shift certain production segments to other countries.

Undoubtedly, the United States is most interested in this development.

The U.S. introduced substantial subsidies last year, dubbed the Inflation Reduction Act, but in essence, it is an initiative to attract manufacturing enterprises from other countries to the U.S. with up to $369 billion in funding.

Automobile manufacturing is one of Germany's key industries, but now more than 20% of manufacturers are considering relocating. Due to the U.S. offering significant tax subsidies for the purchase of new energy vehicles, this policy is highly attractive to German car manufacturers.

However, despite the many advantages of the U.S., European companies are somewhat hesitant when considering relocation.

The reason is the continuous interest rate hikes by the Federal Reserve, leading to a constant increase in domestic interest rates in the U.S., which is doubling the cost of financing for businesses.

04, China More Attractive

Another reason European high-end manufacturing companies are feeling hesitant is that they have an additional option, which is China.At the recent press conference held by the Ministry of Commerce, the spokesperson revealed that currently, dozens of multinational corporations are in negotiations with the Ministry, planning visits to China, many of which are high-end manufacturing companies from Europe.

Goldman Sachs forecasts that the European Central Bank will raise interest rates by at least 125 basis points, while the terminal interest rate of the Federal Reserve could reach 5.75%.

Compared to the high interest rates in Europe and America, China's interest rates are very attractive.

Moreover, China has mature industrial capabilities, a complete supporting industrial chain, and most importantly, a vast market.

In relative terms, the appeal of relocating production to China far exceeds that of the United States.

With recent economic data from China confirming our robust economic recovery, it is believed that these European companies will make a decision soon.