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Shots Fired in China: BYD’s Deep Discounts Shake the Auto Market

• BYD’s steep price cuts signal desperation, not dominance — triggering a deflationary spiral that threatens profits, jobs, and global trade stability.
  
  
• As unsold cars pile up, China’s auto sector leans on shadowy “zero mileage” sales and export surges, potentially triggering eventual retaliation from the West. 

What you need to know: China’s BYD — now the world’s largest EV maker — has slashed prices by up to 34% on 22 electric and plug-in hybrid models through June, further intensifying the country’s fiercely competitive EV market¹. 

Why it matters: Such an aggressive move could spark a “prolonged price war” extending into the second half of the year, pressuring domestic rivals to either deepen discounts at the expense of margins or lose market share to BYD. Global automakers like Volkswagen, Mercedes-Benz, and BMW have already lost ground in China, unable or unwilling to compete on price — indicating potential trade tensions as nations confront China’s growing industrial dominance. 

Now the Deep Dive: With aggressive price cuts of up to 34%, it looks like BYD has fired the first shots in a renewed Chinese EV price war — one that could easily spill across borders.

In a market already known for razor-thin margins, BYD’s move makes things worse for the oversaturated industry. Put simply, the company is battling to hold onto its lead as China’s top EV maker while trying to reignite consumer demand in a sputtering economy. Thus, it looks like BYD is aiming to either:

A) drown out domestic rivals to entrench its dominance, or
B) tempt cautious consumers back into the showroom.

• By cutting prices far enough, it could push other companies into operating at losses or force them to give up on market share (as we’ve seen with the German car producers, they’re not even bothering).

Either way, BYD is willing to bleed to ultimately win.

But the move also pulls back the curtain on some troubling signs in China’s auto market.

See, even with steep price cuts, dealer inventories ballooned in April to their highest levels since December. That prompted China’s Ministry of Commerce to summon major automakers for talks — reportedly over whether companies are gaming the system by pushing unsold cars into the resale channel².

• This practice, known as “zero mileage” cars, essentially means offloading brand-new vehicles to supply chain financing firms or used car dealers to meet internal sales targets. These cars show up with no mileage but are still counted as “sold,” despite never reaching real customers.

So, let’s call it what it is — a quiet form of fraud, masking the deep imbalance in China’s auto sector (aka too many cars chasing too few buyers).

It’s no coincidence this pricing blitz came right after BYD posted its slowest year-over-year vehicle delivery growth in over four years. Now, it's slashing prices to reignite momentum.

But what doesn’t sell at home is being pushed abroad.

According to China Customs data, the value of Chinese EV exports has surged 160-fold between 2019 and April 2024. And in Q1 2025 alone, China exported 1.54 million vehicles — up 16% from the already record year prior³.

That’s why Western economies — from the U.S. and Canada to the EU — are rolling out tariffs – because a tidal wave of subsidized supply is searching for somewhere to land. And these price cuts? They’re only adding to the flood.

• No doubt Western and Japanese automakers will do whatever it takes to protect their own auto industries from this Chinese glut.

Keep in mind that China used to be a net importer of cars (aka import cars > exports). Which was a boon for global car producers. But now, that’s completely flipped, China now exports far more cars than it imports, which the world economy must try to deal with.

Thus, the Chinese auto sector is now a global story — and one to watch closely. Not just because of market share. But because it supports nearly 5 million Chinese jobs – which Beijing doesn’t want to lose.

I’ll dive deeper into this in an upcoming exclusive Morning Pour.

Stay tuned. 

Figure 1: CarbonBrief, April 2025

The TACO Trade: Does Wall Street’s Favorite Tariff Play Have a Shelf Life?

• Wall Street has built a profitable playbook around tariff threats, but if Trump ever flips the script, the TACO trade could turn into a costly surprise.
  
  
• The bond market — not stocks — may be doing the real negotiating, as yield surges force softer stances faster than falling indexes ever could.

What you need to know: According to Wall Street (not me), the “Trump Tariff” trade has seemingly been replaced by the “TACO” trade — Trump Always Chickens Out — as markets repeatedly plunge on his trade war threats, only to rebound sharply when he backs down⁴. 

Why it matters: Markets have caught on to a pattern in Trump’s trade policy — and they’re cashing in on it. Buying the Trump tariff dips has given investors the idea that he won’t actually follow through with tariffs. So any sell-off after a dramatic threat has been seen as a buying opportunity. Retail traders have leaned into this strategy hard, with dip-buying recently hitting historic levels (as we wrote about last week). Thus, the so-called TACO trade became a reliable playbook in their eyes. But as tariff delays begin to unwind this summer, markets may be grossly underestimating the risk that Trump follows through — and if he does, those betting on another bluff could be left holding the bag. 

Now the Deep Dive: Wall Street has coined a new term - the TACO Trade (aka “Trump Always Chickens Out”).

• Not my invention — just one of the many acronyms Wall Street loves to throw around.

Simply put, it’s a tongue-in-cheek nod to a pattern investors have picked up on where markets drop after tough tariff talk and rebound once the rhetoric cools or delays are announced.

This cycle became evident in early April when President Trump announced significant reciprocal tariffs and markets had an aneurysm - with major indexes plunging. Yet, within days, many of these tariffs were paused to facilitate trade negotiations, leading to a market recovery.

Sure, a falling stock market is bad optics for any president since they use it as a scoreboard of their policies. But what really turned heads was the bond market. The 10-year yield jumped from 3.99% on April 3rd to 4.50% by April 11th — a massive move in just days as the bond market revolted⁵.

• These are the bond vigilantes — aka investors who start dumping government (or corporate bonds) when they think things are getting reckless. Too much debt, too much spending, too little discipline. Their message is clear - cut it out, or we’ll raise your borrowing costs.

This sudden spike in yields likely did more than anything to soften the White House’s tone than red stock charts ever could

• And this is a huge sticking point because about a third of America’s $36 trillion debt — nearly $9.3 trillion — comes due between April 2025 and March 2026. That’s a massive pile to roll over in just twelve months. And if rates stay high, it won’t be cheap (the debt will only compound higher). Then add in the government’s growing deficits, and it’s even worse.

Thus, some interpret this as his “art of the deal” negotiating tactics — aka lead with bold threats to bring trading partners to the table, then adjust based on how they respond. As President Trump put it, “It’s called negotiation,” framing high initial tariffs as just the opening move in a broader deal-making strategy.

So far, this pattern has rewarded traders who get the timing right. But leaning too hard on the bluff can backfire.

If Trump does follow through — especially if foreign governments don’t play ball — markets that have grown deaf to the noise could be caught completely offside.

• The TACO Trade could quickly become the TADI Trade - Trump Actually Did It.

I’ve argued before that the U.S. trade deficit isn’t sustainable. It can’t keep widening without long-term consequences — and rising yields are proof that investors are starting to worry (for more on this - check out, Trump’s Tariff Policy Explained: Winners, Losers & its Global Impact and The U.S. Dollar’s Global Dominance: Perks, Pitfalls, and the Peril of Losing It)

So, whether this pattern continues or reverses sharply will be a key focus for investors in the coming months.

Just something to keep in mind.

Figure 2: Business Insider, May 2025 

The Shrinking Slice: How Wages Lost Ground and Debt Took Over

• Labor’s share of the U.S. economy has fallen from over 50% to 43%, while household debt has surged to $17.7 trillion — forcing Americans to borrow just to stand still.
  
  
• The economy keeps growing, but workers take home less — and what wages no longer cover, credit cards and loans now must, feeding a “debt trap” with systemic risk.

What you need to know: Wages — once the core of U.S. growth — have been shrinking in importance. In the 1970s, labor compensation made up over 50% of GDP. Today, it’s around 43% and falling. Meanwhile, household debt continues to climb, hitting record highs across credit cards, auto loans, and personal financing. 

Why it matters: As wages shrink relative to the size of the economy, and the cost of living rises, American households aren’t just working more — they’re being forced to borrow more to keep up. This is worrying as economic orthodoxy pegs debt as a sign of confidence (meaning you borrow now, feeling more confident you’ll make repay it later). Instead, it’s a warning sign of desperation - building systemic fragility one late payment, one layoff, and one rate hike at a time. 

Now the Deep Dive: As we all know, the U.S. economy runs on consumer spending — with it making up nearly 70% of GDP.

And what’s supposed to drive that spending? Wages. See, when the system works, workers earn, they spend, businesses make a sale, and the economy grows.

Simple, right?

But for decades, wages as a share of the economic pie have been declining. . .

To put this into context, in the 1970s, labor compensation made up over 50% of GDP. Today, it’s around 43%, and drifting lower.

Thus, while the economy kept growing — the workers’ share of that growth didn’t.

Instead, more of it flowed upward — toward corporate profits (at record highs⁶), toward capital, toward shareholders, and especially toward CEO pay.

• According to Economic Policy Institute (EPI) - from 1978–2023 - top CEO compensation shot up 1,085%, compared with a paltry 24% increase in a typical worker’s compensation⁷.  

Now, this isn’t an argument about wealth inequality. It’s more than that – it’s a sign of how the economic model is functioning right now and why it’s at risk.

See, the very people whose spending keeps the economy alive are getting less of the gains they help create. Simply put, the average worker produces more and the economy grows — but they take home less.

So what fills the gap? Debt.

Credit becomes the stand-in for wage growth. Why? Because if wages can’t make up enough to fuel growth, debt is needed to consume (hence why the Fed kept rates so low for so long up until COVID).

But consumer debt has ballooned to $17.7 trillion — nearly 63% of GDP — with mortgages (45%), auto loans (5.7%), student loans (5.7%), and credit cards (4%) helping keep households (and prices) afloat.

But here’s the real cycle to worry about. . .

Worker wages stall = they borrow to spend = that borrowed money becomes someone else’s interest income = that someone is usually already wealthy (hence why they have enough to lend).

• This is known as a “debt trap” – which I will write about more in an upcoming Morning Pour.

So while the economy grows, the foundation looks weaker as the top thrives. The middle class gets squeezed. And the bottom breaks (just look at poverty and homelessness rates rising sharply).

We’re not just talking about inequality anymore. We’re talking about a silent, structural, ignored economic risk.

And like all ignored risk — it doesn’t just go away. It just shows up later. 

 Figure 3: St. Louis Federal Reserve Dunham, May 2025

Anyway, who knows what will happen?

This is just some food for thought as we watch how these trends develop.

As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.

Sources:

1. BYD’s Sweeping Price Cuts Turn Up Heat in China’s EV Price War - Bloomberg
2. Exclusive-China regulator summons automakers to discuss 'zero-mileage' used car sales
3. China's Q1 automobile exports up 16% y/y, industry official says | Reuters
4. TACO Trade Has Replaced Trump Trade. Inside the Stock Market's New Meme. - Business Insider
5. US10Y: U.S. 10 Year Treasury - Stock Price, Quote and News - CNBC
6. US corporate profits hit record high before Trump's tariffs | Reuters
7. CEO pay declined in 2023: But it has soared 1,085% since 1978 compared with a 24% rise in typical workers’ pay | Economic Policy Institute 

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