Beijing Boosts Exports, World Feels the Second China Shock

The world is currently facing a phenomenon referred to as the second China Shock. A wave of cheap Chinese exports is once again flooding the global market. However, this time the scope is broader and targets high-tech sectors, sparking fears of deindustrialisation and political upheaval in various parts of the world. Twenty-five years ago, the first China Shock occurred when cheap Chinese goods flooded the United States market, contributing to the loss of 3 million factory jobs. Now, a similar shock is spreading to Europe, Southeast Asia, Africa, and Latin America. The current export explosion is rooted in Beijing’s response to the collapse of its property bubble several years ago. According to investment firm KKR, the crisis wiped out US$10 trillion in household wealth. Since 2020, Chinese authorities have diverted investment into additional manufacturing capacity to compensate for the decline in real estate. The focus shifted to advanced industries such as electric vehicles (EVs), lithium-ion batteries, and solar power. However, these factories are producing far more goods than domestic Chinese consumers can purchase. To keep millions of workers employed, Chinese manufacturers have turned to overseas markets. Data from Beijing Customs shows exports in the first half of the year surged 18 per cent compared to the same period last year. ‘There has been a massive increase in manufacturing capacity over the last five to six years. However, domestic demand growth has not been sufficient to absorb it,’ said Julian Evans-Pritchard, head of China economics at Capital Economics in Singapore. While the first shock in the early 2000s was dominated by basic goods like clothing and footwear, this second China Shock features high-tech products such as semiconductors and electric vehicles. The impact is now being felt more acutely outside the United States, particularly in Europe. The US has so far managed to cushion the impact of this latest wave through strict tariff policies. In contrast, Europe is struggling. German Chancellor Friedrich Merz and French President Emmanuel Macron have called for joint action to protect European industry from a flood of subsidised Chinese products. Germany, as Europe’s traditional manufacturing powerhouse, is in a difficult position. Volkswagen reportedly plans to close four factories in Germany and cut 100,000 jobs as part of a restructuring effort to face Chinese competition. Chinese car manufacturers can now produce nearly twice the number of vehicles they can sell in their own domestic market. ‘There is no money to be made selling in the highly competitive and oversupplied Chinese market,’ said Brad Setser, an economist at the Council on Foreign Relations. US Treasury Secretary Scott Bessent has urged China to shift from an industrial policy to supporting household consumption, calling the current Chinese economic model unsustainable and harmful to the world. The US is expected to launch additional tariffs this month to combat structural overcapacity. Meanwhile, China’s own economy is showing signs of weakening. Economic growth slowed to 4.3 per cent in the second quarter. With house prices continuing to fall six years after the bubble burst, Chinese consumers remain reluctant to spend, forcing the government to continue relying on exports as an engine of growth. Despite pressure for coordination among trading partners, some countries like the United Kingdom and Canada are beginning to take independent steps by cutting separate deals to maintain access to the Chinese market, adding complexity to the global response to Beijing’s manufacturing dominance.