You may think you have lived through an enormous economic shock as the result of the rise of China and surging Chinese exports.
uncertain
you → think → China
But you ain’t seen nothing yet.
asserted
you → see → nothing
It was widely believed that before too long, China’s export share would stabilise.
asserted
share → believe → ?
Yet nothing of the sort has happened.
asserted
nothing → happen → sort
Indeed, the world faces a second phase of the China shock, which is known in the trade as the China Shock 2.0.
asserted
which → face → Shock
From 2010 to 2018, when President Trump introduced the first round of tariffs against China, Beijing’s share of world goods export volumes rose from just over 9 per cent to nearly 13 per cent.
asserted
share → introduce → cent
In late 2021, it plateaued has since surged again and currently stands just short of 19 per cent.
asserted
it → plateaue → cent
Remarkably, Trump’s second round of tariffs against China, launched after he became president again in January 2025, has had next to no impact on this upward surge, even though it has had an impact on China’s trade with the US.
asserted
it → launch → US
But this has simply led to a redirection of China’s exports to other parts of the world, and those other parts have stepped up their exports to the US.
asserted
parts → lead → US
China invests about 40 per cent of its GDP, an enormous figure by Western standards.
asserted
China → invest → standards
Admittedly, it has invested this much for many years, but the difference now is that, whereas in the first phase of China’s development it pushed a lot of investment into real estate, since the real estate crash this has been diverted into manufacturing.
asserted
this → invest → manufacturing
The growth of consumers’ real incomes has faded and the housing market has been extremely soft, with house prices having fallen by about 20 per cent.
asserted
prices → fade → cent
This is particularly important since housing makes up about a half of consumers’ wealth.
asserted
housing → make → wealth
The result is a major drop in consumer confidence as Chinese people tighten their purse strings.
asserted
people → tighten → strings
Saving was already high, but the savings ratio has risen recently.
asserted
ratio → save → ?
This combination of rapidly increasing productive capacity and weak domestic demand has meant that, over recent years, Chinese manufacturers have engaged in price wars.
asserted
manufacturers → increase → wars
Since early 2023, while goods export prices from the rest of the world have risen by more than 10 per cent, China’s goods export prices have fallen by about 7 per cent.
asserted
prices → rise → cent
Moreover, since the beginning of the first China Shock in the early 2000s, China’s productive capacity and competitive edge have been retained as its output has dramatically climbed the value chain.
asserted
output → retain → chain
It has moved into areas of production in which Western countries thought they would hold on to a comparative advantage, enabling them to out-compete China in domestic and world markets.
asserted
they → move → markets
The effects have been particularly keenly felt in Europe, where traditional manufacturing industries have come under painful competitive pressure.
asserted
industries → feel → pressure
Whereas after the initial China Shock in the early 2000s, Germany enjoyed a surge in exports to China, its exports there have had recent steeps falls.
asserted
exports → enjoy → falls
Meanwhile, Chinese penetration of European markets continues to rise.
asserted
penetration → continue → markets
In 2000, European imports from China amounted to less than 1 per cent of Europe’s GDP.
asserted
imports → amount → GDP
First, Chinese trade and current account surpluses with the rest of the world which have surged are likely to remain extremely high.
asserted
which → surge → world
Most recently, the Chinese surplus has been running at about 1 per cent of world GDP.
asserted
surplus → run → GDP
These surpluses imply that China’s holdings of overseas assets will continue to rise.
asserted
holdings → imply → assets
Meanwhile, those countries with a close overlap in productive capacity to China, such as Germany, Poland and Italy, will continue to find life difficult.
asserted
life → continue → Germany
Interestingly, the overlap between the UK’s productive capacity and China’s is relatively low, and Britain is set to be one of the countries that suffer least from China’s increasing dominance in world markets while continuing to benefit from the lower prices of manufacturing that it entails.
asserted
it → set → that
You might well imagine that this fantastic export success betokens a massive advance for the Chinese economy.
uncertain
success → imagine → economy
But it doesn’t.
asserted
it → do → ?
While China’s share of global manufacturing is pushing up to about one-third as productivity growth has slowed and the consumer economy has languished, China’s share of world GDP has recently fallen.
asserted
share → push → GDP
Remarkably, something like a third of Chinese firms are loss-making and 4.4 per cent of China’s GDP is spent on industrial subsidies.
asserted
cent → make → subsidies
Not that this implies that things have to change radically any time soon.
asserted
things → imply → ?
As Capital Economics has emphasised in its recent extended study of the China Shock 2.0, the current state of the Chinese economy is the deliberate result of policies undertaken by Beijing.
asserted
state → emphasise → Beijing
They do not seek to maximise the economic welfare of the populace in the way that Adam Smith and subsequent economists would have understood.
asserted
Smith → seek → that
Consequently, an important implication of the China Shock 2.0 is the boost it will give to populist political parties across the West and the related erosion of support for the open world trading system which has been behind so much of the world’s increase in prosperity over the past 50 years.
asserted
which → give → years
As if the war between Russia and Ukraine and the conflict between America and Iran were not enough, investors need to grapple with the likelihood, at some point, of a bust-up in the world’s trading system, which could be combined with an associated financial shock.
uncertain
which → need → shock
Telegraph, London
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion.
asserted
newsletter → deliver → stories
The Aporia
