China Shock 2.0 Will Be Different
The latest flood of cheap goods is a lot more sophisticated and is important to Beijing’s long-term plans
By Jacky Wong
Chinese carmaker BYD has been competing with Western automobile companies to build its market share of electric-vehicle sales. PHOTO: FABRICE COFFRINI/AGENCE FRANCE-PRESSE/GETTY IMAGESTreasury Secretary Janet Yellen’s trip to China sent a clear message—a flood of cut-priced exports isn’t welcome.
It will likely fall on deaf ears in Beijing.
Cheap Chinese goods aren’t new to global markets, but a recent surge has some in the West calling it “China Shock 2.0.”
Overcapacity in China could undercut American businesses and workers and lead to overconcentration of supply chains, Yellen said.
The implosion of China’s real-estate sector has been behind some of the shift as domestic Chinese demand slowed and factories overproduced.
That is particularly the case for sectors directly affected by the housing slowdown like steel and cement.
But another reason is that China has hitched its wagon to a different growth engine to replace real estate.
New medium- to long-term bank lending to the industrial sector in 2023 jumped to 4.82 trillion yuan, the equivalent of $670 billion, from 591 billion yuan in 2019 even as new loans to the real-estate sector have slowed to a trickle.
Unlike with previous China shocks, the country has moved up the value chain.
Instead of assembling iPhones for an American firm, for example, Chinese companies are leaders in high-tech sectors.
Exports of electric vehicles, lithium-ion batteries and solar panels accounted for 4.2% of China’s exports last year, a rise from 1% in 2018, according to Natixis.
Yellen has urged China to boost its domestic consumption instead of trying to export its way to rapid growth.
But supporting its manufacturing sector has been Beijing’s playbook all along.
Take EVs: The government kick-started the sector by providing generous subsidies, which spurred legions of companies to enter the field.
As the industry grew in size—China is the world’s largest EV market—the government started to withdraw the subsidies and let intense competition pick the survivors.
While that approach led to much wasteful investment, it allowed the best companies to build scale and lower their costs.
Currently China’s EV sector is engaged in a brutal price war and BYD, which briefly overtook Tesla as the world’s top EV seller by volume in the last quarter of 2023, will likely emerge as a national champion.
Prices of solar panels and batteries have similarly plunged over the years.
The West will likely erect more trade barriers for Chinese products in these new categories as governments try to increase domestic production of these new green technologies.
EVs, in particular, are a thorny issue given the historical importance of the automobile industry in Europe and the U.S.
And China won’t just give up without a fight.
Beijing’s ultimate goal is to create global leaders in advanced manufacturing that are pivotal to growth.
Green technology certainly looks promising, and China dominates the supply chain of batteries and solar panels.
That has the added benefit of reducing its reliance on foreign technology—a lesson it learned recently through U.S. sanctions on its semiconductor sector.
The first China shock cost many jobs in America, but it also benefited many U.S. businesses as they invested in China to lower their production costs.
The second one could feel very different.
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