China’s global manufacturing dominance is a tale of two halves; reliant on home-grown industrial growth and Western consumption, experts say

The so-called China Shock 2.0 narrative is incomplete, analysts argued, as they noted that domestic macroeconomic forces in China and the West, particularly the United States, are at play in driving their growing external trade imbalance.

The term, coined to describe new global ramifications of China’s manufacturing dominance – a phenomenon echoing the trade shock of the early 2000s – has been under renewed debate, particularly as China recorded a goods trade surplus of more than US$1 trillion in the first 11 months of last year.
China’s full-year trade data for 2025, including figures on the trade surplus, will be released by Beijing’s General Administration of Customs on Wednesday morning.

“China Shock 2.0 isn’t fully a China story – it relies on China’s industrial advances as much as demand from the rest of the world,” said Xu Tianchen, senior economist at the Economist Intelligence Unit.

He added that years of stimulus-fuelled demand in the US and a prolonged property downturn in China have reinforced the long-standing global pattern of Chinese production and American consumption, widening the goods trade imbalance.

By contrast, China’s services trade has long run a deficit, with Ministry of Commerce data showing a shortfall of 806.35 billion yuan (US$115.6 billion) in the first 11 months of last year.

Meanwhile, analysts at Goldman Sachs pointed to the yuan’s undervaluation under persistent deflationary pressures, which they said have deepened the competitiveness of Chinese exports and contributed to the country’s outsize goods trade surplus.

In a report last month, they said that “significantly lower inflation” in China, compared to other countries in recent years, had driven a meaningful depreciation of the yuan’s real effective exchange rate – a trade-weighted measure of the currency’s value adjusted for relative inflation – against its trading partners.

The metric fell about 20 per cent over the past few years, according to the note, a shift it said had amplified the advantage of “China price” in exports.

Xu explained that while China’s large surplus should normally imply a much stronger yuan, capital outflows driven by geopolitical and property sector concerns, together with policymakers’ reluctance to allow a sharp appreciation, have kept the currency undervalued and supportive of export competitiveness.

As of November, the yuan’s real effective exchange rate had fallen to 88.58 from 91.54 at the end of 2024, according to financial data provider Wind, compiling figures from the Bank for International Settlements – far lower than its nominal effective exchange rate at 106.58 in November.

As China continues to mitigate deflation risks, the US is dealing with a more inflationary environment, a contrast reflected in their diverging real effective exchange rates.

With the unprecedented stimulus during and after the Covid‑19 pandemic leaving a more inflationary imprint on the US economy, its ballooning government debt also continues to swell – a burden estimated to grow after the passage of the sweeping “One Big Beautiful Act” in 2025.

In contrast to the yuan’s undervalued real effective exchange rate, the US dollar’s real effective exchange rate stood at 109.08 in November, above its nominal effective exchange rate of 104.6 over the same period.

In a report released on January 5, Goldman Sachs projected China’s goods trade surplus to rise to US$1.2 trillion in 2025 and further to US$1.4 trillion in 2026, with the yuan to be around 25 per cent undervalued against the US dollar.

Researchers at the International Monetary Fund have also highlighted the role of domestic macroeconomic conditions in driving external imbalances between China and the US.

In an article published in 2024, it cited “negative domestic demand shocks in China” due to the property market downturn and low household confidence, as well as a “dissaving shock in the United States” caused by elevated government and personal spending.

“External balances are ultimately determined by macroeconomic fundamentals, while the link to trade and industrial policy is more tenuous,” the article said.

“Home-grown surpluses and deficits call for home-grown solutions that require setting the macro dials appropriately.”

The IMF also noted that China’s trade balance generally stood between 2 and 4 per cent of its gross domestic product, much smaller than the peak of around 10 per cent observed during the original “China Shock” of the 2000s.

Source: SCMP

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