China Shock 2.0: Export surge reduces investments
A Banca d'Italia paper finds China's export surge, driven by weak domestic demand and tech upgrades, creates disinflationary pressure and competition for the euro area. This poses potential adverse effects on innovation and long-term growth within the euro area.
Weak demand drives export surge
In the aftermath of the COVID-19 pandemic, China's goods exports have expanded strongly, pushing its trade surplus to record levels of USD 1.2 trillion in 2025.
A Banca d'Italia paper, 'China Shock 2.0', reveals that approximately three-quarters of this export growth since late 2023 is driven by domestic factors rather than external demand.
Weak domestic demand is identified as the primary driver, as firms redirect output abroad due to subdued domestic absorption.
Subsidies and technological upgrading also contribute significantly to this surge.
For the euro area, this translates into sizeable disinflationary pressures, with lower Chinese import prices estimated to reduce consumer prices of non-energy industrial goods by about 1 percent over three years, focusing on 2025 alone.
This new 'China shock' differs from the early 2000s, being investment- and policy-driven, fostering technological innovation and generating overcapacity.
Euro area faces investment drag
The shock spreads to the euro area through several channels beyond disinflation.
Stronger import competition weighs heavily on manufacturing activity and reduces investment, particularly in sectors like transport equipment and intellectual property.
This poses potential adverse effects on innovation and long-term growth within the euro area.
Furthermore, China's technological upgrade and increased market penetration in third countries significantly weaken the export performance of euro-area economies.
The study highlights that Germany appears most exposed to these dynamics, with Italy also vulnerable in specific manufacturing segments.
There is no strong evidence of trade diversion of China's exports from the US market to euro-area destinations in 2025.
A new kind of shock
This 'China Shock 2.0' is not merely a cyclical phenomenon but a structural shift driven by China's domestic policies and technological ambition.
It forces euro-area economies to confront not just cheaper goods, but direct competition in advanced and strategic sectors, demanding a strategic response.
The long-term implications for European industrial policy and innovation capacity are profound, requiring adaptation to avoid significant economic drag.