China Shock 2.0: structural drivers and implications for the euro area

In the aftermath of the COVID-19 pandemic, China's goods exports have expanded strongly while imports have remained subdued, pushing the country's trade surplus to record levels and raising concerns about a new 'China shock'. This paper analyses the recent surge in Chinese exports and investigates its economic implications for the euro area and its main countries. We show that around three quarters of China's export growth since late 2023 has been driven by domestic factors rather than external demand. Weak domestic demand emerges as the main driver of the export surge, consistent with firms redirecting output abroad as domestic absorption weakens, while subsidies and technological upgrading also make a significant contribution. The shock spreads to the euro-area economy through three main channels. First, lower Chinese import prices exert sizeable disinflationary pressures: focusing on 2025 alone, the decline in Chinese import prices is estimated to lower consumer prices of non-energy industrial goods by about 1 per cent over three years. Second, stronger import competition weighs on manufacturing activity and reduces investment, especially in transport equipment and intellectual property, with possible adverse effects on innovation and long-term growth. Third, the technological upgrade in China and the subsequent increase in Chinese penetration in third markets significantly weakens euro-area export performance.