During the “China Shock 1.0,” which began in the mid-1990s, China’s enormous production capacity led to the formation of a significant surplus. However, following the 2008 global financial crisis, this surplus declined. A boom in infrastructure and housing construction absorbed domestic resources; imports of equipment and raw materials increased; and outbound tourism helped offset the trade surplus. By the end of the 2000s, the first “China shock” had come to an end.
But the situation soon changed again. The COVID-19 pandemic brought the tourism sector to a standstill, and the collapse of a massive housing bubble in 2022 undermined domestic demand. As Chinese companies sought to capture overseas markets, exports rose while imports fell.
China’s trade surplus surged sharply once again, exceeding $1 trillion last year—which amounts to just under 1% of global GDP (about $120 trillion).
Although China’s share of exports in GDP is lower today than it was in 2008, this is solely because China’s GDP has grown significantly over that period. Similarly, although China’s share of the global economy (in current prices) has declined slightly over the past five years, this is due to the fact that the yuan has weakened significantly, while domestic prices have remained at the same level, even as they have risen almost everywhere else in the world.
Since low domestic demand in China contributed to a trade surplus, exports naturally grew in those sectors that are most competitive on the international market.
Following Japan’s path—but with a difference
However, while the effects of the first “China shock” were concentrated in low-tech, labor-intensive sectors such as textiles, toys, and furniture, Chinese exports now dominate several high-tech “green” sectors, such as batteries, solar panels, electric vehicles, and mechanical engineering.
Industrial policy and subsidies help channel China’s growing exports into priority sectors. However, they are not the main driver of this growth. Rather, China needs an external market for its excess savings.
Today, China is often compared to Japan in the 1980s. At that time, Japan was an Asian economy with a high savings rate that had secured a dominant position in cutting-edge manufacturing sectors, particularly in the automotive industry, consumer electronics, and semiconductor production. It accounted for about 30% of global automobile production, which is comparable to China’s current share of 33%. Japan’s share of global GDP peaked at about 18% in 1994—which, again, is comparable to China’s current share.
Furthermore, as in China, Japan’s trade surplus peaked, triggering a sharp political backlash abroad, and then declined over the course of several years due to a housing market boom. After that bubble burst, the surplus rose again, reaching a new peak in the mid-1990s. Ultimately, however, slowing growth and declining savings weakened the Japanese economy. This is not happening in China.
“China Shock 2.0” combines ongoing supply-side modernization with an absorption problem: a decline in investment in real estate and related sectors has led to a drop in domestic demand, but the national savings rate remains very high.
The result is a more significant surplus of savings over investment, which flows into net exports. Unlike steady growth in labor productivity, this macroeconomic component is predominantly level-dependent: as soon as the economy reaches a new, lower investment equilibrium, exports and the current account balance increase by a fixed amount, unless savings grow even further or domestic investment continues to decline.
The dynamics of savings over time are the main reason why China’s development trajectory diverged from Japan’s. Between 1991 and 2024, Japan’s savings rate fell from over 38% of GDP to less than 27% of GDP. In 2024, China’s savings rate exceeded 43% of GDP.
Unpleasant Consequences for the U.S. and Europe
Unless the economy is growing at a rate close to double digits, it is virtually impossible to create enough profitable investment opportunities to absorb such a significant volume of savings. Given that China’s GDP has grown by approximately 5% per year over the past five years, the country can be expected to continue to run significant surpluses for the foreseeable future.
It is often argued that China needs to transition to a new growth model based on domestic demand, and that reducing savings would go a long way toward achieving this goal.
The same argument was made during the first “China shock” and with regard to Japan in the 1980s. However, it turned out that getting people to spend more is no easy task. If we look to Japan’s experience, it will take decades before China’s excess savings begin to decline.
This has unpleasant consequences for Europe and the United States. Protectionist policies may slow the influx of Chinese goods into certain sectors, but they cannot eliminate the macroeconomic cause of the new “China shock.” As long as China saves more than it can profitably invest domestically, this surplus will continue to flood foreign markets.
The first “China shock” subsided when China’s economy began to absorb most of what it produced. The second shock will only abate when China’s savings rate declines or domestic demand recovers. Neither of these is likely to happen anytime soon.
Daniel Gros,
director of the Institute for European Policy at Bocconi University.
© Project Syndicate, 2026.
www.project-syndicate.org
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