Huang Yiping on China Shock 2.0 debate

NSD director suggests deeper China-Europe cooperation in green transition, advanced manufacturing, industrial AI, high-end services, and third-country markets.

As Europe grapples with a new wave of debate over “China Shock 2.0”, Huang Yiping, Boya Distinguished Professor, Dean of the National School of Development (NSD), Dean of the Institute of South-South Cooperation and Development (ISSCAD) at Peking University, argues that Europe’s anxiety reflects both the pressure from China’s industrial rise and its own structural challenges. These include Europe’s difficulty in commercialising scientific innovation at scale, underdeveloped capital markets, and stringent regulatory approaches that may have constrained the growth of innovative companies.

Huang also offers a more nuanced reading of China’s own position. He notes that China has made substantial progress in economic rebalancing, with its current-account surplus declining significantly from its historical peak. Yet because of the sheer size of China’s economy, the absolute scale of its surplus continues to attract international attention, particularly when measured against the GDP of the rest of the world.

He argues that China must continue advancing domestic economic rebalancing and expanding domestic demand, while calling for deeper China-Europe cooperation in green transition, advanced manufacturing, industrial AI, high-end services, and third-country markets.

This article is based on Huang’s keynote address delivered at a seminar by China Finance 40 Forum (CF40) on 31 May, 2026. Huang is also a member of CF40. The original article was published on CF40’s official WeChat account on 12 June.

黄益平：中欧关系“冰与火并存”，合作是唯一出路

Huang Yiping: China-Europe Relations Amid “Ice and Fire” — Cooperation Is the Only Way Forward

What Lies Behind Europe’s Anxiety over the “China Shock 2.0” Narrative?

My remarks today will mainly share some observations and assessments from my recent exchanges in Europe, although not all of them relate directly to Europe. I should make clear at the outset that I do not endorse terms such as “China Shock 1.0” or “China Shock 2.0.” I will nevertheless use them here for the sake of discussion.

In the age of globalisation, economic shocks are nothing new. Examples include the rise of German and Japanese manufacturing and the dominance of the U.S. and UK financial sectors. The key question is how individual countries respond and adjust.

To begin with, one of the most heavily hyped topics internationally today is “China Shock 2.0.” The debate has become pervasive. During my time in Europe, the structural challenges associated with “China Shock 2.0” were raised in virtually every bilateral meeting, think-tank seminar, and roundtable with government and business representatives.

The so-called “China Shock 1.0” refers to the impact on international markets of large-scale exports of lower-end light industrial goods, textiles, toys, and other traditional manufactured products following China’s accession to the WTO. Objectively speaking, the structural impact of that episode on many developed economies was not as great as is sometimes imagined. Many labour-intensive industries were already undergoing relocation. Even without China taking on this production, they would have moved to other low-cost economies.

As some U.S. economists have argued, the loss of manufacturing jobs in developed economies was attributable less to China itself than to the combined effects of automation driven by technological progress and changes in the global division of labour. In short, it was a dynamic evolution.

The so-called “China Shock 2.0” mainly refers to the widening of China’s external imbalance in recent years, particularly as the country has begun to compete at scale in frontier and high-end manufacturing sectors such as electric vehicles, lithium-ion batteries, solar photovoltaics, high-end machinery, industrial robots, and semiconductors.

The main difference from the earlier episode is that these are sectors in which developed economies have invested for decades and believed themselves to possess firmly established competitive advantages. Yet supported by comprehensive supply chains, large-scale production capacity, and the continuous refinement of manufacturing processes, China performed remarkably well as soon as it entered these sectors.

This does not mean that Chinese producers have reached the global frontier in every product category. But judging from field research and industry data, the quality of many Chinese high-end products is already close to European standards — roughly 90 per cent, and in some cases more than 95 per cent, of the European level. At the same time, China’s domestic supply-chain advantages can reduce overall production costs by 30 to 50 per cent. This creates a substantial cost-performance advantage and has prompted some countries to speak of a “China’s export tsunami.”

In fact, the Chinese economy has been gradually rebalancing over the past two to three decades and has already made substantial progress. France is hosting the G7 summit this year, and the French Presidency recently commissioned the Centre for Economic Policy Research (CEPR) to prepare a special report titled The New Global Imbalances. I was invited to contribute the section on the Chinese economy.

A systematic review of the historical data shows that, by medium- to long-term measures — whether the investment share of GDP, the household final consumption share of GDP, or the current account balance as a share of GDP — the Chinese economy has moved towards greater balance over the past two decades. Rebalancing has indeed been taking place.

China’s current-account surplus as a share of GDP has risen somewhat since 2018, reaching 3.7 per cent in 2025, an increase from previous years. It nevertheless remains below the 4 per cent warning threshold. What deserves attention instead is the cause of this recent change at the margin.

At present, however, China does face considerable international criticism and economic and trade pressure over its external imbalance.

The first reason is that the Chinese economy has become extremely large. China’s current-account surplus has fallen sharply as a share of GDP, from a historical peak of 10 per cent to 3.7 per cent last year. Yet some experts have pointed out that, as China’s share of the global economy has expanded, the absolute size of its surplus has actually increased relative to the combined GDP of the rest of the world.

This illustrates that once China became a major economy, even continued domestic rebalancing could not prevent the sheer size of its surplus from having a significant impact on the industrial structures of other countries.

The second reason relates to the debate over “China Shock 2.0.” Europe has reacted with greater alarm this time because the sectors now under pressure have traditionally been pillars supporting the high-income, high-welfare systems of developed economies. Europeans worry that, once Chinese products enter global markets in large volumes, they may displace established domestic industries.

If these pillar industries are replaced or subjected to sustained pressure, will these countries be able to develop new industries quickly enough to fill the resulting economic gap and maintain existing levels of welfare spending? Developed regions with a strong record of cultivating emerging high-tech industries and more diversified economies are relatively less concerned. Most European economies, however, remain heavily dependent on traditional high-end manufacturing, making the pressure to transform much more acute.

Simply put, the way many developed economies experience this new round of competition is fundamentally different from their experience during the earlier relocation of lower-end industries.

The Changing Global Technology Landscape: Northeast Asia’s Rise and Europe’s Awkward Position

Let me use the AI sector to illustrate some recent changes in the global distribution of emerging technologies and industries.

The shift is particularly striking in AI. China and the United States occupy the first tier, with both performing relatively well in algorithm development, the deployment of computing infrastructure, and the commercialisation of AI applications.

The United Kingdom is generally regarded as belonging to the second tier and has also been performing well. Our overall impression from our exchanges there was that the country had clear upward momentum. Its stance towards China was also somewhat more moderate than that of the continental European economies.

Because the UK’s traditional manufacturing base is less substantial than those of Germany, France, and other Western European countries, it faces less direct pressure from the displacement of domestic high-end manufacturing by Chinese counterparts. It also appears to have comparatively greater scope to expand into higher-value future industries.

One interesting phenomenon that we had not paid much attention to before, but which emerged during our recent exchanges with industry representatives and think tanks from various countries, is the rise of Northeast Asia in AI-related hardware.

From Japan’s advanced materials and precision components, to South Korea’s memory chips, and Taiwan’s advanced semiconductor fabrication, packaging and testing industries, Northeast Asia as a whole provides a solid and comprehensive hardware foundation for the global AI supply chain, primarily in support of Western technology companies.

Judging from both investment and financing trends in global capital markets and changes in production capacity across emerging industries, Northeast Asia appears to be entering a second major wave of manufacturing expansion.

Within this increasingly stratified global landscape of technology and innovation, Europe finds itself in a somewhat awkward position. Europeans noted that their universities and research institutions hold a vast number of cutting-edge patents and are home to many innovative start-ups, yet these strengths have translated into few visible breakthroughs in industrialisation and commercialisation.

From the digital economy and the implementation of the General Data Protection Regulation (GDPR) to stablecoin regulation and AI legislation, Europe has moved relatively quickly in establishing regulatory frameworks. Yet the commercialisation of innovation in frontier industries does not appear to have kept pace with institutional development.

The reasons are highly complex. The broader point I want to make with this example is that, as emerging industries evolve rapidly, countries experience shifts in the global industrial landscape differently, reflecting differences in their resource endowments, policy approaches, and stages of development.

Europe Faces Multiple Internal Challenges

Within Europe, the 27 EU member states have differing priorities and significant internal divisions. Even so, one central concern has become a broad consensus across European society: if Europe’s competitive domestic industries are displaced by foreign products, while emerging industries fail to reach sufficient scale quickly enough to fill the resulting economic gap, the continent will face severe challenges to its medium- and long-term economic development.

Put more starkly, Europeans increasingly see this not merely as a source of anxiety over market competition, but as a systemic challenge to the continued viability of their high-welfare model.

This also helps explain the clear differences between China-U.S. and China-Europe relations on many economic, trade, and technology issues.

U.S. anxiety initially stemmed from distributional tensions arising from the loss of blue-collar jobs in small towns across the Midwest. Later, as China’s new-energy, 5G, high-end equipment, and other emerging industries expanded, these concerns broadened to include competition for global technological leadership and influence over international economic and trade rules.

Overall, however, the United States continues to display strong dynamism in industrial innovation. Its competitive advantages remain particularly pronounced in technological and industrial innovation, advanced manufacturing and financial services, especially in such frontier fields as artificial intelligence, quantum computing, biotechnology and aerospace. The United States is concerned that China may one day overtake it in certain fields, but the U.S. economy as a whole continues to exhibit strong endogenous growth momentum.

I recently met some industry representatives visiting from the United States. When the conversation turned to Europe, they said Europeans were now concerned that China’s industrial expansion could ultimately hollow out the continent’s pillar industries, eroding jobs and household incomes.

Americans were once worried about the offshoring of manufacturing as well. I remember that when Janet Yellen visited the NSD, she also raised related issues. But one of the visiting U.S. industry representatives said that Americans were now less concerned about the impact of Chinese industries on U.S. employment. At present, the single biggest variable affecting industrial employment, in his view, is job displacement caused by AI-driven automation.

I do not know whether this assessment has been rigorously confirmed by data. His broader impression, however, was that U.S. sensitivities concerning China had shifted, and that the situation was now fundamentally different from Europe’s predicament.

Europe’s problem is that its high-welfare social model, which has operated for decades, depends heavily on the economic rents from technological premiums and brand barriers in high-end manufacturing such as automobiles, precision machinery and chemicals. These pillar industries are now under considerable pressure from competitively priced Chinese products.

Europe also faces multiple internal development bottlenecks. During our field research in Germany, we heard one particularly interesting assessment: because the country’s domestic capital markets are underdeveloped and its venture-capital ecosystem remains relatively weak, Germany lacks effective financing channels to translate laboratory technologies into emerging industries at scale, even though the country is home to a vast number of high-quality patents and innovative, highly specialised start-ups.

I responded that China and Germany do indeed face some common challenges in industrial commercialisation. Germany was once regarded as an important model for China as it pursued its own industrial transformation and upgrading. Now, however, as both countries enter a new phase of industrial upgrading, inadequate direct financing appears to be constraining the commercialisation of scientific and technological innovation in both economies.

I am not certain whether this suggests that, once economies reach a new stage of development, the traditional bank-dominated financial system becomes poorly suited to the needs of innovative industries. If so, it would pose a broader challenge to financial system reform around the world.

In the UK, I came across data suggesting that a large share of Europe’s capital-market activity had once been concentrated in London. Following Brexit, however, only 4 per cent of the relevant business remained there, with the rest relocating to continental European financial centres such as Paris and Amsterdam.

Yet in the short term, neither the market capacity nor the supporting legal infrastructure of these cities is sufficient to fully replace the role once played by London. Europe’s capital markets remain underdeveloped overall and have yet to provide the support needed to scale up emerging industries.

At the same time, Europeans place great emphasis on regulation and standards when dealing with innovation. To some extent, stringent compliance requirements may have dampened the innovative vitality of start-ups.

In my view, every industrial regulatory framework ultimately needs to strike a dynamic balance between innovation and risk control, and between industrial vitality and regulatory compliance.

Take the GDPR as an example. Europe has done an excellent job of protecting personal privacy. Yet one objective result after years of implementation is that Europe has not produced major global technology companies or large-scale clusters in the big-data industry.

The same issue can be seen in AI regulation. Europe moved at a very early stage to establish a risk-based regulatory framework for artificial intelligence. Policy researchers in China have organised several initiatives to study this approach and draw lessons from it. Under the EU framework, regulatory requirements are calibrated according to the level of risk: AI systems posing minimal or limited risk are subject to lighte obligations, while high-risk systems face stricter requirements.

The result, however, is clear: Europe has produced very few home-grown flagship AI companies.

During our discussions in Brussels, we also touched on stablecoins. Our European counterparts noted with considerable pride that the EU’s Markets in Crypto-Assets Regulation (MiCA) had taken effect well before the various legislative proposals in the United States.

I then asked: if the regulatory framework was established so early, why have Europe’s domestic crypto and blockchain-related industries failed to achieve significant scale?

Of course, Europe’s legislative approach may place greater emphasis on controlling risk and safeguarding financial stability. There is nothing inherently wrong with that policy orientation. However, judging from the actual results of industrial development, Europe’s emerging technology industries have made only limited progress.

Across Europe, policymakers are increasingly considering a shift away from the previous emphasis on economic stability and towards a stronger focus on economic resilience. Yet European countries have not reached agreement on how this “resilience” should be quantified or achieved, or which industries should underpin it.

It should also be recognised that Europe is by no means monolithic. Divergences of interest between Northern and Southern Europe, and between France and Germany, are quite pronounced.

France and Southern European economies are more directly affected by imports of Chinese high-end manufactured products and are therefore more inclined to introduce protectionist trade legislation. Germany and many Nordic countries have substantial direct investments in China, and the interests of their multinational corporations are deeply intertwined with the Chinese market. Their overall positions are consequently more pragmatic and restrained.

The diverging interests of the EU’s 27 member states, together with constant policy bargaining, have also substantially reduced the effectiveness with which unified industrial policies can be implemented.

The EU has recently introduced a succession of new measures, including revisions to the Cybersecurity Act under CSA2 and the Industrial Accelerator Act. Many of these rules are framed in terms of security or industrial support, but in practice they raise barriers to foreign investment and increasingly pan-securitise and politicise economic and trade issues.

Steadfastly Advancing Domestic Economic Rebalancing

Despite the EU’s increasingly protectionist policies and rising trade barriers, China and Europe still share many deep common interests.

I believe the most important question is this: if Europe’s economy comes under increasing pressure from industrial shocks and slowing growth, how should China respond?

At a meeting in Europe, I told the head of a leading think tank that, against the backdrop of rising unilateralism and protectionism and intensifying competition among major powers, China and Europe may be the last hope for preserving an multilateral, open international economic system.

Whether that system can remain viable over the long term is critically important. If a serious and wide-ranging trade war or economic confrontation were to break out between China and Europe, the damage to the global multilateral trading system and to global industrial and supply chains would be enormous. The direction of U.S. economic and trade policy is already clear to everyone.

How, then, should the current bilateral frictions and tensions be addressed? In my view, China’s approach to foreign economic and trade relations should shift from focusing solely on the “competitiveness” of its own industries to pursuing win-win outcomes in bilateral economic relationships.

Now that China has become a major economy — the world’s second largest, accounting for more than 30 per cent of global manufacturing output — any expansion in its exports or shift in the composition of its imports can have a material impact on supply-demand balances in international markets, as well as on industries and employment in its trading partners.

If practical problems affecting people’s livelihoods are not properly managed and addressed, simply emphasising the macroeconomic benefits of free trade will not be enough to win public or political support in partner countries.

China’s external economic and trade strategy therefore needs to take full account of the capacity of its trading partners’ industries to absorb these pressures, as well as the rationale behind their policy responses. The top-level strategic approach must evolve as circumstances change.

More specifically, I see two levels at which this approach can be implemented.

Domestically, China must remain firmly committed to economic rebalancing. It should by now be clear that unless the external imbalance is steadily corrected, weak domestic demand and excessive reliance on external demand as a driver of growth will pose risks to the medium- and long-term sustainability of the Chinese economy.

Rebalancing the economy by expanding domestic demand is therefore necessary not only to ease international discourse pressure, but, more importantly, because it is an inherent requirement of China’s own high-quality development.

Going forward, China must communicate its policies more clearly and effectively in multilateral forums and bilateral economic and trade meetings. This is not only about achieving mutually beneficial outcomes with trading partners; it is also about strengthening the foundations of China’s own externally oriented economy. Economic rebalancing will remain a critically important direction for macroeconomic policy for many years to come.

Stabilising the domestic property market is a key lever for expanding domestic demand and advancing macroeconomic rebalancing, and has economy-wide strategic significance in the current macroeconomic environment.

The real estate sector has extensive upstream and downstream links with dozens of industries in the real economy, including building materials, interior decoration, household appliances, and property services. It is also a major source of large-ticket household consumption and local-government revenue, the principal destination of Chinese household wealth, and connected to the financial system through bank lending, non-standard financing, and other channels.

While adhering to the fundamental principle that “house are for living in, not for speculation,” it is essential to adopt a range of well-targeted policies. In the short term, the focus should be on stabilising expectations, reducing inventories, and supporting essential housing demand. Over the medium to long term, the objective should be to establish a new model for real estate development which encourages both renting and purchasing.

China-Europe Relations: “Ice and Fire” Coexist; Cooperation Is the Only Way Forward

With regard to specific segments of China-Europe economic cooperation, I have identified five practical, specific avenues that the two sides could jointly explore and advance. These would enable China and European countries to draw on their respective comparative advantages, develop a complementary division of labour, and pursue win-win cooperation.

The first is the green transition. This is the largest area of cooperation between China and Europe and the one offering the greatest certainty of practical progress.

China possesses large-scale production capacity across the full value chains of solar photovoltaics, wind power, energy storage, and new-energy vehicles, with particularly strong advantages in cost and commercialisation. Europe, for its part, has accumulated considerable strengths in green hydrogen, carbon capture, carbon-footprint accounting standards, next-generation grid technologies, and green-project certification systems.

The two sides have complementary industrial chains. Cooperation is therefore an inevitable path as Europe implements the European Green Deal and works towards its climate-neutrality targets.

The second is a complementary division of labour in high-end manufacturing.

The two sides could explore a differentiated model in which Europe focuses on high-value-added upstream segments, including core components, specialty materials, industrial software, and vehicle-chassis design, while China builds on its strengths in large-scale intelligent manufacturing, final-product assembly and production, and its vast domestic consumer market.

Cooperation along the automotive value chain could serve as a model for aligning the interests of upstream and downstream participants.

The third is the cautious deepening of cooperation in industrial AI and intelligent manufacturing.

Europe enjoys first-mover advantages in data compliance, privacy legislation and the formulation of global AI governance rules. China, meanwhile, offers a vast range of industrial applications, large-scale computing infrastructure, and extensive experience in deploying intelligent manufacturing.

The two sides could avoid sensitive areas such as general-purpose large language models and facial recognition, and instead focus on practical projects such as smart-factory upgrades and industrial digitalisation.

The fourth is the two-way opening of high-end service industries.

This area is relatively less politically sensitive and is a major source of Europe’s surplus in services trade with China. In 2024, the EU’s surplus in services trade with China exceeded US$50 billion, while payments for the use of intellectual property rights amounted to more than US$10 billion.

Finance, insurance, commercial legal services, healthcare, and high-end education are not only areas in which Europe enjoys clear advantages, but also sectors that meet China’s practical needs during its industrial upgrade. Greater two-way openness could steadily enlarge the pie of shared interests.

The fifth is the joint development of third-country markets.

The two sides could initially avoid highly politicised EU-wide negotiating frameworks and instead work with individual countries that have a stronger capacity to act, such as Germany and France, to expand jointly into overseas markets.

China and European countries could cooperate on new-energy, infrastructure, and industrial-park projects in Africa, Central Asia, and other parts of the Global South, combining their respective strengths to develop new sources of market growth.

To conclude, China-Europe relations currently display a clear combination of “ice and fire.” Rising tariff barriers and an expanding range of protectionist legislation represent a “thickening layer of ice.” At the same time, multinational companies’ continued investment in China, the imperative of the green transition, and the shared interest in preserving the multilateral system form underlying “warm currents.” Although structural problems undoubtedly exist, the objective foundation of deeply intertwined bilateral interests remains in place.

The real question is not whether China and Europe should cooperate, but in which areas they should cooperate and under what rules. That said, translating cooperation into practical results will not be easy. In any event, this is an issue that deserves sustained and close attention over the long term.

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