China’s consumer spending and investment slumped to levels unseen since the pandemic, even as the country’s export machine kept humming and its trade surplus hit a record $1.2 trillion last year. The latest data, released by the National Bureau of Statistics on Tuesday, shows the familiar pattern of top-down economic management: households are told to tighten their belts while factories, banks and exporters keep the gears turning.
Who Pays for the Boom
Retail sales declined 0.6% last month from a year ago, a worse-than-forecast drop and the first fall since the reopening from Covid lockdowns in late 2022. Home prices fell at a quicker pace in May, and fixed-asset investment shrank a deeper-than-expected 4.1% in the first five months from a year ago. China’s May retail sales fell for the first time in over three years, with investment slumping while industrial output rose. The numbers point to a lopsided economy where ordinary people are being squeezed even as production keeps moving.
Economists say China’s policies encourage factories to overproduce and consumers to underspend. State-run Chinese banks pay low interest rates to savers but offer cheap loans to government-owned manufacturers. A flimsy social safety net pressures Chinese families to save, not spend, to build a financial buffer against old age and medical problems. Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund, said the policies are partly meant to keep factories busy and workers employed. “The result is an excess domestic supply of manufactured products, which must be exported abroad,” he said.
The Export Wall Moves Outward
China’s exports across EVs, batteries, advanced machinery, software and instruments are rising, intensifying competition with wealthy economies and landing on the agenda at the G7 summit in Évian-les-Bains, France. The world’s second biggest economy is exporting more products than ever, but it is redirecting them away from the U.S. tariff wall and toward more open markets in Europe and elsewhere in Asia. Exports from China to the 27-nation EU climbed 16.4% in January to May from a year earlier. For France, that meant its trade deficit with China rose to $5.3 billion from $3.3 billion a year earlier, according to Beijing’s customs statistics.
French President Emmanuel Macron warned earlier this year that Chinese exports are “literally killing a large part of the European industry” and admitted that Europe was “slow to see that.” French officials now say they hope to leave the summit with a plan to tackle the China threat. One possibility is that the European Union and others will build a higher tariff wall of their own against Chinese imports. Currently, the EU imposes relatively low tariffs on China under World Trade Organization rules, though it hits specific Chinese products with higher ones, up to 35% on electric vehicles, for example.
Trade Wars, Same Bosses
For eight years, the United States has waged economic war on China, slapping big taxes on Chinese products before they enter America. But the campaign hasn’t dented China’s industrial prowess. China last year notched a record global trade surplus of $1.2 trillion. The first China Shock started around 2001 when the Chinese joined the World Trade Organization and gained low-tariff access to the lucrative markets of the United States and Europe. In the United States, many factories couldn’t compete with low-cost Chinese textiles, furniture, electronics and other manufactured goods.
Economists David Autor of the Massachusetts Institute of Technology, David Dorn of the University of Zurich and Gordon Hanson, now at Harvard, found that competition from China had led to the loss of 2.4 million American jobs. China Shock 2.0 is playing out differently because China now dominates world trade and manufacturing. China accounted for just 4% of global goods exports in 2000. Now its share is 16%, the highest in the world, making Beijing’s trade policies far more consequential.
Eswar Prasad of Cornell University said, “The second China shock is characterized by its companies running the board on manufacturing exports -- from low-tech, low-wage to high-tech high value-added industries.” He said, “This is directly hitting advanced economies where it now hurts the most” — high tech industries such as EVs and high-end robotics that many countries “had been counting on for a manufacturing revival.”
Germany has been hit hard. German companies once grew fat on exports to China but the situation has reversed: China now sells more goods to Germany than it buys. German companies are struggling to compete with Chinese rivals in industrial machinery, construction equipment, cars and chemicals, all mainstays of Germany’s export-oriented economy. Partly because of the competition from China, Germany’s economy has stagnated, shrinking in 2023 and 2024 and growing just 0.2% last year.
The United States is less vulnerable than it was in the 2000s. Trump’s tariffs have kept out a lot of Chinese products. Exports of Chinese goods to the United States dropped 37% from January through April this year, versus the same period of 2025, the U.S. Commerce Department reports. The United States is also in a stronger economic position because it produces its own energy, unlike the EU and Japan, and is enjoying a boom in productivity and investment in artificial intelligence.
Despite Trump’s tariffs and diminished sales to the United States, China is benefiting from soaring demand for its low-cost EVs and from AI investment, which generates sales of Chinese electrical components and machinery for data centers. Taylor Wang at HSBC warned this month that a China-EU trade dispute could threaten Chinese exports; Europe accounted for a big share of China’s exports of electric vehicles, solar panels and lithium-ion batteries.
China has repeatedly promised to rein in overproduction and encourage consumer spending, as the United States and other countries have urged for decades. That would make its economy less reliant on exports and its consumers better off. It would also give U.S. and European an expanding market to sell into. “The leadership has long said this is a goal,” Obstfeld said, “but they have been slow to act as if they mean it.” Wendy Cutler, former U.S. trade negotiator and now senior vice president at the Asia Society Policy Institute, said, “Beijing has been relying on the rest of the world to address its overcapacity problem.” She added, “However, this unsustainable situation may soon change if the EU and others take steps to halt Chinese imports, following the U.S. lead.”