CHINA OVERPRODUCTION

 Huang Xian’s product is about the size of his fist, a sensor that detects electrical current leakage and slots into electric vehicle chargers as a safety guard between the car and the grid. 

The device is not just a symbol of the innovation and accomplishments of China’s high-tech sector. It also reflects a trend eviscerating high-end manufacturing across the world, to the near despair of governments from Asia to Europe and beyond.

The EV boom has propelled Huang’s sensor shipments to a projected 10mn units this year, up from about 20,000 in 2019, when his company Mega-Senway Electronic Technology entered the market. Back then it was still a niche product, supplied by a handful of German and Swiss groups that sold the sensors for roughly Rmb200 (around $30) — or more per unit.

Mega-Senway made its first sensors for about Rmb40 each and sold them for Rmb100, leaving Huang with a healthy margin. As Chinese competition poured in, prices started to fall. European groups gradually exited the market. Huang’s Shanghai-based company now sells some sensors for as little as Rmb10 a pop. “We never thought the price decline would happen this fast,” he says. 

His company’s trajectory is emblematic of the larger economic forces reshaping global industry and trade as extraordinarily competitive Chinese companies push into a variety of industries at dizzying speed. 

Twenty years ago the global economy was shaken by a first “China shock” as a wave of low-cost goods destroyed the business models of manufacturers in advanced economies, displacing millions of workers and feeding discontent that fuelled populist politicians including US President Donald Trump. 

Now a second shock is under way — one that is even more threatening to China’s trading partners: an assault on high-end manufacturing.

Vicious domestic competition, coupled with vast industrial scale, ample pools of engineering talent and some of the highest subsidies in the world, has generated world-beating Chinese champions in EVs, solar panels, batteries, wind turbines and a lengthening list of advanced manufacturing sectors. 

But the same forces that forge those companies also tend to generate overcapacity, crushing margins at home while flooding global markets and fuelling trade tensions. Aided by an undervalued exchange rate, Chinese groups are cutting a swath through the most advanced industries around the planet.

The China shock 2.0

This is the first in a series about the economic consequences of China’s record trade surplus for the rest of the world

Part 1: The high-end Chinese products flooding the world

Part 2: Europe’s ‘embrace or repel’ China dilemma

Part 3: South-east Asia’s ‘China squeeze’

Bonus: Is China shock 2.0 really shocking?

“Companies that can survive in China are unbeatable anywhere else in the world,” says Huang He, an investor in Mega-Senway and more than a dozen other Chinese industrial groups. Chinese founders have to “use every possible means” to survive, he says, collectively creating the country’s unmatchable competitiveness. “China is full of engineers — tech barriers last six months to a year at most.”

For Huang of Mega-Senway it feels like a whirlpool sucking his company downwards. “This is not a healthy situation,” he says. “There’s malignant competition.”

The outside world sees unstoppable Chinese champions selling quality products at impossible prices. After racking up a record trade surplus in goods that surpassed $1tn in 2025, China boosted exports by nearly 15 per cent year on year in the first three months of 2026.

In just one example, China’s Jaecoo 7 SUV, with a starting price of £29,000, became the UK’s best-selling car in March.

France’s President Emmanuel Macron, one of several European leaders to visit Beijing in the past six months, did not mince his words on a threat he sees as existential. The surge of high-quality Chinese goods, he said, represented nothing less than a “question of life or death” for manufacturing on his continent.

In China, there is a word that has come to describe the phenomenon: neijuan, or involution — a term that has become shorthand for a competitive dynamic in which everyone runs harder and harder for diminishing returns.

It forces companies like Mega-Senway to move fast. Huang explains how they cut their own costs so dramatically over just a few years. First they acquired the factory that manufactured the sensors they designed. Then he visited nearby factories to study their best practices.

A worker testing their finished sensors initially did it one at a time, he says. Huang redesigned the testing jigs to test four at a time, then eight, with a worker constantly loading or unloading batches. Now he has replaced the workers with robotic arms.

“We would update our processes two or three times a year,” Huang says. “The pressure came that fast.”

The five-year product cycles with annual price negotiations that the auto industry once ran on have disappeared, he says. One large automaker has cut out all middlemen and puts out tenders each month directly to manufacturers up the supply chain such as Mega-Senway. They submit prices, are told if they are the lowest or not, and submit again — round after round, until no one will go lower.

Huang, in turn, has had to bring in more suppliers to pit against each other. “I’m being squeezed, so my only option is to pass my pressure on to them,” he says, noting even the automakers at the bottom of the supply chain are not immune to the price wars.

BYD, the world’s largest EV maker, saw its average selling price per car fall from Rmb143,100 in 2021 to Rmb119,223 last year. Nio, one of China’s premium EV brands, has lowered the price of its flagship ES8 SUV by about 20 per cent since its 2018 debut, despite packing much more technology into the car.

Chief executive William Li says cutting costs has been a focus as they have redesigned the car. “For the first-generation ES8, the vehicle structure used 97.4 per cent aluminium, which was very expensive,” he says. “Today, we can achieve the same strength with less aluminium.”

Li adds that the group has brought the manufacture of components such as semiconductors in-house and localised the sourcing of parts such as the air suspension, which was once imported from Germany. 

“Since 2018, China’s whole supply chain has transformed — new EV sales are now a hundred times what they were back then, so costs across the entire supply chain, batteries and everything, have come down enormously,” he says.

Nio reported its first-ever quarterly profit in the December quarter. But, up the supply chain, Huang’s gross margins are approaching zero on some orders and his customers keep demanding lower prices. 

It is a similar story across Chinese industry, from chemicals to solar to the manufacturers providing components for the car and wind giants: volumes keep rising but profits are shrinking or negative.

This has spurred Huang and other Chinese entrepreneurs to consider larger questions such as supply and demand, government incentive structures and game theory as they try to find a way out of the unrelenting competition. 

“Before you could just focus on making products,” he says. “Now everyone is in a confused state, wondering what is actually happening, why have we been sucked into a downward spiral.”

The problem of global imbalances is by no means confined to China.

The long-term stability of the world economy is equally menaced by the US’s yawning current account deficit and the country’s need to bring down its budget deficit, bolster national saving and reduce its reliance on foreign financing. 

Such structural concerns are rising up the international economic agenda and will be a focus of the IMF/World Bank spring meetings in Washington DC this week.

But the fracturing of the western alliance triggered by Trump has left senior officials pessimistic about the prospects of any concerted attempt to address such structural economic issues.

And while the US president is set at a summit with President Xi Jinping next month to renew his country’s longstanding calls for China to rebalance its economy, few hold out any hope of a volte-face by Beijing away from its dependence on exports.

“There is an ideological hardwiring at the top of the Chinese hierarchy to favour production over consumption,” says Daleep Singh, a former White House adviser under Joe Biden who is now chief global economist at PGIM, the asset management group.

“China will continue to rely on the rest of the world to absorb their excess production because the domestic political cost of empowering their own consumers is too high.” 

European economies including the UK, Germany and France are among those in the path of the wave of merchandise exports, since the continent’s high energy prices and labour costs leave it particularly vulnerable to cheaper products from elsewhere.

By contrast, the first China shock had more mixed effects in Europe because Beijing’s consumer electronics, furniture and appliances did not directly compete with core industries such as German auto manufacturing.

Now the sense of security has evaporated. The surge in Chinese exports in the first three months of 2026 was driven by shipments to the EU, up 21.1 per cent, and to south-east Asia, up 20.5 per cent year on year — even as exports to the US fell.

Alarmingly for governments across Europe, Asia and elsewhere, the political and economic factors fuelling the rise in China’s trade surplus are intensifying. 

The country’s protracted property slump and weak social safety net have curbed consumer spending, resulting in zero inflation last year and an increasing reliance on external demand to prop up growth. 

Chinese officials shrug off criticism of the country’s economic strategy, indicating they have no immediate plans to change course. 

“The so-called issue of ‘China’s overcapacity’ does not really exist and should not be used as a pretext for political manipulation,” Beijing’s foreign affairs ministry said last month in response to renewed US efforts to increase tariffs on China.

Xi inaugurated a campaign against neijuan-style competition last year, seeking to curb price wars in sectors including high-tech and green energy.

But when Chinese leaders last month formally launched the country’s five-year plan for 2026-30 they signed off on overwhelming state support for sectors ranging from biomanufacturing to robotics.

A further, critical factor is the Chinese currency. Lower inflation relative to Chinese trading partners has led to a real exchange rate devaluation in the past three years, helping boost net exports and the current account surplus, which stood at 3.7 per cent of GDP last year. 

The IMF estimates the country’s real effective exchange rate — which measures the real value of the currency against a basket of competitors — is undervalued by around 16 per cent, fuelling the competitive advantage enjoyed by Chinese exporters. 

China has kept exports competitive by buying dollars and depreciating the currency, accumulating “shadow reserves” through a complex web of state-owned banks. 

Then, crucially, there is Beijing’s industrial policy. 

China has a ream of policies to help companies get off the ground, with local governments in particular battling with each other to offer the best subsidies, cheap land, financing and tax breaks to lure in manufacturers and seed new industries on their turf. 

The competition between localities can be so great that some businesses move from one place to the next as they chase subsidies and investment. They have become known as “migratory bird enterprises”. 

Among the hottest sectors is humanoid robotics, an area that in recent years has drawn a wave of venture capital and government funding, with so many start-ups entering the sector that even the government has warned about the risk of a bubble.

Li Chao, a spokesperson for China’s state planner, recently told journalists there were more than 150 humanoid robot companies with the number still growing. “We must guard against the risks of highly duplicative products crowding into the market and squeezing the space for R&D,” she said.

But Li’s numbers may understate the scale. Corporate data provider Qichacha lists 1.2mn Chinese companies with “robot” in their name or business scope. Some have recently pivoted from fields like cosmetics, green energy or semiconductors.

The founder of a robotics company in western China ticked off the subsidies that have helped him get started: grants to help his customers purchase his robots, subsidies to expand his factory vertically instead of horizontally, money for rooftop solar panels and energy storage and a “smart factory” plaque from the provincial government with more attached benefits.

His competitors get the same benefits, he says, acknowledging it may have contributed to the onslaught of new rivals that has forced his prices down 10 per cent over the past year. “At the same time, we wouldn’t be here without them,” he says. “The benefits outweigh the downsides.”

The system creates more and more companies fighting for the same piece of pie, says Huang He, whose group, Northern Light Venture Capital, is an investor in Mega-Senway. The problems arise when the government money for nurturing companies becomes what sustains them, he says. 

“Local governments are reluctant to let their local companies fail,” he says. “That’s why overcapacity is so hard to fix.” 

The way the Chinese system works, local officials have every incentive to protect their companies.

Value added tax generates nearly 40 per cent of China’s tax revenue, and the central government splits the receipts with the localities where products are made, giving them a direct stake in keeping factories running.

Adding local production capacity also creates the growth that officials are largely judged on, and any large-scale lay-off could threaten social stability, Beijing’s overriding priority.

“Officials are scared of missing their GDP targets. Nobody is scared of overcapacity,” says another founder, who asks to remain unnamed. “As long as you’re manufacturing, there’s VAT revenue. Whether you sell [a product] or make a profit, that doesn’t really affect them.”

Beijing is aware of the problem. Yin Yanlin, a top government economic adviser, told Qiushi, the party’s top theoretical journal, during parliamentary meetings last month that tax reforms were needed to shift VAT from being collected at the point of production to point of sale.

Qiushi published a widely read essay last July calling for an end to neijuan-style competition and accused local governments of stoking the problem by luring manufacturers with illegal tax breaks, subsidies and cheap land, as well as all piling into the same hot industries.

Huang of Mega-Senway suspects some of his competitors are losing money on every sensor they sell and are being sustained by investment from local government funds. “I know the costs, some of their prices don’t make commercial sense,” he says. 

The result is that companies which should exit the market keep operating, sustained by government capital, especially China’s politically favoured industries, such as solar, wind, batteries and EVs. 

“Analysts often confuse the global competitiveness of Chinese manufacturing with manufacturing efficiency but these are two very different things,” said Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace.

“China’s manufacturing competitiveness depends on an undervalued exchange rate, very cheap financing and very low wages relative to productivity.”

Workers wearing white coats and hair coverings on a production line

Mega-Senway’s production line used manual labour in 2020 © Mega Senway

A worker tracks production on a screen

The company is now nearly fully automated — workers control a software system © Mega Senway

Recent OECD analysis underscores the role of subsidies. Company-level analysis of Chinese industry by the 38-member organisation estimates that Chinese businesses are subsidised at between three and nine times the rate of their rich-world counterparts. 

As well as grants and tax breaks, the OECD data finds that the biggest subsidies come in the form of loans from Chinese state banks offering below-market rates to Chinese companies that undercut international competition.

While such dynamics have helped Chinese groups dominate globally, profits are vanishing. In the solar industry, overcapacity has led to vast losses, which China’s top six publicly traded solar groups indicated would cumulatively total Rmb43bn for 2025. 

Yet the subsidies continue. One of those six companies, Jinko Solar, received Rmb1.3bn in subsidies in the first half of 2025 but still lost Rmb3bn in the period. Another, Trina Solar, received hundreds of millions of renminbi during the period.

Gao Jifan, chair and founder of Trina, tells the FT the government needs to help retire underutilised capacity and bring supply and demand in the sector back into balance.

He urges officials to monitor his competitors’ prices. “The key to tackling neijuan is enforcing laws that penalise selling below cost,” he says. 

As Chinese factories rushed into solar, production capacity skyrocketed. The country has the ability to manufacture 1,200GW of solar panels annually, roughly double the 647GW installed worldwide last year, according to the China Photovoltaic Industry Association and energy think-tank Ember.

“Why was it possible to build capacity exceeding global demand by double in such a short time?” asked Li Dongsheng, the chair of television and solar conglomerate TCL. “The key reason is the distortion of resource allocation and inappropriate local government participation,” he said in an interview with local media last month.

Li said he had watched as local governments poured money into building solar plants over the past five years, contributing more than 50 per cent of funding for many projects. “Almost none was built without local government capital involvement,” he said, noting the central government had tried to restrain local officials from further investment. 

“But they kept doing it, in various ways,” he said. Expanding overseas could help gradually absorb China’s overcapacity, he said, but “it’s hard to achieve overnight”.

Selling more abroad, where profit margins are healthier and competition less brutal, is top of many Chinese companies’ priorities. Many car and battery makers, wind turbine groups and solar manufacturers are all working to expand their foreign sales.

China’s vehicle exports were up 21 per cent to $142bn last year and lithium-ion battery shipments hit $77bn. For solar cells, export volumes jumped 73 per cent, but collapsing prices brought the total value of shipments down 8 per cent to $28bn.

John McLuskie, who leads the Asia business of Swiss current sensor maker LEM, says he is worried about his Chinese competitors pushing into global markets. “I think it would be strange not to be a bit concerned,” he says, while adding that his group has been preparing for the contest. 

LEM makes current sensors that are similar to Mega-Senway’s, but are fitted directly into cars, batteries, solar panels and wind turbines. The Swiss-listed group’s largest market is China but the brutal competition there has contributed to its net income margin falling from 19.4 per cent in the year to March 2022 to 2.7 per cent last year. 

LEM has scrapped its dividend and worked to cut costs, particularly in Europe, but its shares are still down 84 per cent over the past four years. McLuskie said the company’s only option was to become more like its Chinese competitors, including sourcing more from China’s low-cost supply chain and hiring about 30 more R&D staff for Shanghai. 

“We need to be close to our customers and work at their pace,” he says. “We have to be able to make money and compete here.” He says that LEM also stood to benefit as its many Chinese customers expanded abroad.

German automaker Volkswagen has reached similar conclusions. VW last year opened a new R&D headquarters in Hefei that now handles all engineering for new Chinese models, and which will gradually make more VW vehicles for the global south and the Middle East. The company sees it as its only way to compete with China’s homegrown automakers.

In this instance, and countless others across the globe, the impact on manufacturers of the second China shock is only intensifying. 

“We have to stop the Chinese steamroller or slow it down so our industry does not disappear overnight,” says Jeromin Zettelmeyer, head of the Bruegel think-tank, referring to the manufacturing capacity of Europe and its partners.

Workers on a production line at the GCL technology plant

While grants, tax breaks and subsidies have helped Chinese groups dominate globally, profits are vanishing and in the solar industry, overcapacity has led to vast losses © Bloomberg

“But we cannot do it in a way that is inconsistent with a long run where China will continue to be dominant in world manufacturing,” he adds. “We need a combination of softening the blow and adapting to the blow.” 

Back at Mega-Senway, Huang is developing new products for data centres and is cautiously looking to build overseas sales. He does not want to enter new markets by undercutting on price. When he began visiting overseas distributors directly, one gave him pointed advice: respect the local commercial rules. 

“The subtext,” Huang says, “was please don’t bring that bottomless Chinese competition. Don’t come here and destroy our way of doing business.”

Huang says he wishes he could escape the ruthless competition. “We started the company because we loved developing new products,” he says. “Now every year when I’m working through the budget, I’m asking how much can I squeeze out to invest in building something new.”

He says at trade shows he runs into his competitors, who also look miserable. “One of them suggested ‘Can’t we all ease up a bit?’” he recalls. “I said I’d love to ease up too.”

“Then he turned around and undercut me on price,” he says.

Data visualisation by Haohsiang Ko. Additional reporting by Edward White, Tina Hu and Cheng Leng

Letter in response to this article:

How Beijing is coping with its industrial overcapacity / From Mihir Torsekar, Senior Economist, Coalition for a Prosperous America, Alexandria, VA, US