With the International Monetary Fund expecting Chinese export volumes to rise by around 30 per cent between the end of 2023 and 2026, while imports barely budge at all, Sorbus Partners discusses what some are dubbing the “second China shock”.
Sorbus
Partners, a private investment office, has
highlighted that the second largest global economy has
increased its exports by a third in just three years,
without a compensating rise in imports – a huge achievement
from one point of view.
This means that unless other forces shift, there could be a shock
on the scale of a decade-plus ago to European and US
manufacturing, stoking a variety of problems, the firm said in a
note.
China’s surplus reached very large levels in the early to mid
2000s, Sorbus said. “Any surplus or deficit larger than around 3
per cent of GDP, especially one lasting several years, is the
kind of thing which tends to have close watchers of the data
raising an eyebrow or two.”
More recently though, it has begun to rise again. By 2019, before
the pandemic, China’s current account surplus had fallen below 1
per cent of GDP, but it is now comfortably back at over 3 per
cent. Of course, that looks materially lower than in, say, 2006.
But China’s economy is much larger than it was 20 years ago.
Putting the numbers into dollar terms makes that clear and
explains why global policymakers are becoming increasingly
concerned, the firm continued.
“Before the pandemic, China was running a surplus with all other
global nations of around $100 billion. Nowadays, it is over $700
billion. That is, even in global macroeconomic terms, a large
number. And one that looks set to keep on growing.”
The commentary speaks to how wealth managers are trying to work
out the impact of China”s efforts in areas such as auto
manufacturing and how this works at a time of sometimes fraught
relations between the Asian giant and the West.
Made in China
Sorbus said the latest phase of development began with the Made
in China programme, unveiled as part of the communist party’s
medium-term economic plans in the later 2010s. That was a
conscious effort to lower the foreign made component of Chinese
exported goods, and to step up the global value chain. When the
pandemic hit, China doubled down on this programme, investing –
by some accounts – more than a trillion dollars in building up
manufacturing capacity.
The best evidence for the programme meeting many of its goals is
to be found by looking at the cars one sees in a car park or on
the motorway. “The single best-selling new car model in the
United Kingdom in March, according to the Society for Motor
Manufacturers and Traders, was the Jaecoo 7, with more than
10,000 registrations,” Sorbus said.
“It was not that long ago that seeing a Chinese made car on the
British roads was a very infrequent experience. Now though,
Jaecoo is a leading new brand, alongside Build Your Dream (BYD) –
the leading Chinese auto firm. BYD opened its first UK dealership
in April 2023. In December 2025, it opened its 125th.”
As recently as six years ago, China was a net importer of cars.
“Now, it exports more than five million vehicles annually and has
surpassed Germany, Japan, and South Korea to be the world’s
largest export of automobiles,” the firm added.
The same can be seen in solar panels or, increasingly, in areas
such as machine tools. The challenge facing global policymakers
is stark: China shows no interest in increasing its imports,
whilst continuing to grow its exports.
Sorbus emphasised that this is a major issue for a country such
as Germany. In the 1990s to 2010s, the terms of the relationship
was simple: Germany bought cheap consumer goods from China and
exported back high end autos, chemicals, and machine tools. “Now,
China is making its own machine tools and chemicals and has
switched from being a key customer for German carmakers to one of
their fiercest rivals,” Sorbus continued.
The firm believes that even for nations with a lower
manufacturing process than the Germans, there is a clear
challenge here. “While consumers may gain in the short term from
cheaper Chinese goods, domestic manufacturing risks being swept
away on a tide of cheap imports,” the firm said. “US tariff
policy swings wildly and without much consistency, the European
Union struggles to agree a position acceptable to all of its 27
member states, let alone agree with the United States.”
Under US President Donald Trump, the US response of higher
tariffs offers little protection. “Even much higher levels of
tariffs on China have simply led to Chinese exports being routed
via third parties. The G7 nations devote around 20 per cent of
their output to investment and consume the rest. China invests
around twice as much.”
“One issue, readily identified by the IMF, is that China’s
currency is too cheap,” the firm said. The country has maintained
capital controls which prevent the yuan from rising or falling on
an open market. The extent of undervaluation varies by estimate,
but is usually within a broad range of around 20 to 30 per cent.
“In the absence of an agreed position, a second China shock –
much like that of the early to mid 2000s – risks crashing over
European and US manufacturing,” Sorbus said. “In the short to
medium term, that may help lower inflation. But in the longer
run, it would not bode well for any firm in any sector targeted
by China’s national plans.”
Meanwhile, with emerging market equities recently outperforming
developed ones, a number of wealth managers like BNP Paribas
Wealth Management, Ninety One, Aberdeen Investments, have been
stepping up their investment in emerging market equities, notably
tech, which remains undervalued compared with the US. See
here and
here.