China’s effort to export its way out of a weakening domestic economy is creating a sharp divide between its increasingly powerful external sector and subdued internal demand, while generating a new group of potential corporate winners.
The contrast has become increasingly visible in recent months. China recorded 24% year-on-year export growth in July and a $113 billion trade surplus, following similarly strong figures in June and putting the country on track for another trillion-dollar-plus surplus in 2026. At the same time, second-quarter GDP growth disappointed at 4.3%, while retail sales growth remained subdued, at minus 0.6% in May and 1.3% in June.
The divergence reflects Beijing’s policy choices. Over the past decade, China has sought to strengthen its position in advanced manufacturing, building enormous market shares in industries including electric vehicles, solar cells and batteries.
Western policymakers have labelled the resulting export surge “China Shock 2.0”, echoing the disruption caused by China’s manufacturing expansion in the early 2000s. Governments in Europe and elsewhere argue that subsidised Chinese electric vehicles and green-technology exports are putting pressure on domestic producers and threatening industrial employment, particularly in Europe.
Europe has responded with sectoral tariffs, tighter cybersecurity requirements and calls for China to allow its currency to appreciate. US President Donald Trump has also intensified the use of tariffs, adding to the pressure facing Chinese exporters.
Yet while trade tensions have escalated abroad, Beijing has taken only modest steps to strengthen domestic consumption. Measures intended to curb aggressive price competition in industries such as food delivery, electric vehicles and solar components have had limited success. The campaign, known as “anti-involution”, has therefore done little to resolve the underlying pressure on domestic profitability.
Chinese companies have increasingly adapted by expanding production directly into major overseas consumer markets. Establishing manufacturing bases closer to customers can help companies bypass trade barriers, build local support and protect supply chains from geopolitical disruption, while also reducing their dependence on an increasingly difficult domestic market. The strategy forms part of Beijing’s “Globalization Phase 3.0” initiative.
The approach is creating potential winners among companies already dominant in China’s export economy. Electric vehicle and battery manufacturers are particularly well positioned. China represented 65% of global intellectual property in the EV and battery industries in 2024, while EV leaders BYD and Geely and battery major CATL have established substantial global market shares, diversified manufacturing bases and international supply chains.
Consumer electronics companies Midea and Haier have similarly developed integrated international operations combining local research and development, manufacturing and distribution across Southeast Asia, Latin America, the US and Europe.
Companies producing strategically important technological components may also benefit. Zhongji Innolight and Eoptolink manufacture optical transceivers that are deeply integrated into global artificial intelligence hardware and data centre supply chains. Their substantial production capacity in Southeast Asia could provide some insulation from potential trade disputes involving Western customers. However, such companies remain exposed to escalating restrictions, with the White House considering a ban on US imports of new models of Chinese data centre components, according to a Reuters report.
Currency policy could produce another group of beneficiaries if Beijing responds to criticism of its trade surpluses by allowing the yuan to appreciate. The yuan had gained 3.6% against the dollar and 5.5% against the euro in 2026 as of August 7.
An appreciating yuan could benefit companies with substantial foreign-currency liabilities. Sinopec, for example, has significant euro-denominated debt, while Air China, China Southern and China Eastern carry large dollar-denominated debt burdens that would become smaller in local-currency terms if the yuan strengthens against the US dollar.
The export strategy nevertheless carries significant risks. Strong overseas sales do not automatically translate into stronger share prices. BYD’s overseas deliveries increased by more than 70% in the first half of the year compared with the same period last year, yet its shares declined amid an intense domestic price war.
External shocks can also undermine the benefits of Beijing’s strategy. Chinese airline stocks have fallen sharply since February amid an energy price shock triggered by the US-Iran war, while a shortage of global refining capacity could keep jet fuel prices elevated even if an interim agreement is reached.
China’s first export shock helped reshape global industrial production during an era of expanding globalisation. The second is emerging in a markedly different environment, where Chinese companies face fragmented markets, geopolitical conflict, higher trade barriers and growing resistance from other major economic powers.
