‘Second China shock’ is already upon us

HAN WOO-DUK
The author is a senior reporter of the China Lab.

G2, the Group of Two, refers to the United States and China. Bloomberg columnist William Pesek spread the term in the media during the 2008 global financial crisis. The term shows his insight into the global economy.

Pesek recently wrote a column for Barron’s, a leading source of information on stocks, investments and market movement. In the column titled “China’s Deflation Could Go Global, Fast,” he argued that high-tech companies such as Tesla, Apple, Sony and Samsung — not the toll manufacturing factories of garments, furniture and toys — will be hit this time. Western high-tech companies are likely to face another “China shock.”

This trend is already becoming a reality. Thanks to its rapid advancement with electric vehicles (EVs) last year, China emerged as the world’s largest car exporter as BYD pushed Tesla into second. The same happened in solar power. With China’s low-price offensive, global solar panel prices plunged by more than 25 percent in 2023. As a result, European solar power companies went bankrupt one after another.

The most popular products among China’s exports last year were EVs, lithium batteries and solar power. Total exports exceeded 1 trillion yuan ($140 billion). Due to an economic slowdown, the domestic Chinese market for these products is oversupplied, offering a good explanation as to why there are talks of “exporting dumping and deflation.”

The global semiconductor industry also needs to worry about China exporting deflation. In a recent article for the Financial Times, Chris Miller, author of “Chip War,” warned about the possibility of China flooding the market with certain types of chips. He analyzed that the country’s production of general-purpose semiconductors, used in automobiles and appliances, will double in five years’ time. Taiwan’s TSMC — which relies on general-purpose chip processing for about 25 percent of its sales — also cannot avoid the shock.

The second “shock” began in 2001, when China joined the World Trade Organization. After emerging as a “world factory,” China sucked in manufacturing jobs from the rest of the world. While the first shock mostly hit manufacturing in developing economies, the second shock threatens the high value-added industry in developed economies. The West, including the United States, Europe and Japan, is busy building high walls so as not to be overtaken by China at least in the high-tech sector. They are working hard to attract cutting-edge product factories, foreshadowing more acute pains from the second shock.

BYD is preparing to release its EVs in the Korean market, with BYD Korea reportedly recruiting staff to create a sales network within the first half of the year. Hyundai Motor cannot but be nervous. The “second China shock” is already upon us.