China’s export juggernaut turns into its biggest vulnerability as EU weighs market shutdown

China’s economy is growing faster than expected, but the strength is increasingly concentrated in exports — a dependence that is fast becoming its most exposed flank, with the European Union now weighing measures that could sever its access to the bloc’s market.

Data released this week showed GDP growth of 4.5 per cent in September and 4.6 per cent for the first nine months of the year, keeping Beijing on track to meet its target of 4.5 to 5 per cent growth for 2026. The figures beat economist forecasts. Yet the headline strength masks a widening internal imbalance, according to analysis published by Brisbane Times, The Sydney Morning Herald, and The Age.

For the past five years, domestic activity has stagnated following President Xi Jinping’s “three red lines” policy, which curbed property developers’ leverage and triggered a property market crash that continues today. With domestic demand weak — retail sales rose just 1.1 per cent in September from a year earlier — China has leaned ever harder on exports to absorb factory over-capacity.

That reliance is accelerating. September exports grew 36 per cent, the fastest pace in more than 15 years, generating a trade surplus of US$938 billion ($1.34 trillion). The country is on track to beat last year’s record surplus of US$1.2 trillion.

Washington’s trade war has crimped exports to the US, prompting China to diversify toward Asia, emerging markets in Eastern Europe and South America, and a large increase in shipments to the European Union. The EU is now by far the biggest market open to China — and, the analysis warns, the most direct and significant threat to its export model.

Europe’s tolerance is fraying as key manufacturing industries are overwhelmed by Chinese imports, with plant closures and job losses mounting. Imports from China are running 36 per cent higher this year than last, with more than €1 billion ($1.6 billion) worth of goods entering the bloc each day.

The EU this month reached an agreement with Beijing to cap imports of Chinese hybrid vehicles at roughly half their existing levels. The deal followed Germany joining France in seeking greater powers for the European Commission to curb the influx of Chinese cars that is causing increasing damage to Europe’s auto sector.

France and Germany are also spearheading a proposal to create new powers for the European Commission that would completely shut off a country’s access to the European market where that country was seen as damaging the EU economy. The so-called “kill switch” could also be deployed in response to coercive trade measures — such as the threat China wielded against the US by cutting off access to rare earths essential for most advanced manufacturing, a move that successfully forced Washington to back down from its most punitive proposed tariffs.

The Europeans want to slash China’s trade surplus with the EU and are considering whether the hybrid caps can be replicated in other sectors. China’s sensitivity to the bloc’s newly assertive stance was shown by the speed with which it acceded to the hybrid cap, the analysis notes. A complete shutdown of the EU market, while unlikely, could destroy China’s economic model.

The EU’s angst reflects a view that China has pushed its export model too far, fuelled by subsidised loans, direct funding, preferential tax treatments, export rebates and state-directed equity injections. Other countries — the EU bloc foremost among them — do not want their industries wiped out by becoming the safety valve and dumping ground for Chinese over-capacity.

Beyond trade retaliation, the strategy carries another risk. Export growth is increasingly driven by high-tech goods and semiconductors, with the artificial intelligence boom pushing those exports to the point where they now account for roughly a third of China’s export growth. The US-centric AI boom rests on fragile foundations, as its voracious appetite for capital collides with growing awareness and pricing of risk among suppliers. A material slowdown or bust in AI deployment would have destructive consequences for China, alongside the US.

So far, Beijing has done little to rebalance the economy away from exports. Stimulus measures have been modest — cuts to mortgage rates and deposits, and subsidies for trade-ins of old autos and appliances — but no meaningful action has been taken. Urban households have seen their wealth, much of it tied to property, ravaged by the real estate collapse, which is showing some signs of stabilising but remains a drag on consumption.