‘We’re not that wealthy’: Beijing’s answer to China Shock 2.0

As trade tensions between China and Europe reached a new high, Chinese Premier Li Qiang used the opening ceremony of the 15th Annual Meeting of the New Champions, also known as the Summer Davos, on 24 June to push back against the “China Shock 2.0” narrative, which has gathered momentum in recent months. Instead, he advanced the idea of “China Opportunity 2.0” as a counter-narrative.

Notably, Li credited China’s innovation success to its society and businesses, hailing Chinese enterprises as “remarkable”. His evident admiration and appreciation for the country’s companies revealed a rarely seen side of the relationship between China’s leadership and its business sector.

Hard-earned innovation and breakthroughs

Known for his low-key and pragmatic style, Li departed from his prepared remarks several times during the speech to challenge Europe’s widespread “China Shock 2.0” narrative, criticising “unfriendly narratives” advanced by people anxious about China’s technological and industrial innovations.

Li said that China’s economy has been able to maintain steady and healthy growth because of two key factors: the stable environment and the strength of innovation. He said there was no need to elaborate further on the former; as for the latter, “the strenuous efforts and long-time dedication that contributed to the successes in innovation might not always be fully appreciated”.

Li framed his case around three key arguments. The first was that “China’s innovation has been forged through relentless, painstaking effort” — a point he emphasised repeatedly. He cited China’s sustained investment in research and development (R&D), which expanded at an average annual rate of 10% between 2021 and 2025, making the country the world’s second-largest R&D spender. He also noted that basic research accounted for more than 7% of total R&D expenditure last year, a record high for China.

He stressed that “Chinese companies are remarkable”. He said many industry leaders have endured operational pressures due to prolonged and costly R&D commitments — some incurred heavy losses, while others faced unfair external suppression, yet none of them ever wavered in their commitment. 

Li highlighted Huawei as being “perhaps the most typical example”. Despite having long suffered from financial and technological blockades, the company had invested as much as one trillion RMB (US$147 billion) in R&D over the past decade, and “achieved a host of breakthroughs in frontier technology”.

Favourable business environment and market

Li’s second point was that China’s innovation has been strengthened through its wide range of industrial applications. Given China’s complete industrial system and vast domestic market, promising scientific and technological breakthroughs, backed by the country’s manufacturing capabilities, can be rapidly transformed into commercial products. Likewise, a niche product introduced into a market of more than 1.4 billion consumers has the potential to grow into a sizeable business — or even an entire industry.

Through large-scale commercial applications, new technologies can continue to evolve and improve. These innovations, Li argued, are the true source of the competitiveness of Chinese products, not government subsidies. Li remarked bluntly, “The Chinese government is not that wealthy. We cannot afford to give so many subsidies.”

His third point was that China’s innovation has been nurtured in an enabling environment. Only at this point did Li lay out the government’s role, including “putting in place a diversified investment system with enterprises leading the way, government providing guidance and society participating”; it has deepened reforms of systems and institutions, and will speed up the development of infrastructure including new-type power grids, computing power networks and new-generation telecommunication networks.

Deflecting blame to China

Li’s remarks also suggested that, within China’s system, innovative technology companies have ample room to grow at home and no longer necessarily need to seek opportunities abroad. Instead, international technology firms could consider coming to China to test and refine their technologies.

As for Li’s rebuttal of China Shock 2.0, the term refers to the impact of the rapid global expansion of Chinese technology products since 2018. It draws a contrast with the original “China Shock” of 2000-2007, when China’s accession to the WTO unleashed a wave of low-cost Chinese manufactured goods, reshaping global markets.

Faced with this pressure, German media have called on the European Union (EU) to introduce carefully targeted tariff barriers to protect domestic European industries, restrict Chinese investment and reduce Europe’s dependence on China. 

Meanwhile, Chinese media have pushed back, arguing that China Shock 2.0 is essentially a Western narrative designed to deflect blame. They contend that Western politicians have deliberately manufactured the notion of a Chinese threat, blaming China’s industrial upgrading for their own economic weakness and employment challenges while deflecting attention from failures in domestic governance.

Both sides have firmly held to their respective positions. The reality is that the intensity of China Shock 2.0 has not exceeded that of the original China Shock. However, because China’s exports are now far larger in scale than they were two decades ago, and because this latest wave centres on strategically important technology industries and its impact is concentrated in a relatively small number of sectors, European businesses have felt the shock much more acutely.

Moreover, after years of relentless involution at home, Chinese companies have driven prices down to cut-throat levels. Europe, meanwhile, has been hit this year by the combined impact of the Russia-Ukraine war and the crisis in the Strait of Hormuz, pushing up energy and raw material costs. For some European companies, profit margins have been all but wiped out. Faced with the aggressive expansion of Chinese competitors, they have become increasingly anxious. 

Against this backdrop, German Chancellor Friedrich Merz said at last week’s EU summit that the RMB was undervalued by 30%, and proposed pressuring China to revalue its currency through an arrangement similar to the Plaza Accord reached between the US and Japan.

Not yielding to pressure

Is the narrative of China Shock 2.0 justified? For the companies affected, the shock is undoubtedly real. But attributing the structural challenges and industrialisation issues facing the global and European economies entirely to Chinese exports is fallacy.

Countries around the world must also accept a fundamental reality: Chinese companies are no longer the inexperienced challengers they once were. Direct competition between Chinese and foreign firms will become increasingly unavoidable, and what we are seeing now is only the beginning.

Nevertheless, taking concrete measures to rebalance the domestic economy and raising household incomes to drive domestic demand are also necessary steps for China to ease tensions in international trade.

For now, however, there is little sign that China will yield to European pressure. Li’s robust defence of Chinese companies and his rebuttal of China Shock 2.0 at the Summer Davos forum were themselves a signal: if Europe launches a trade war against China, Beijing will not hold back. 

Europe also appears to have no appetite for a full-scale trade war with China. However, with bilateral relations remaining tense, the outbreak of limited trade frictions has become unavoidable.

This article was first published in Lianhe Zaobao as “李强回击“中国冲击2.0”为中企发声”.

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