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China: Constrained but still central to growth – Rabobank

RaboResearch stresses that China’s production-oriented model, weakened by property and debt strains, increases reliance on manufacturing exports as US market access narrows. Beijing is unlikely to cut capacity or subsidies quickly, instead leveraging critical materials and supply chains for selective retaliation. This keeps Europe exposed to Chinese export pressure despite rising economic-security frictions.

Export-led model and retaliation leverage

"China's domestic weakness sharpens the problem. Its production-oriented economic model, compounded by the property downturn, debt overhang and weak domestic demand, reinforces reliance on manufacturing and exports."

"With the US market harder to access, Europe is an obvious outlet. Cheap, advanced imports benefit European buyers, but can also displace production, squeeze margins and deter investment. ECB research suggests these negative effects may dominate, without accounting for longer-term scarring or strategic vulnerabilities."

"For Beijing, rapid rebalancing is unattractive. Manufacturing supports growth, jobs, technological upgrading and autonomy while domestic demand remains weak. Cutting capacity, subsidies or exports would impose visible costs. The campaign against 'involution' acknowledges strain in China’s supply-driven model, not Europe's preferred remedy."

"Europe matters more as US access narrows. China therefore has reason to keep talks alive: a conflict would weigh on exports and add pressure on strained firms."

"China therefore has the tactical advantage in a sudden confrontation, while Europe’s position strengthens as the conflict lengthens, provided the EU remains united and reduces critical dependencies. That condition matters: a rising number of EU-sceptical leaderships could hollow out EU powers itself and/or obstruct cooperation. It could also weaken its soft power as perceived by outsiders, creating opportunities for external powers to exploit internal divisions."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

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The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

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