The world did not become more Western. It became more Chinese
For twenty years, we expected China to grow richer and eventually resemble us. It did something else entirely: it modernised without Westernising.
The “China Shock 2.0” is no longer about cheap toys and textiles, but increasingly about high-value-added products. Europe’s trade deficit with China is approaching €1 billion a day. In 2025, China’s trade surplus reached almost $1.2 trillion – the largest ever recorded. And the momentum has not slowed in 2026: exports continue to surge, driven increasingly by high-tech and advanced manufactured goods.
1/ There is no single Chinese economy. There are two
The first key to understanding China is to stop speaking of “China” as though it were a single economic actor. On one side stands the strategist state: steering, planning, subsidising and directing capital towards priority industries.
The scale is real. In June 2026, the OECD found that Chinese firms had received between three and eight times more government support than firms headquartered in OECD countries over the period 2005–2024. In semiconductors, that support reached nearly 10% of company revenues in 2021 and 2022, against a global average of 2%. Subsidies and an undervalued yuan helped build the machine. But they do not explain the machine.
Because on the other side is a private sector of extraordinary ferocity – BYD, Haier, ByteDance, DJI, Shein – whose companies devour one another on their home market and increasingly go abroad in search of the growth and margins they can no longer find there.
These two Chinas are not separate. They overlap, collide and constantly reshape one another.
These two Chinas are not separate. They overlap, collide and constantly reshape one another. Private companies benefit from public infrastructure, industrial policy and, in many cases, government support. Their success can serve China’s strategic interests. But that does not mean that every decision they make is the execution of a strategy devised in Beijing. Intent matters.
The private sector is not primarily trying to extend Beijing’s influence. It is trying to grow outside a market that is suffocating it. Its expansion may strengthen China’s global economic power – sometimes dramatically – but an outcome that serves Beijing’s interests is not necessarily an outcome engineered by Beijing.
Without that distinction, we risk reading every Chinese investment, acquisition or market entry as evidence of a single coordinated project – and treating as a threat what could sometimes be a competitor, a supplier, an investor or a partner. One of Europe’s most persistent mistakes is to confuse China’s capacity to plan with its capacity to control. They are not the same thing.
2/ The dragon is not the steamroller we think it is
So why is China’s domestic market suffocating even some of its most successful companies? The answer has a name: neijuan – involution. It describes a form of competition so intense that everyone runs faster simply to avoid falling behind. Companies cut prices, accelerate product launches, invest in new capacity and accept ever thinner margins just to stay in the race.
Behind China’s record trade surplus lies this vicious circle. Local governments, whose finances and employment depend heavily on factories, have powerful incentives to keep production going. State banks can roll over debt. Companies invest more to produce more, even as profitability deteriorates. Close to 30% of Chinese industrial companies operate at a loss – rising to 34% in priority sectors associated with the “Made in China 2025” plan. Produce more to survive. Cut prices to sell more. Export what the domestic market cannot absorb. The cycle feeds itself.
China’s industrial advantage is no longer simply about cost. It is about density: supply chains of extraordinary depth, thousands of specialised suppliers clustered within hours of one another, infrastructure built around manufacturing, engineers trained by the hundreds of thousands, and factories able to move from prototype to mass production at a speed Europe struggles to match. That ecosystem took thirty-five years to build, and it has developed a momentum of its own.
The achievement compels admiration. The excess should command attention.
China’s industrial engine went into overdrive. Beijing is now discovering how difficult it is to throttle back a machine it spent decades accelerating. The scale is extraordinary. China has built the capacity to produce roughly 55 million cars a year – close to 60% of a world market that absorbs around 90 million – and solar panels at nearly twice the volume the planet installs annually.
The economist Yasheng Huang describes an economy of “absolute advantage”: a country that competes with the United States in artificial intelligence and electric vehicles, while still competing with the poorest nations in textiles. The achievement compels admiration. The excess should command attention.
And here lies the paradox Europe too often misses: the dragon flooding our markets is also a dragon that needs them. China’s overcapacity is a threat to European industry, but the need to find outlets for that capacity is also a Chinese vulnerability.
3/ Building barricades is not a strategy
Europe’s instinct is to raise its guard, partly rightly. At the end of 2024, Brussels imposed countervailing duties of up to 35.3% on Chinese electric vehicles. Europe must defend itself against unfair competition, protect strategic technologies and set red lines where security and sovereignty demand them. But a raised guard is not a strategy. Before deciding how to respond to China, Europe needs to understand the system it is responding to – and that is precisely where our usual categories fail us.
China disorients us because it fits none of our familiar frameworks. It is neither a command economy nor a liberal capitalist one, but a hybrid, shifting and deeply empirical system in which markets coexist with planning, private entrepreneurship with state direction, and fierce competition with massive public support.
China joined the rules of world trade without giving up its mixed economy. It adopted Western technologies without adopting the Western political model. It modernised – on its own terms. That is why we so often misread it: we look for the categories we know – state or market, public or private, partner or adversary – while China keeps blurring the lines between them.
The restrictions did not create China’s drive for technological self-reliance, but they accelerated it.
And when we have tried to contain its technological rise, we have sometimes produced the opposite of what we intended. The most striking example is artificial intelligence. U.S. restrictions on advanced semiconductors were explicitly designed to slow China’s progress by limiting its access to the computing power needed to develop frontier AI. Instead, scarcity became an incentive to innovate differently. Chinese engineers learned to extract more from less – improving algorithms, reducing computing requirements and accelerating the search for domestic alternatives to American technology.
DeepSeek was the wake-up call; Kimi suggests it was not an exception. The restrictions did not create China’s drive for technological self-reliance – that ambition long predates them – but they accelerated it. They pushed Chinese companies to build, substitute and innovate around technologies they could no longer reliably obtain from the West, accelerating the passage from “Made in China” to “Created in China.”
There is a broader lesson here. Pressure on China does not necessarily produce retreat; it can produce adaptation, and in a system built around speed, experimentation and fierce domestic competition, adaptation can happen remarkably fast. Every badly calibrated act of pressure risks feeding the very acceleration it was designed to stop.
The question is not whether the dragons can be stopped. They cannot. It is whether we will learn to channel their momentum rather than simply absorb it.
4/ Dance with the dragons, use the European market as a bargaining power
There is another way of looking at China, neither naive nor fearful. I call it lucidity: the ability to hold together truths our political reflexes too often want to separate.
China is a formidable engine of innovation and growth, but it also pursues interests that are not ours. Its industrial ecosystem is extraordinarily powerful, while parts of the economic model sustaining it are deeply fragile. Chinese companies can threaten European industries; some can also bring technology, capital, manufacturing capability and competitive pressure that Europe needs.
Chinese companies can be a lever for Europe. A lever is neither a friend nor an enemy; it is a force one learns to use.
Understanding that is not conceding. It is acquiring the means to act.
Chinese companies can be a lever for Europe. A lever is neither a friend nor an enemy; it is a force one learns to use. China needs markets, and Europe, with 450 million demanding consumers, enormous purchasing power and standards that influence the rest of the world, possesses one of the most valuable markets on earth.
Europe’s market is not merely something to defend. It is bargaining power. The question is whether we know how to use it.
So we must learn to dance with the dragons. Dancing with dragons does not mean taming them – that would be presumptuous – or fleeing them – that would be suicidal. It means learning their step.
A dance requires two partners and constant attention to the other. One can lead without crushing, follow without submitting. But one only dances well with someone one has taken the trouble to understand.
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What this letter will do
That is the promise of this newsletter: neither naive fascination nor reflexive rejection. Over the coming weeks, we will replace noise with understanding, theme by theme: how China innovates; why its companies internationalise; where their real fragilities lie; how the balance of power shifted; and what a genuine European doctrine of cooperation could look like.
Every letter is intended to be useful in a room where something is being decided – a board discussion, an investment, a partnership, a negotiation. Understanding is not the opposite of firmness. It is what firmness needs in order to work.
Understanding is not the opposite of firmness.
It is what firmness needs in order to work.
And one more thing: Dancing with Dragons – Chinese Companies: Turning Challenges into Opportunities for Europe is on its way. The French edition, “Danse avec les dragons. Les entreprises chinoises, un levier pour l’Europe”, will be published by Dunod on 30 September 2026; the English edition follows from BIS Publishers in early 2027.
I will leave you with the question I put to every executive I work with: Faced with the China shock, is your first reflex to raise your guard – or to understand what is coming at you? Your capacity to act may depend on the answer.