From Property Bust to Tech Boom: Is China Trading One Bubble for Another?
WINSTON CHURCHILL famously said, “Those who cannot remember the past are doomed to repeat it”. This serves as a prescient warning about how we could be in the middle of another bubble in China, this time centred on high-tech manufacturing.
The last bubble, which was mainly about real estate, saw an extraordinary acceleration in China’s demand for petrochemicals, persuading too many project proponents that this would carry on into the distant future.
True, exports remained a critical part of China’s economic growth at the mainly real estate fuelled bubble kicked off in 2009 with the launch of the world’s biggest-ever economic stimulus package for an economy the size of China’s. But a lot of the post-2009 growth was down to this stimulus. In other words, much of the growth was “local for local”.
Then, of course, as everyone now belatedly recognises, the bubble went pop in late 2021 when China decided not to support the failing property developer, Evergrande. This coincided with ever-worsening demographics, and, more recently, the trade war.
The chart below shows what this has meant for Northeast Asian ethylene margins, which dipped into negative territory in late 2019 on oversupply, but then were temporarily rescued by the pandemic-related boom for demand for finished goods, most of which were made in China.
Post the Evergrande Turning point, we are left with Chinese petrochemicals demand growth in general that seems more likely to range between 1-4% per annum over the long term versus expectations before 2021 of 6-8%. This largely explains today’s record levels of oversupply.
But now a new narrative has emerged that challenges the notion of declining Chinese economic growth momentum, which is the tech bubble.
Many years ago, a senior chemicals industry executive talked about the innovation surge in China in these terms:
The government says to startups in high-tech sectors words to this effect: There are say half a dozen of you in this sector, but only one of you will succeed but we will write-off the debts of the failing five, and, if you work for the failing five and are any good, you will get jobs with the winner”.
Since evidence has emerged of growing financial distress in electric vehicles, solar panels and batteries, maybe we should be asking ourselves the question of whether this kind of approach has invited too much wasteful competition. Or maybe we don’t, despite what Churchill said, need to learn from history. Let’s examine the evidence.
The Electric Vehicle Race: A Costly Sprint
The Chinese government has channelled financial resources into strategic high-tech industries. This includes substantial bond financing for tech enterprises and significant increases in bank loans to the sector.
State-backed financial muscle allows companies to invest heavily in R&D, and push the boundaries of innovation, but it also contributes to the nation’s overall debt levels. The reliance on investment, often debt-financed, over consumption remains a key characteristic of China’s growth model.
Let’s first focus on EVs. In a 28 May article, TECHINASIA wrote: “China’s vehicle production has exploded from just 5,200 units in 1985 to over 31 million in 2024, creating a market where many companies now face overcapacity and unsustainable competition.
“Great Wall Motors’ chairman explicitly warned that, ‘Evergrande in the automobile industry already exists,’ drawing a parallel to the collapsed property developer and signalling that some automakers are on the brink of financial collapse.”
In another 28 May article, Reuters said: “Of the 169 automakers operating in China today, more than half have less than 0.1% market share. The crowded field is reminiscent of the US auto sector in the early 20th century, when more than 100 companies vied with big players such as Ford, before the industry consolidated.”
With over 100 EV companies vying for market share, the competition is nothing short of brutal. Only a handful of companies appear to be turning a profit. Recent reports confirm that as of early 2025, BYD, Li Auto, and Series (part of the Series Group) stand out as the few consistently reporting positive margins, while many others, like Nio and Xpeng, continue to burn cash.
This intense competition has spiralled into price war. Market leader BYD, for instance, has been at the forefront, implementing significant price cuts across its models.
In a sign of official concern, the government is now getting involved.
“The China Association of Automobile Manufacturers and the Ministry of Industry and Information Technology (MITT) issued public warnings against ‘disorderly price wars,’ citing a drop in industry-wide profit margins,” wrote Car News China in a 6 June article.
MITT said it would intensify efforts to tackle “involution-style” competition in the country’s auto industry, vowing to strengthen oversight and safeguard a fair and orderly market environment,” according to a 1 June article in macaubusiness.com.
The challenges of exporting surpluses
In an attempt to manager oversupply, Chinese EV companies are aggressively expanding their exports. Strategies include:
- Diversifying Markets: Targeting emerging economies in Southeast Asia, Latin America, the Middle East, and Africa where demand for affordable EVs is rising.
- Focusing on Hybrids: As tariffs bite on pure EVs, a shift towards plug-in hybrids could offer a way to circumvent some protectionist measures.
- Establishing Overseas Manufacturing: Companies like BYD are building plants in countries like Hungary to produce locally and reduce exposure to import duties.
However, this export drive is running headlong into a wall of protectionism:
- Tariffs as Barriers: The US has imposed a 100% tariff on Chinese EVs, effectively closing its market. The EU has also applied varying duties, adding to an existing 10% import tariff, though recent discussions suggest they might explore replacing tariffs with minimum prices.
- Reduced Competitiveness and Profitability: These tariffs directly increase the cost of Chinese EVs in importing countries, making them less competitive and eroding the profit margins that Chinese manufacturers enjoy from overseas sales. This could, in turn, reduce the financial cushion that allows for aggressive domestic price wars.
- Trade Diversion and Geopolitical Tensions: Tariffs can divert exports to less protected markets, intensifying competition there, and thus increasing trade tensions with the less protected markets.
Beyond EVs: Solar panels, batteries and wind turbines
Chinese solar companies “faced sharp declines in 2024. Core supply chain companies saw a 28.8% drop in revenue and a 72.2% plunge in profits,” wrote PV Magazine in a 6 March 2025 article.
But the magazine added that China installed 277.57 GW of solar in 2024, up 28.3% from 2023 and bringing total capacity to 887 GW.
As with EVs, this has triggered retaliatory tariffs and anti-subsidy investigations from Western nations, leading to “record trade tensions” and “surging duties” on Chinese clean-tech products, according to a 3 April Carbon Brief article.
In batteries, which of course are closely tied to EVs, “pricing turmoil is also unfolding against a backdrop of significant overcapacity. The average production utilisation rate in China’s automotive industry was a mere 49.5 per cent in 2024,” wrote the Straits Times in a 9 June article.
“Even as global economies make efforts for ‘onshoring’ and ‘friendshoring’ clean-tech production, China continues to command the lion’s share of investments in this space. The Asian giant took around 76% of the global clean-tech factory investments in 2024, especially for solar modules, wind turbines and batteries,” said BloombergNEF in a 29 April report.
Conclusion: Accepting the new growth realities
For some time at least as government mandates in China continue to push EV sales, car and public-vehicle sales could be supported by switching from internal combustion engines.
But what about the overcapacity versus this mandated demand? It appears as if there will have to be a shakeout in the Chinese EV sector, similar perhaps to what happened in the US auto industry in the 20th century.
Plus, of course, we must think about the demographics and what China’s shrinking population will mean for autos demand.
Can China afford the big improvements in pension and healthcare systems necessary to at least partially compensate for a falling population? Maybe not given debts left over from the real-estate bubble, and now a potentially very expensive restructuring of the EVs sector.
Let’s assume China can afford big improvements in pension and healthcare. As the population ages, the need to own a car will still diminish even if the elderly population is in a financially comfortable position, as when your retired you have less of a need to travel by car.
Here’s the chart again from Kevin Swift, the ICIS economist, showing two alternative outcomes for the Chinese population out to the end of the century.
Sure, 2100 is way off the radar of corporate planners when, under Kevin’s downside scenario, China’s population could have fallen to as little as 373m versus the base case scenario of 633m.
But 2050 is obviously just 25 years away, when China’s population could be either 1.2m or 1.3m. And Kevin’s downside is quite conservative. Other estimates suggest steeper population declines.
For EVs as well as solar panels, batteries and wind turbines, the other aspect of the oversupply challenge is the extent to which China will be able to export its surpluses.
As friendshoring and reshoring accelerate, a lot may depend on the counterbalancing force of China’s economic and geopolitical relationships with the rest of the world.
If China ends up replacing the institutions that the US may continue to retreat from (the World Bank and the IMF replaces by the OBOR and AIIB as examples), exports could be tied to wider support for economies. Protectionism for individual sectors might then not be as severe.
Or countries and regions such as the EU could move aggressively down the protectionist route because, regardless of broader relationships with China, the hollowing-out of manufacturing might be too much to tolerate.
Think here of the huge German auto industry which generates so many direct and indirect jobs. Could there even be an outcome where internal combustion engines are given more life through trade protectionism in markets such as the EU?
Nobody has a clue, of course, but we do know that the boosterism we saw during the 2009-2021 China credit boom, centred on the data-flawed notion that China had suddenly become middle class by Western standards, eventually got the global petrochemicals industry into a lot of trouble.
We cannot afford to make the same mistakes twice, which is why we need to be very conscious of the risks of a Chinese high-tech bubble going pop with all that this could mean for the Chinese economy – and therefore, also, petrochemicals demand.
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