The old China narrative: Taiwan as the central risk
At the Shangri-La Dialogue on May 31, US Defence Secretary Pete Hegseth warned that China poses an imminent threat to Taiwan. General Charles Flynn, former commander of the US Army Pacific, told lawmakers that a Chinese invasion is “no longer distant.”
Beijing sees Taiwan as a sovereign part of China. The global context may look favourable: the US is consumed by domestic turmoil, Europe by Russia’s war in Ukraine, and NATO weapons stockpiles are depleted after two years of supporting Kyiv.
Taiwan is no longer the same prize
In an era defined by a US-China AI arms race, Taiwan’s semiconductor ecosystem should matter more than ever. TSMC still produces about 90 percent of the world’s most advanced logic chips—including all Nvidia GPUs, Apple iPhone processors, and Broadcom accelerators.
China has long pursued semiconductor self-sufficiency: chip design, chipmaking tools, and fabrication. Covid-era supply disruptions elevated this ambition to a national priority.
However, Taiwan is less strategically irreplaceable to China than it was. China’s domestic semiconductor sector has made surprisingly rapid progress. SMIC, China’s closest equivalent to TSMC, shocked the industry by producing 7-nanometre chips powering Huawei’s latest smartphones and data-centre accelerators. SMIC chips lag TSMC’s by several generations, and their GPUs consume roughly three times the power of Nvidia’s Blackwell, according to SemiAnalysis—but they work, and that is enough for Beijing’s strategic goals.
The power equation
The US and Europe face tight electricity supply and ageing grids. Many hyperscalers already rely on off-grid gas turbines. Electricity consumption in Germany is no higher than in 1990.
These constraints are partly the legacy of a shrinking Western industrial base—while China’s industrial rise has surged power generation capacity.
China produces roughly twice as much electricity as the United States and is unconstrained in building more. With the property sector collapsing, Beijing may see energy infrastructure, grid upgrades, and AI data centres as a natural outlet for investment. To maintain about five percent real GDP growth amid demographics and weak housing, China will need heavy investment—especially as exports sit at historic highs.
Figure 1: China dominates global manufacturing
Figure 2: Yearly electricity generation
China Shock 2.0: from toys to tech—without giving up toys
The original China shock of the 1990s centred on low-cost goods—textiles, toys, furniture. It hollowed out Southern European manufacturing and US industrial towns.
China Shock 2.0 is different. China is now the world’s largest producer of electric vehicles, solar panels, and batteries, and is on track to dominate robotics. Domestic firms such as Alibaba, Baidu, and DeepSeek are building their own frontier AI models. China already has more robotaxis on the road than the US.
What is striking is that China has not transitioned away from low-cost goods. It has kept its global market share in low-tech products while adding electric vehicles and AI hardware on top. No economy has ever done both simultaneously at this scale.
Figure 3: Passenger vehicle exports
Neijuan: competition that hurts everyone
The rise of China’s technology companies brings fierce price competition. The Chinese term neijuan (“involution”) captures a race so intense it harms all participants—even prompting criticism from Beijing itself.
Some firms may maximise objectives other than profits: strategic autonomy in semiconductors, employment targets for provincial governments, or the imperative to meet GDP growth benchmarks that drive political promotions.
What this means for investors
Chinese champions may be world-class operators but poor investments. If firms are not profit-maximising, minority shareholders are unlikely to be rewarded—even if the technology is competitive.
Non-Chinese firms in strategically important sectors face heavier competition risk. When Beijing is willing to invest “whatever it takes,” entire industries can experience structural margin compression. Western policy responses offer some protection, but state-supported sectors historically deliver weak earnings growth (steel, airlines, banks).
What is new is that technology—normally the fastest-growing, most profitable sector—is now moving into the geopolitical arena. Investors must analyse tech companies not only on fundamentals but also on their exposure to state-driven competition.
