For several decades much of south-east Asia has sought to slipstream China’s economic miracle — and with considerable success. But such is the scale of Chinese manufacturing, the region is now questioning whether its hopes of developing its own globally competitive industries are being dashed.
South-east Asia faces not so much a “China shock” as a “China squeeze”, says Arvind Subramanian, a former chief economic adviser to Indian prime minister Narendra Modi. Beijing, he warns, risks suffocating the region’s long-term aspirations with its excess exports of low and high-tech goods.
“It is squeezing out space for all the developing countries poorer than itself in these low-skilled sectors,” he told an IMF conference in Bangkok in March. “So the ‘Asia model’ that China, Korea, and Taiwan benefited from is now being squeezed out more and more.”
The concern for regional officials is that this trend could end the so-called “flying geese” paradigm. This is the idea first formulated in Japan in the 1930s that Asia’s less advanced but lower-cost economies can follow a more developed nation rapidly up the industrial value chain, as the leader shifts towards ever more sophisticated manufacturing and services.
China’s market dominance in electric vehicles, solar panels and computer technologies is de facto blocking south-east Asian economies from moving up the manufacturing value chain. At the same time, its increasing exports of low-cost products from shoes to plastics risks gutting their industrial base.
“Because of its scale, you could say that China encompasses a whole flock of geese,” said Mark Williams, chief Asia economist at consultancy Capital Economics.
“The question is whether the 50-year pattern that saw countries like Taiwan and Japan get rich was just a window in time — a window that is now closing.”
At the lower end of the manufacturing value chain, in an industrial estate on the outskirts of Kuala Lumpur, a forlorn-looking factory testifies to the impact that offloading Chinese surplus goods on to its neighbours has.
For three decades MPI Polyester Industries was a major Malaysian producer of polyethylene terephthalate (PET). At its height it produced 38,000 tonnes a year of the lightweight plastic used to make drinks bottles and food containers.
But in January the manufacturer called time on its plastics business, blaming fierce competition from foreign rivals. “The margins are just not there any more because we are being undercut by Chinese imports,” said Mok Chee Kong, marketing manager at MPI.
The story of MPI’s demise — which came despite the Malaysian government’s imposition of anti-dumping duties on Chinese plastic last year — is becoming a familiar tale.
China’s trade surplus with the 11-nation Asean bloc hit a record $276bn in 2025 — up 45 per cent from the year before — with strong growth in intermediate goods, including electronics and capital goods such as machinery used by manufacturers.
Labour-intensive manufacturing sectors such as shoes and clothing have been particularly affected. In Indonesia, around 60 factories closed between 2022 and 2025, according to the Indonesian Textile Association.
The biggest casualty was Sri Rejeki Isman (Sritex), a company that once supplied garments to Uniqlo and Walmart, but which shut its factories last year and axed more than 10,000 workers. The textile association estimates that 250,000 jobs have been lost in the sector over the past four years.
“The volume of textiles and garments from China flooding the Indonesian market is at a very massive scale, estimated to reach thousands of tonnes per year,” ITA’s executive director Danang Girindrawardana told the FT.
Indonesian finance minister Purbaya Yudhi Sadewa said in March that Jakarta was considering measures to curb the growing dominance of Chinese products on the country’s ecommerce platforms.
“If this continues without intervention, it would be as if we are handing over our domestic market directly to China,” Purbaya said.
At the other end of the value chain, Chinese exports of EVs, batteries and solar panels to members of the Association of Southeast Asian Nations increased more than 50 per cent last year to nearly $22bn.
Vietnam imported $84bn in electrical machinery and electronics from China last year, up 43 per cent, according to the Asia Society Policy Institute (ASPI) think-tank.
The China shock 2.0
This is the final article in a series about the economic consequences of China’s record trade surplus for the rest of the world
Part 1: The high-end Chinese products flooding the world
Part 2: Europe’s ‘embrace or repel’ China dilemma
Part 3: South-east Asia’s ‘China squeeze’
Asean countries are simultaneously becoming dependent on China for both industrial inputs for manufacturing and also finished goods like EVs and solar panels, according to Shay Wester, director of Asian economic affairs at ASPI.
Vietnam, which has become the base for many manufacturers relocating from China, imports at least half its raw materials from its northern neighbour. Cambodia is also heavily dependent on Beijing, importing around 60 per cent of the raw materials for its crucial garment industry from China.
“These inputs help make Asean exports competitive in markets like the United States and Europe. On the other end, Chinese finished goods are flooding domestic markets across a range of sectors, undercutting local producers,” Wester said.
The threat posed by China’s expanding market share at both ends of the value chain was a key focus of an IMF conference on “Asia in 2050” in Bangkok in March.
South-east Asia faces a difficult balancing act trying to deal with both the threat and opportunity provided by China. “It isn’t black and white,” said Trissia Wijaya, a McKenzie research fellow at the University of Melbourne, since China’s capital and technology base remained a major driver of industrial development. “There’s always an input to the south-east Asian economy from China, although it’s not without flaws.”
A few Asean members have attempted to protect their markets against what they say is the dumping of Chinese goods, but the region has often struggled to respond effectively because of the fear of angering Beijing.
Liew Chin Tong, Malaysia’s deputy finance minister, has warned that Asian countries that long relied on the US as their export destination of “first and last resort” now risk crashing each other’s markets, “resulting in cut-throat price wars, involution and deindustrialisation of fellow Asian economies”.
“To prevent this from happening, China and all other Asian economies will have to open up for candid conversations about managing or even curtailing manufacturing capacity at home and offering voluntary export restraints,” Liew wrote in December.
China dismisses accusations of widespread dumping of products. In an article in the official China Daily last year, researchers at a commerce ministry think-tank said the country’s exporters were creating “rich cross-border production and supply systems that help Southeast Asia accelerate transformation and upgrading”.
The bind for Asean governments is that while Chinese investment brings short-term benefits to the region, it also reduces incentives for longer term investment in home-grown technology, workforce education and structural reforms to drive them up the value chain.
The challenges that led to the closure of MPI Polyester’s plastic factory are starkly revealed in Zhangmutou, one of China’s largest plastics trading hubs situated in the southern manufacturing city of Dongguan.
Despite the vast needs of Dongguan’s manufacturers, local supply comfortably exceeds demand thanks to a combination of US President Donald Trump’s tariffs hitting trade with the US and a softening of China’s own economy following a property market crisis.
“No matter how great [China’s] domestic demand is, it’s never enough,” said Xia Yongfu, who runs Dongguan Aohua Plastic Trading.
Xia added that while some demand came from south-east Asian companies, the majority of his clients in the region were Chinese business people who had opened factories there.
Huang Yongxin, who runs Yuanxin Lianhe Plastics Manufacturing, another Dongguan company, conceded the system did nothing to incentivise Vietnamese industrial development, either in creating new production processes or cultivating workers’ skills.
“Vietnam can never match China’s manufacturing supply chain. Many of Vietnam’s senior engineers are recruited from China, travelling back and forth by plane every week,” he said, adding that new plastics formulations were much more easily made in China.
Wester of ASPI said there were already signs China’s dominance was likely to deepen in the long term as technology became increasingly important to production of both goods and services.
“Digital infrastructure is an area to watch, as Chinese firms invest heavily in data centres across south-east Asia,” Wester said. “[These] firms are exporting not just products, but entire technology and industrial ecosystems.”
Data visualisation by Haohsiang Ko in Hong Kong
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