China's deepening structural economic vulnerabilities are generating fresh strategic and financial risks for Europe, with Beijing adopting an increasingly assertive posture at home and abroad even as its growth trajectory slows, according to an analysis by The Diplomat. The report argues that Europe can no longer afford to operate on the assumption that China's rise will be uninterrupted or that economic integration will eventually produce political liberalisation.

Structural Pressures Weighing on China

Despite remaining a formidable global industrial powerhouse, technology innovator, and geopolitical force, China is grappling with a cluster of interlocking structural challenges. These include an ageing population, a shrinking workforce, a prolonged property sector crisis, weak domestic consumption, elevated debt levels, and decelerating economic growth.

These pressures have prompted Chinese households to prioritise saving over spending, suppressing domestic demand. In response, Chinese firms have reportedly turned to aggressive overseas expansion to sustain output and revenue, according to the analysis.

Industrial Overcapacity and Competitive Pressure on Europe

The report warns that excess industrial capacity — underpinned by substantial state subsidies — has enabled Chinese companies to engage in aggressive pricing strategies. This poses a mounting challenge to the competitiveness of manufacturers across Europe and other global markets.

Notably, China's expanding dominance in strategic industries risks deepening global dependence on Chinese technology, which in turn increases Europe's exposure to political and economic leverage from Beijing. The report describes this as a long-term structural vulnerability that European policymakers have been slow to address.

What the Report Recommends for Europe

Rather than advocating full economic decoupling — which it characterises as neither practical nor desirable — the analysis calls on the European Union (EU) to pursue a more pragmatic, interest-driven strategy. Specific recommendations include diversifying supply chains, reinforcing Europe's own technological leadership, and deploying market access, investment, and technology cooperation as negotiating leverage with Beijing.

The report also urges Brussels to strengthen trade defence mechanisms, deepen engagement with partners across the Global South, and press China for concrete concessions — including on export surges, the shipment of dual-use goods to Russia, and stricter localisation requirements for Chinese investments within Europe.

Consequences of Inaction

Failing to respond adequately, the report cautions, could accelerate the erosion of Europe's industrial base and undermine confidence in the capacity of European democracies to protect their long-term economic and strategic interests. This comes amid a broader global debate about supply chain resilience and the geopolitical risks of over-dependence on a single manufacturing ecosystem.

With the EU already navigating trade tensions with both Washington and Beijing, the analysis adds fresh urgency to calls for a recalibrated European China strategy — one grounded in strategic realism rather than optimistic assumptions about convergence.