China’sGreatExportSurprise

The biggest surprise in China’s economy this year has been its export performance, which has remained strong despite intense external pressures. This has, in turn, powerfully driven domestic industrial production, becoming a key factor in achieving the full-year target for real GDP growth. Is this a fluke or an inevitability? A welcome surprise or a hidden danger? And can this outperformance be sustained next year and during the 15th Five-Year Plan period?

Deglobalization and tariff shocks have become a mainstream narrative, but paradoxically, global trade growth has significantly outpaced economic growth over the past two years. A possible explanation is that in the wake of the public health crisis, countries have begun reconfiguring their industrial chains based on security rather than efficiency concerns.

China is actively integrating into this global supply chain reconfiguration, evidenced by the recent surge in its exports of capital and intermediate goods. Although global direct investment has been trending downward, trade friction has ironically driven a surge in overseas expansion by Chinese companies. This, in turn, has boosted trade in commodities, strengthening export resilience. Japan and other countries have had similar experiences.

Yet this export strength presents a dilemma. In recent years, China’s trade surplus as a percentage of GDP has risen to around 4%, a new high since the 2008 global financial crisis. Pivoting to a domestic demand-led model is a long-held vision for China’s structural transformation, but it is no easy task. Japan, for example, long sought to make this transition. But it was not until the financial crisis caused a significant contraction in external demand, and extraordinary policies like “Abenomics” were deployed, that its economy finally began to show a trend of shifting toward domestic demand.

Looking ahead, China’s exports are likely to remain resilient, buoyed by monetary and fiscal easing abroad that is boosting aggregate demand, combined with China’s integration into the restructured global supply chains and its continuing price advantages. Viewed from another angle, however, this very scenario of healthy external demand makes it more challenging for China to break its dependence on exports, implement significant domestic countercyclical adjustments, and achieve a transition to a domestic demand-driven economy.

Wu Ge is chief economist at Changjiang Securities Co. Ltd. Wu previously worked for China’s central bank and the International Monetary Fund.