China’s record $1.1 trillion trade surplus masks a demand weakness that a stronger yuan could address

As reported this week, China’s trade surplus topped $1.1 trillion over the first 11 months of this calendar year—a record figure. No doubt, this is a sign of China’s export resilience. Despite a near 20% decline in exports so far this year to the world’s largest market, thanks to US President Donald Trump’s 47% tariff on imports from China, its shipments continue to make waves as its merchandise storms other markets.

Clearly, Trump’s shake-up of global trade has not deprived the country of its status as the world’s factory. Other countries, however, have grown anxious as they watch their domestic industries lose market share both at home and abroad to cheap Chinese goods.

That may not have mattered much if China’s export thrust were limited to sectors like electric vehicles, solar power modules and battery storage, where its comparative advantage could help decarbonize other economies. But China seems bent on selling the world everything from garments to advanced machinery, leaving little space for others.

Beijing has long spoken of boosting the internal half of its economy’s ‘dual circulation’ model. Such a shift, policymakers said, would ease its over-reliance on ‘external circulation’—exports and the supply chains behind them.

This talk did not translate to action. First, covid intervened. Then, China saw its property bubble burst, with indebted real-estate firms going bust. While it boasts of robust manufacturing, its uneven emergence has left its financial sector stunted.

The vast bulk of people’s savings were parked in home ownership, so battered real estate spelt a negative wealth effect that took a toll on consumption—which was exactly what it needed to drive up.

Retail stimulus measures have tried to achieve this, but with weak results so far. Its GDP growth has struggled to rise above an annual 5%, about half the rate of its boom phase, and deflationary pressures still haunt several sectors. While China’s tech advances are notable, especially in AI, domestic demand remains limp.

Signs of public discontent, meanwhile, may have turned Beijing cautious on reforms. If it enlarges pensions and liberalizes its rigid ‘hokou’ registration system to give citizens access to state benefits wherever they choose to move, it would let people spend more freely.

What would work best is a macro-level fix. China’s current account surplus, at 2% of GDP, is only about half the size of its trade surplus, thanks to a services deficit. But it also means it’s exporting capital to that extent. Some of it has long been going into foreign sovereign bonds, its stash of which was enlarged by a cheap-yuan policy and could plausibly be weaponized (against, say, the US).

But a win-win approach would be to let its currency appreciate and spur import demand for its people to lead better lives. Its yuan has strengthened by 3% against the dollar over the year. But since February, the dollar index has fallen by 8%, which means the yuan has effectively fallen against a basket of non-US currencies. This makes ‘internal circulation’ harder to achieve. Getting people to consume more is the flip-side of a better balanced current account with the rest of the world.