Why China needs to look within

China reached a $1 tn trade surplus this year, a month earlier than in 2025. Chinese hi-tech exports are feeding the global race to build AI infrastructure, and demand is expected to be strong despite volatile equity markets. Washington and Beijing have extended their tariff truce, but principal partners like the US and the EU will face pressure to balance their trade with China. Trump and Xi are scheduled to meet for the third time this year next week at the APEC summit in Shenzhen with economic relations in focus. Where caps have been agreed, like those by the EU on Chinese auto imports, factories are front-loading shipments before restrictions take effect. EU leaders are seeking broader trade curbs. They may prevail if China's exports keep up their scorching growth.

China's rising dependence on exports to power growth raises its vulnerability to protectionism and a slowing world economy. The extraordinary trade performance masks struggling local consumption amid a property market meltdown. Beijing hasn't been able to stimulate domestic consumption despite a series of fiscal measures. Chinese auto exports, for instance, are surging while domestic sales are caught in a tailspin. This effectively forces Chinese carmakers to export deflation, causing global economic growth to cool down. Unless China manages its domestic demand better, short-term export growth will have a transient effect. The AI investment cycle is expected to come off its current trajectory as regulation catches up with its resource requirements. Debt burden of AI infrastructure is also set to climb as central banks raise interest rates to tame inflation.

China's trade surplus should start stabilising next year over restrictions and plateauing AI investment. Beijing will have to double down on stimulating domestic consumption to take up the slack from an eventual export slowdown. It has the fiscal firepower to provide consumers income support they need to counteract savings lost in the property market. The economy needs a convincing structural readjustment.