China’s economy registered a 4.5% growth in the July-September quarter from a year ago, fueled significantly by robust exports. This performance brings the nation closer to its official annual growth target as the year draws to a close, even as its trading partners express increasing urgency in addressing trade imbalances.
Export-Driven Acceleration Amidst Domestic Headwinds
The official data, released on Monday, indicates an acceleration from the 4.3% year-on-year growth recorded in the April-June quarter, which marked the slowest expansion in over three years. Chinese leaders have set an annual growth target of 4.5%-5% for the whole year, a slight reduction from last year’s 5% expansion. The International Monetary Fund recently trimmed its forecast for China’s 2026 economic growth to 4.5%, aligning with the lower end of Beijing’s stated goal.
However, this headline growth figure may not fully reflect the underlying economic realities. Max Zenglein, Asia Pacific senior economist at The Conference Board, noted that the official growth figure is becoming “an increasingly poor indicator of how the broader economy is performing.” Zenglein elaborated that it masks “widening disparities across industries, regions, and households,” suggesting that managing domestic imbalances could prove more challenging for Beijing than addressing external pressures.
Persistent Domestic Weakness
A key factor contributing to these disparities is China’s weakened domestic demand. This has been significantly weighed down by a yearslong downturn in its property market, which has squeezed household wealth and consequently driven up savings. The reluctance of consumers to spend creates a reliance on external markets to absorb the nation’s vast manufacturing output.
The Export Engine: A Bright Spot
Despite domestic challenges, strong exports remain one of the few bright spots for the Chinese economy. China is on track to surpass last year’s record $1.2 trillion global trade surplus, having already logged a 36% growth in exports last month and accumulated a $938 billion surplus between January and September. Elevated U.S. tariffs have prompted China to diversify its export destinations, increasingly looking towards Southeast Asia, Latin America, and Europe.
High-tech exports are a significant driver of this growth. Areas such as semiconductors and autos, including hybrid and electric vehicles, are prominent contributors to this year’s export surge. China’s pursuit of self-sufficiency, aimed at shielding itself from Western export controls and trade uncertainties, has led to the build-up of massive domestic manufacturing capacities across industries like solar and EVs. These industries are heavily subsidized by the government. However, rapid scaling of output at a time of weakened domestic consumption means many of these goods are shipped to overseas markets at competitive pricing, exacerbating global trade imbalances.
Global Implications and Trade Tensions
This export-reliant growth model, while boosting China’s headline figures, has shown limited job creation and broad income gains, according to Ecaterina Bigos, senior market strategist at BNP Paribas Asset Management. Bigos also highlighted the growing risks of artificial intelligence-driven labor displacements.
For many of China’s trade partners, the surge of lower-cost Chinese manufactured imports poses growing threats to their domestic industries and economies. Eswar Prasad, a professor of economics and trade policy at Cornell University, described the situation as “untenable and unsustainable for the world’s second largest economy to rely on foreign demand to prop up its own growth.” Prasad further asserted that through its persistent and large trade surpluses, China “has become a drag on world growth rather than an engine that pulls the rest of the world along.”
EU’s Stance and Protectionist Pressures
The European Union is among those actively seeking to reduce its trade imbalance with China, currently running a deficit of more than $1.1 billion a day. Chinese exports to the EU were up 16% for the first nine months of the year. The EU has already taken steps, reaching an agreement with China this month to roughly halve the number of Chinese hybrid vehicle imports over the next few years.
Gary Ng, a senior economist for Asia Pacific at French bank Natixis, suggested that China can work with other countries on disputes to maintain market access, potentially selling more made-by-China products in the longer run while avoiding broad tariff hikes. However, Lynn Song, chief economist for Greater China at Dutch bank ING, cautioned that even with agreements, “trade imbalances will be difficult to resolve quickly.”
Policymakers also argue that an undervalued yuan, China’s currency, against the dollar and the euro has contributed to China’s growing trade surplus, a claim China’s central bank has dismissed. Bigos noted, “We are likely to see continued resistance, rising protectionism, and persistent pressure from economies globally to protect their industries, and jobs, notably in high value sectors.” Beijing, for its part, has insisted that it does not seek a large trade surplus, with China’s central bank governor Pan Gongsheng stating that China, as a responsible country, has been committed to expanding domestic demand.
As China navigates these complex economic currents, the challenge remains to rebalance its growth model away from an over-reliance on exports towards more robust domestic consumption. The current trajectory, while boosting headline growth, intensifies global trade tensions and highlights the internal structural issues that Beijing must address for sustainable and equitable economic development.
