China's Export Surge Masks Weak Domestic Demand

China’s economy grew 4.5% year on year in the July-September quarter, while weak domestic demand and limited job and income gains sat behind the headline as exports carried more of the growth burden. The National Bureau of Statistics said growth for the first three quarters was 4.6%. Beijing’s annual target is between 4.5% and 5%, below the “around 5 per cent” goal set in previous years.

The quarterly result beat the 4.41% consensus forecast from economists surveyed by Chinese financial data provider Wind. Growth accelerated from 4.3% in April-June, when the rate marked the lowest quarterly figure reported since the end of 2022. The International Monetary Fund trimmed its forecast for China’s 2026 growth to 4.5%, the lower end of Beijing’s target.

Households Left Behind by Headline Growth

Max Zenglein, Asia Pacific senior economist at The Conference Board, said the official growth figure was “an increasingly poor indicator of how the broader economy is performing” because it masks “widening disparities across industries, regions, and households.” He said Beijing faced difficult trade-offs, and managing domestic imbalances might prove more challenging than handling external pressures.

Domestic demand has weakened during a yearslong downturn in the property market. The downturn has squeezed household wealth and driven up savings. Ecaterina Bigos, senior market strategist at BNP Paribas Asset Management, said an export-reliant, highly tech-driven growth model had produced limited job creation and broad income gains, while risks of artificial intelligence-driven labor displacement continued to grow.

Self-Sufficiency Meets Export Dependence

Exports remain a bright spot: China is on track to surpass last year’s record $1.2 trillion global trade surplus. Exports grew 36% last month, and China recorded a $938 billion surplus between January and September. High-tech exports, including semiconductors, and autos, including hybrid and electric vehicles, drove growth this year.

China has expanded domestic manufacturing capacity in solar power and electric vehicles as it pursues self-sufficiency and protection from Western export controls and trade uncertainty. The government heavily subsidizes those industries. But production rose rapidly as domestic consumption weakened, sending goods to overseas markets at competitive prices.

Elevated U.S. tariffs have affected some U.S.-China trade, prompting China to seek other markets, including Southeast Asia, Latin America and Europe. That strategy ties Beijing’s push for domestic industrial capacity to continued reliance on customers abroad. Eswar Prasad, a professor of economics and trade policy at Cornell University, said, “It is untenable and unsustainable for the world's second largest economy to rely on foreign demand to prop up its own growth.” He said persistent, large trade surpluses meant China “has become a drag on world growth rather than an engine that pulls the rest of the world along.”

Trade Partners Consider Restrictions

The 27-nation European Union has a trade deficit with China of more than $1.1 billion a day. Chinese exports to the EU rose 16% in the first nine months of the year, and EU countries are considering further restrictions. This month, the EU and China agreed 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, said China wanted to maintain market access and could keep selling more made-by-China products to EU economies over the longer term under the hybrid-car deal, while avoiding a broad tariff increase. Lynn Song, chief economist for Greater China at Dutch bank ING, said, “Trade imbalances will be difficult to resolve quickly.”

Policymakers have argued that an undervalued yuan against the dollar and euro has contributed to China’s growing trade surplus; China’s central bank has dismissed those claims. Bigos said, “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.” On Friday, central bank governor Pan Gongsheng said countries with trade deficits and surpluses should work together, and that China was committed to expanding domestic demand.