China's Export Growth Outpaces Weak Household Demand

China’s economy grew 4.5% year on year in July-September, with exports supporting growth as domestic demand remained weak. That was faster than the 4.3% growth in April-June and above economists’ 4.41% consensus forecast. But the headline figure sits alongside a property downturn that has squeezed household wealth and driven up savings.

Exports and the Surplus

China recorded a $938 billion trade surplus between January and September. The country is on track to surpass last year’s record $1.2 trillion global trade surplus after exports grew 36% last month. High-tech exports, including semiconductors, and autos, including hybrid and electric vehicles, have driven export growth this year.

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

Elevated U.S. tariffs have affected some U.S.-China trade. China has sought other markets, including Southeast Asia, Latin America and Europe. But the export-reliant growth model hasn’t translated into broad job creation and income gains, according to Ecaterina Bigos, senior market strategist at BNP Paribas Asset Management. She said risks of labor displacement driven by artificial intelligence continued to grow.

Households and Workers

The National Bureau of Statistics reported 4.6% year-on-year growth for the first three quarters. Beijing is targeting GDP growth between 4.5% and 5% this year, below the “around 5 per cent” target in previous years. The second-quarter rate was the lowest quarterly growth reported since the end of 2022.

The International Monetary Fund trimmed its forecast for China’s 2026 economic growth to 4.5%, the lower end of Beijing’s target. 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 managing domestic imbalances might prove more challenging than dealing with external pressures.

The property downturn has weakened domestic demand by squeezing household wealth and driving up savings. Bigos said an export-reliant, highly tech-driven model had generated limited job creation and broad income gains. Her warning about artificial intelligence-driven labor displacement points to another pressure on workers as production and exports expand.

Trade Partners and Policy

Trade partners have raised concerns that lower-cost Chinese manufactured goods threaten their domestic industries and economies. “It is untenable and unsustainable for the world’s second largest economy to rely on foreign demand to prop up its own growth,” said Eswar Prasad, a professor of economics and trade policy at Cornell University. He said persistent, large trade surpluses had made China “a drag on world growth rather than an engine that pulls the rest of the world along.”

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

Policymakers have argued that an undervalued yuan against the dollar and euro contributed to China’s growing surplus; China’s central bank has dismissed those claims. Bigos said resistance and protectionism were likely to continue, with pressure from economies seeking to protect 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 had been committed to expanding domestic demand.