China’s economic landscape is once again making headlines, this time for achieving a record-breaking trade surplus. In June 2024, China’s trade surplus hit an unprecedented $99 billion, a figure that has sent ripples through global markets and raised alarms in various international capitals. This record surplus highlights China’s growing economic clout but also underscores the mounting concerns among its trading partners. Notably, China use these hard currencies to subsidize its producers and send artificially cheap products to its trading partners with the intent to break local industry in those sectors.
The Export Surge and Domestic Caution
China’s export sector has been on an impressive upward trajectory. Vast fleets of electric cars, huge numbers of household appliances, and a seemingly endless supply of toys, clothing, and other products are flooding global markets. The surge in exports, reported by China’s customs administration, contrasts sharply with a decline in imports. Chinese companies and households have become more cautious with their spending, contributing to the record surplus.
For the Chinese government, this surplus is a boon. It signifies robust foreign demand for Chinese goods, which helps keep domestic factories operational and fuels further industrial expansion. This export-driven growth aligns with China’s national strategy of bolstering industrial output. As Brad W. Setser, a senior fellow at the Council on Foreign Relations, noted, “It is clear evidence that China continues to try to grow on the back of exports, and manufactured exports in particular.”
Global Repercussions and Rising Tariffs
However, this burgeoning surplus is causing unease globally. Countries like the United States, the European Union, Brazil, India, and Turkey are increasingly wary of being outpaced by China’s industrial prowess. In response, many have started imposing new tariffs or raising existing ones on Chinese goods to protect their domestic industries. Higher U.S. tariffs on Chinese-made electric vehicles and other high-tech products are set to take effect on August 1, while the EU has already implemented new duties on Chinese electric vehicles.
This latest surplus eclipses the previous record set in July 2022, when China’s economy was rebounding from severe COVID-19 lockdowns. The persistent imbalance in trade, especially with significant economies like the U.S. and the EU, exacerbates fears of job losses and factory closures abroad. China’s trade surplus with the United States rose to nearly $32 billion last month, up from $29 billion a year earlier, while the surplus with the European Union reached $22.6 billion in June, up from $19.1 billion in the same month last year.
Domestic Economic Pressures
China’s internal economic dynamics also play a crucial role in this scenario. The country’s real estate sector, which traditionally accounts for a significant portion of household savings, is in a downturn. Apartments and other properties represent 60 to 80 percent of household savings in China, an unusually large proportion by international standards. Falling property prices have dampened consumer spending, leading to a 2.3 percent decline in imports in June compared to the previous year. Meanwhile, exports soared by 8.6 percent, driving the trade surplus to new heights.
Millions of people in China are now looking for ways to save money in response to the real estate downturn. A housing crisis that began three years ago due to overbuilding has already led to dozens of developers defaulting on debts. “This reflects the economic condition in China, with weak domestic demand and strong production capacity relying on exports,” said Zhiwei Zhang, the chief economist at Pinpoint Asset Management.
China’s trade has become particularly lopsided with some countries. For instance, its exports to Kenya are now more than 40 times its imports from that country. Kenya, which also owes heavy debts to China and other lenders, recently experienced deadly protests as crowds rejected proposed tax increases and demanded a stronger economy.
Strategic Implications and Future Outlook
China’s strategy of expanding industrial capacity, even amid a housing crisis, is evident in the substantial increase in bank loans to industrial borrowers. This shift is part of a broader economic plan to offset the slowdown in the real estate sector. Net new bank loans to industrial borrowers reached $614 billion in the 12 months through March, six times the annual lending to those borrowers before the pandemic.
The Chinese Communist Party’s leadership is set to review economic policies and strategies, focusing on sustaining growth amid these challenges. With net new bank loans to industrial sectors reaching $614 billion over the past year, China is clearly doubling down on its industrial expansion. Xi Jinping, the country’s top leader, has set a national goal of fostering “new quality productive forces,” with an emphasis on building even more factories with lots of robots and other automation.
However, the sustainability of this export-driven growth is under scrutiny. Analysts warn that the global economic slowdown, particularly in the U.S., and escalating trade conflicts could pose significant risks to China’s economy in the latter half of the year. “The sustainability of strong exports is a major risk for China’s economy in the second half of the year,” Zhiwei Zhang noted. “The economy in the U.S. is weakening. Trade conflicts are getting worse.”
The upcoming tariffs from the U.S. and EU on Chinese goods, especially in the automotive sector, could further complicate the situation. There is likely to be a front-loading effect before auto tariffs from the EU and U.S. come into effect, but tariffs could lead to a slowdown in auto exports towards the end of the year. This export-driven growth increasingly puts China at odds with some of its trading partners, raising concerns about “one-sided trade and excessive dependence on Chinese supply,” Setser said.
Conclusion
China’s record trade surplus underscores the country’s formidable export capabilities and its strategic focus on industrial growth. However, this economic triumph comes with significant global and domestic challenges. As China navigates these complexities, the world watches closely, mindful of the broader implications of China’s economic maneuvers. The road ahead for China is fraught with uncertainty, as it balances the benefits of its export boom with the risks of global backlash and internal economic pressures.
