Exporting Illusions: China’s Dependence on Overseas Demand

The latest trade data from China paints a picture of exports booming while domestic demand stagnates. Beneath the surface, however, lies a more ominous trend that speaks to a deeper structural problem in the Chinese economy.

Manufacturers are relying increasingly on overseas buyers despite risking exacerbating trade tensions with major partners like the European Union. The 27% surge in exports from last year, driven largely by orders for AI chips and automobiles, underscores this point.

In theory, a strong export sector should complement a thriving domestic market. However, in China’s case, manufacturers are turning to overseas buyers as a lifeline rather than addressing fundamental issues driving stagnation at home. This trend is not new; China has long relied on exports to drive growth, often at the expense of its own domestic market.

The speed with which manufacturers are adapting to changing global circumstances – particularly the AI boom and attendant demand for high-tech goods – is striking. Xu Tianchen, a senior economist at the Economist Intelligence Unit, notes that continued export strength “points to a better second half” if policymakers can conjure up an expansionary policy mix.

However, domestic demand remains a drag, with retail sales flat and fixed asset investment negative in June. The irony lies in China’s reliance on exports creating a vicious cycle: strong export performance feeds into policymakers’ expectations of continued growth, which encourages manufacturers to focus on the global market while domestic demand stagnates.

This pattern is not unique to China; other economies have struggled with similar issues. Japan’s “lost decade” and the eurozone’s ongoing stagnation serve as cautionary tales. What sets China apart, however, is its scale and speed of transformation into a global export powerhouse.

Chinese manufacturers now account for over 24% of total manufacturing sales, up from 18.3% in 2019 – a level not seen since China joined the World Trade Organization in 2001. This raises questions about the sustainability of this growth model and its impact on global trade dynamics.

Policymakers must examine the structural underpinnings driving China’s export surge. It’s not just a matter of tweaking policy mixes or accelerating fiscal spending – it requires rethinking what drives growth in this economy.

The next few months will be critical in determining whether policymakers can break free from this cycle and prioritize domestic demand. Will they address the protracted property crisis, which has weighed on domestic demand for years? Or will they continue to rely on exports as a crutch, threatening global trade stability?

China’s dependence on overseas demand is not sustainable in the long term. It’s high time policymakers acknowledged this reality and began working towards a more balanced growth model – before it’s too late.