China’s tech export boom is hiding a weakening economy

NEW YORK — A week after US voters rebuked Donald Trump’s Republican Party, China delivered a stinging reminder that his presidency is going awry from all directions. China’s trade surplus swelled to just over US$1 trillion for the year despite Trump World’s best efforts to hobble President Xi Jinping’s economy. This was even as imports jumped to their largest level since 2021. Imports rose roughly 42% year on year in October. Exports jumped 35% from a year ago, as Beijing continues to navigate around Trump’s tariffs on Asia’s biggest economy. In the first 10 months of 2026, a trade surplus that Trump was reelected to reverse is rightly 9% bigger than a year ago. And that $1.2 trillion surplus was already a record high. For Trump’s Republican supporters, this week’s data out of Beijing is as demoralizing as it comes. “We expect Chinese exports to stay strong for the rest of this year, led by electronics and autos,” said Dave Chia, an economist at Moody’s Analytics. Economist Hao Zhou at Guotai Junan International told Bloomberg that the trade surplus “underscores the resilience and competitiveness of its export sector despite a more challenging global trade environment.” Add in China’s growing share of the artificial intelligence boom. Tianchen Xu, senior economist at Economist Intelligence Unit, said China’s export surge is related to demand for tech-related products. To be sure, critical minerals copper and energy supplies like liquefied natural gas, oil, and coal are part of China’s 2026 growth story. But AI is the real driver. “High-tech demand, supported by the global and domestic AI upcycle, remained the key driver, while China’s pricing and supply-chain competitiveness in other major export categories also helped sustain the momentum,” said HSBC economist Taylor Wang. Yet this moment is fraught with risk as China’s domestic economy slows despite huge export gains — and as the global AI trade gets wobbly. A giant property slump, now in its sixth year, is catching up with Xi’s economy. Real estate values, which account for roughly 70% of household assets, continue to ratchet lower, slamming consumer confidence and causing big drops in property development investment. This, in turn, has led to sluggish growth in retail sales, which increased just 1.1% in the first nine months of 2026. At home, vehicle sales have posted 12 straight months of declines. In August alone, auto sales fell 18.5% year-over-year, while gold and jewelry sales plunged 17.5%. It’s also kept deflation a live risk for China’s $21.5 trillion economy. The same goes for an 18% youth unemployment rate. This domestic weakness has become a global concern. As Chinese households scale back consumption, producers are flooding overseas markets with cheap goods. That’s helping push China’s trade surplus higher and higher as local manufacturing suffers from severe price wars. Hence worries that if the AI boom goes bust, China’s economy is vulnerable to a slowdown. “While this AI tailwind should continue to support exports into 2027, we think it will flip to a major headwind later in the year with the biggest fallout in Asia,” said Simon MacAdam, deputy chief global economist with Capital Economics. The fallout from the recent US midterm elections poses other risks. Democrats who will soon control Congress might vote to limit overseas chip sales and ban data center construction. Another wildcard: that Trump, reined in at home, might lash out overseas with new tariffs. Joe Peissel, lead macroeconomist at Trivium China, notes that the risk of additional tariffs and other trade barriers will “remain elevated” in the year ahead. This makes it hard for mainland manufacturers to plan for 2027 and beyond. For now, economist Duncan Wrigley at Pantheon Macroeconomics thinks Team Xi is content with efforts to date to stabilize growth as exports rise, hi-tech manufacturing output outperforms traditional sectors and China climbs the value-added ladder. If AI hits a wall, though, China’s economy could limp into 2027, analysts say. “Robust export and import growth in October again underscores the importance of tech manufacturing to China’s economy,” said David Qu, an economist at Bloomberg Intelligence. “It also highlights a vulnerability for a recovery that lacks support from domestic demand. The tech sector depends heavily on sales of AI-related hardware in foreign markets and, to a large extent, also operates as a processing hub. A drop in external demand — for example, if US data-center investment slows — could hit exports, a key engine of growth,” Qu said. Worries about 2027 are evident in China’s local and regional governments increasing borrowing to finance investment amid weak land revenue, which constrains their ability to fund capital expenditures. Fitch Ratings analyst Sherry Zhao expects capital revenue to fall by more than 20% in 2026, as tighter land and property policies limit land supply and demand. Land-related expenditure was also weak in the third quarter. China’s leaders have been slow to respond to a stark split in the economy. Exports are booming, while domestic weakness keeps deepening: a major property downturn, soft household demand, strained local government finances, and youth unemployment near record levels. Foreign demand is doing a lot of work. China is riding the AI wave with electronics, rare earth minerals, and other inputs, and its electric-vehicle and auto-parts makers are thriving abroad. But exports are no longer enough to offset the growing list of headwinds at home, or to pull the country out of deflation. Economists say Beijing needs fresh support, including new spending, more room to issue bonds, and additional liquidity from the People’s Bank of China. A rate cut or two might help as well. The case for cuts is murky, though, because PBOC Governor Pan Gongsheng has been reluctant to ease. There are two main reasons. The central bank doesn’t want to waste years of progress on deleveraging, and a weaker yuan could raise the risk of large property-developer defaults. A third reason comes from the top. Xi has little appetite for provoking the Trump administration during high-stakes trade talks. He isn’t rushing to sign a “grand bargain” with Washington, but he sees no benefit in inviting new US tariffs over a weaker yuan. He is probably also content to watch Japan absorb Washington’s criticism over exchange rates. Along with high oil prices, the weak yen is one of the few international economic issues Treasury Secretary Scott Bessent seems to care about strongly. The US recently joined a currency intervention, the first of its scale since 1998, and so far it has lifted the yen only slightly. China’s economy is also a weaker shield against Trump’s trade policies than Beijing may believe. GDP is growing around 4.5%, which is solid but probably not fast enough to lift household confidence or break the “deflationary mindset” among consumers. The IMF and investment banks have urged Beijing for years to build stronger social safety nets. That is the key to getting 1.4 billion consumers to stop adding to household savings of about $22 trillion. A property market in near-constant distress, the trade war, and energy prices pushed up by the conflict in Iran all keep sentiment low. China is still nursing self-inflicted damage. The harsh Covid lockdowns hit the property market and consumer spending hard, as did the 2020 crackdown on internet giants. That campaign began with Alibaba founder Jack Ma and spread widely, leaving Wall Street debating whether China was “uninvestable.” This year brought little of the progress investors wanted. Their wish list includes: ending the property crisis fueling deflation; reducing opacity; leveling the field so the private sector can thrive; tackling dangerously high youth unemployment; repairing the finances of local governments weighed down by trillions in debt; building safety nets that encourage households to save less and spend more. Any one of these is hard, and doing several at once is harder. A sensible first step would be to stop announcing annual GDP targets. Chasing an arbitrary number each year distorts incentives, pushing officials across China’s provinces toward short-term stimulus rather than the bigger reforms needed for a more dynamic economy. This dynamic explains why China finds it so hard to pivot away from rapid, debt-fueled growth. The way local government officials with national ambitions get on Beijing’s radar screen is by producing above-target GDP year after year. The odds are exceedingly low that the giant infrastructure projects on which municipalities rely to fuel growth are necessary or financed productively. Any shot China has to grow better, not just faster, relies on breaking this cycle. The year ahead seems as good a time as any to step up the pace. Follow William Pesek on X at @WilliamPesek