China's trade grows against the trend: exports exceed expectations, but weak domestic demand and energy risks coexist.

Against the backdrop of continued pressure on global trade, China's trade data for May unexpectedly strengthened, with export growth rebounding significantly. However, the imbalance in internal structure and the accumulation of external risks are calling into question the sustainability of this growth model.

Driving Forces Behind Strong Exports

According to data released by the General Administration of Customs, exports in May grew by 19.4% year-on-year in dollar terms, exceeding the 14.1% growth in April and the market expectation of 15%. Among them, exports to the United States surged by 35.4%, marking the highest growth rate since March 2021. This rebound is partly attributed to a low base from the same period last year, but a more important driver is the global surge in demand for AI-related products.

Yu Xiangrong, Chief China Economist at Citibank, pointed out that the wave of artificial intelligence is supporting production and trade, with rising prices of technology and semiconductor goods pushing up nominal export values. In addition, expectations of higher energy costs due to the Middle East conflict have prompted overseas buyers to accelerate inventory replenishment, creating a short-term buying frenzy. However, Frederic Neumann, Chief Asia Economist at HSBC, warned that this restocking momentum may fade quickly. Once overseas orders return to normal, China's weak domestic consumption will find it difficult to fill the gap.

Concerns Over Imbalance in Import Structure

Import growth also exceeded expectations, rising 27.4% year-on-year in May, higher than April's 25.3% and the forecast of 25%. But looking at the structure, the surge in imports is highly concentrated in specific categories such as semiconductor chips and gold, reflecting more of rising input costs and safe-haven demand rather than a substantial recovery in domestic demand. The Global Research Team at Bank of America explicitly stated that this import pattern "shows almost no signs of economic rebalancing," and believes that the export boom has actually reduced the urgency for Beijing to introduce strong stimulus policies.

The continuously expanding trade surplus reached $105.4 billion in May. However, it is worth noting that the cumulative import growth rate for January–May (24.5%) has surpassed the export growth rate (15.5%), and the trade surplus has narrowed compared to the same period last year. This alleviates criticism from some trading partners to a certain extent, but the underlying structural reasons—rising commodity prices and dependence on high-tech products—are not the result of proactive policy adjustments.

Weak Domestic Demand and Solidification of K-shaped Growth

Despite the impressive export performance, internal divergences in China's economy are intensifying. The growth rates of industrial added value and retail sales in April fell to multi-year lows, and the official manufacturing PMI in May dropped to the 50 threshold, indicating that expansion momentum is nearing stagnation. Jing Wang, China Economist at Nomura, stated that the Iran war has disrupted energy flows through the Strait of Hormuz. Although rising commodity costs help alleviate deflationary pressures, they will also squeeze downstream corporate profits through shortages and price increases.

The continued weakness in the labor market is further suppressing consumption.The persistent weakness in the labor market has further suppressed consumption. Frederic Neumann of HSBC observed that despite surging exports, manufacturing jobs are shrinking continuously, and automation-driven productivity gains are reducing labor demand. This "K-shaped growth"—where the tech manufacturing and export sectors boom while real estate and consumption sectors remain mired in downturn—has become a structural feature of China's economy.

Energy Risks and Inflation Outlook

The energy supply tightness caused by the Middle East conflict is the biggest external risk facing China. Fitch Ratings estimates that China held about 15% of the world's oil reserves before the outbreak of the war, but if forced to tap inventories to cover supply gaps, existing reserves could be depleted by the end of October. Although stable domestic power supply offers some buffer, the pass-through of energy costs to the production side is unavoidable.

The market widely expects the May Producer Price Index (PPI) to accelerate to 3.8% year-on-year, hitting a nearly four-year high; the Consumer Price Index (CPI) is expected to rise modestly to 1.3%. The rebound in inflationary pressure, to some extent, helps to escape the deflation trap, but if cost-push is excessive, it may further suppress already weak domestic demand.

RMB Appreciation and Policy Trade-offs

This year, the renminbi has strengthened significantly against the US dollar, with offshore and onshore exchange rates appreciating by 2.8% and 3% respectively, to around 6.78. This has put pressure on export companies, especially manufacturers with large US dollar positions, in terms of exchange losses. But Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, believes that the strong export performance itself weakens the motivation for the policy authorities to immediately roll out massive stimulus, and policymakers may prefer to wait until July before making decisions.

In fact, the resilience of exports has kept monetary and fiscal policies relatively restrained. But economists generally believe that once the reliance on external demand is reduced, the problem of insufficient domestic demand will re-emerge. How to stimulate domestic demand without triggering a new round of inflation and external imbalances remains a core issue facing policymakers.

Conclusion

China's May trade data shows short-term resilience amid the interplay of global tech cycles and geopolitical conflicts, but also reveals the high degree of imbalance in the economic growth model. The export boom masks the fragility of domestic demand, while energy risks and structural divergence cast a shadow over the medium- to long-term outlook. Against the backdrop of the restructuring of the global trading system and the fragmentation of the geo-economy, whether China can shift its growth drivers through technological upgrading and market diversification will determine its position in the global economic landscape.