China’s massive surplus is popping up everywhere 

It is not hard to find evidence of China’s massive trade surplus. Its car exports have surged to well over six million – or about a 10th of the global auto market. They are now on a trajectory that will lead to eight million passenger car exports in 2026. 

That tops the surplus of the previous auto exportweltmeister, Japan, by a decent margin. China’s leading EV manufacturer, BYD, intends to keep its new fleet of car transporters busy. 

It is on track to export one million EVs and plug-in hybrids in 2025, and ultimately wants to export five million cars – or about a million more than Japan. 

China, of course, also dominates a range of clean technology export categories – battery cells, solar PVs and so on. 

In the IMF’s data on global goods trade volume, Chinese exports are up a cumulative 40% in volume terms since the end of 2019, while imports in volume terms are up only 1%.

Trading partners

China’s surplus in manufactured goods now easily exceeds US$2 trillion, according to its customs data. That is around 10.5% of the country’s GDP, and over  2% of world GDP. It is a  surplus that far exceeds the combined totals of Germany and Japan at their peaks. 

China’s surplus in all goods is now $1.2 trillion, according to customs data, after a roughly $800 billion increase over the last five years. The surplus is around 6% of China’s GDP and well over one percentage point of the GDP of the country’s trading partners.  

That means the surplus in goods trade towers over the surplus of Europe. Dutch data shows China’s export volume growth lapping global trade as it takes market share from Europe. There should be no doubt these imbalances have returned, and are now quite large. 

Moreover, the biggest surplus country, China, is growing heavily on the back of net exports – a trajectory that augers wider imbalances and more trade tension.

Ultimately, this stems from a shortfall in the country’s domestic demand, according to the European Central Bank, which makes sense. Beijing has ample scope to meet foreign demand  out of capacity that is not used supplying China’s consumers.  

And a weak domestic economy has led to rate cuts, low yields on Chinese savings and a relatively weak RMB. State banks have also intervened to keep the yuan super-weak. 

The French have recognized the risk that this surplus poses to Europe and want to make imbalances a central focus of the next G-7 summit. The Germans also have reasons to think this is a very good idea, given the impact that Chinese exports now have on its industrial base. 

Yet even with overwhelming evidence of a massive surge in China’s exports over the past five years relative to imports, the International Monetary Fund has struggled to clearly identify Beijing’s outsized contribution to global imbalances. 

IMF forecasts

The IMF relies exclusively on countries’ reporting current account surpluses and deficits in its assessment of the size of external payments imbalances. And China’s current account surplus, scaled to China’s GDP, is the number that has not really popped. 

Sure, its reported current account surplus rose to $420 billion last year, a bit up from 2023. It reached 2.2% of China’s GDP, a number that let the IMF claim that China now has an excess imbalance. 

But the reported surplus was actually only a bit over China’s estimated current account norm, and the 1.5 percentage point rise since 2019 is not gigantic. 

Moreover, the IMF’s forward looking forecasts in October show China’s current account surplus falling back to under 2% of GDP. For reasons known only to the IMF, the 2025 surplus is not likely to be sustained. 

That means on the measure the IMF relies upon, China just does not look like it has all that big a surplus. Japan’s surplus is bigger as a share of GDP, South Korea’s surplus is bigger as a share of GDP, Germany’s surplus is bigger as a share of GDP. 

Even the EU’s surplus last year was bigger as a share of GDP – 2.6 percentage points versus 2.2 percentage points of GDP. 

In much of the IMF’s analysis, such as the 2024 staff report, China’s external surplus can be ignored, which leads to serious problems in its policy recommendations. It has allowed the IMF to define China’s problem as one of lack of internal balance.

Its preferred solution to deflationary pressures in Asia, China included, is generally monetary easing, which tends to weaken the currency and raise the external surplus. 

The right response to a shortfall in demand that is leading to deflation and a rising trade surplus, though, is a sustained fiscal expansion – something the IMF is loath to recommend for China, despite the strong central government balance sheet and limited net debt. 

Yet as long as China’s external surplus appears small in the only measure the IMF uses, the organization does not have to make the hard call. 

Housing slump

Instead, the IMF is able to recommend policies that imply that it wants China to, in effect, export its way out of its housing slump with a clean conscious. 

It does not have to reach the harder conclusion that Beijing has exhausted its ability to draw on external demand to make up for its internal weakness, and call for a fiscal expansion – funded at the central government level – that supports demand. 

So far the IMF has been willing to call for recapitalization of the banking sector to assure the completion of unfinished, but already sold, apartments, but not a deficit-funded expansion of China’s social safety net.

To be fair, the IMF does want pro-consumption structural reforms, it just bulks at calling for a bigger structural fiscal deficit to fund a bigger social safety net. 

Yet, China’s mis-measured and understated current account surplus has a second effect as well – it means the IMF’s analysis of global imbalances is not squarely focused on East Asia. 

I do not know how many times I have heard that Europe’s surplus is almost as big and that a focus on China is not really warranted. That is not the case – at least not in the well-measured trade data. 

Beijing’s surplus there is massive and growing, while Europe’s surplus is disappearing if adjustments are made for Ireland’s obviously tax driven export surplus. 

That is largely because China has taken Europe’s market share in a host of manufacturing sectors, which shows up in Germany’s shrinking exports. Overall, China’s exports are growing at a rate that far exceeds global trade growth, while Europe’s export volumes are dwindling.

They are now far below the overall growth in global trade. I would not go over the reasons why China’s reported current account surplus is artificially deflated. 

International investment

Suffice to say that its 2022 balance of payments methodology magically cut the goods surplus by over a percentage point of GDP. The mysterious income deficit, despite nearly $4 trillion positive net international investment, also knocks another percentage points off the surplus. 

But the result of these statistical shenanigans is rather problematic if it keeps the IMF – and others – from recognizing how much of an issue China’s current growth model is for the rest of the world. 

In other words, sometimes it pays to watch the flow of container ships and auto transport vessels – and not to just trust the Chinese data.

Brad W Setser is the Whitney Shepardson senior fellow at the Council on Foreign Relations.

This edited article was published by the Council on Foreign Relations under a Creative Commons license. Read the original here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.