China's Record Trade Surplus May Fuel Tensions

China's trade surplus is on track to reach a record-breaking $1 trillion this year, a development that could exacerbate trade tensions with the US and other major economies, reports Bloomberg.

The widening trade surplus, which reached $785 billion in the first ten months of 2024, represents a 16% increase from the same period in 2023 and is poised to surpass the previous record set in 2022.

"With Chinese export prices still falling, export volume growth was enormous," noted Brad Setser, senior fellow at the Council on Foreign Relations, on X. "The overall story is of an economy that is again growing off exports."

China's reliance on exports has intensified as Beijing attempts to stimulate domestic demand. This lopsided economic picture has drawn criticism from numerous countries, and the newly elected Trump administration is expected to implement tariffs that could further restrict Chinese exports to the US. Countries across South America and Europe have already raised tariff barriers against Chinese goods, including steel and electric vehicles.

Foreign companies are also pulling funds from China, with foreign direct investment liabilities declining in the first nine months of 2024. If this trend continues, it could mark the first annual net outflow in foreign direct investment since at least 1990.

In response, Beijing has promised increased support for companies, with the state council announcing financial assistance to industries to promote stable foreign trade growth, stimulate economic development, and stabilize employment.

While Chinese companies have boosted their export performance in recent years, slowing economic growth, the rise of electrification, and the increasing adoption of domestic alternatives are suppressing import demand.

October saw the third-widest trade surplus in history, just below June's record. The trade surplus calculated in yuan reached 5.2% of nominal gross domestic product in the first nine months of 2024, the highest level since 2015 and well above the average for the past decade.

The surplus with the US has increased by 4.4% year-on-year, while the surplus with the European Union has risen by 9.6%. The surplus with the Association of Southeast Asian Nations (ASEAN) has jumped by nearly 36%.

China's trade imbalances are also expanding with other nations. China now exports more goods to almost 170 countries and economies than it buys from them, the highest number since 2021.

The potential for a currency war is also looming. India's central bank has indicated that it is prepared to let the rupee weaken if China allows the yuan to drop in response to US tariffs. A weaker yuan would make Chinese exports cheaper and could further widen the surplus with India, which has already reached $85 billion this year, 3% higher than in 2023 and more than double the level just five years ago.