Council of Councils
Think Global Health
It is not hard to find evidence of China’s massive trade surplus.
China’s exports of cars has surged to well over 6 million cars (or about a tenth of the global auto market outside of China), and are on a trajectory that will lead to 8 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 1 million EVs and plug-in hybrids in 2025, and ultimately wants to export (gulp) five million cars -- or about a million more than Japan.
China of course 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, China’s exports are up a cumulative 40 percent in volume terms since the end of 2019, while imports in volume terms are up only 1 percent. That incidentally implies a contribution of net exports to growth of over a percentage point a year over this period—an amazing sum (exports were 17 percent of GDP at the start of this boom, so the math here is simple, even if it doesn’t quite line up with China’s GDP data).*
China’s surplus in manufactured goods, in China’s customs data, now easily exceeds, $2 trillion. That is around 10.5 percent of China’s GDP.
That is over 2 percent of world GDP, a surplus that far exceeds the combined surpluses of Germany and Japan at their peaks.
China’s surplus in all goods is now $1.2 trillion in China’s customs data, after a roughly $800 billion increase over the last 5 year. The customs is surplus is around 6 percent of China’s GDP and well over 1 percentage point of the GDP of China’s trading partners.
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That means that China’s surplus in goods trade towers over the surplus of Europe—especially if Ireland’s outsized contribution is netted out and the semiconductor export powerhouses on China’s border.
The Dutch CPB data set on export volumes shows China’s export volume growth lapping global trade—as China is rapidly taking market share from Europe.
There consequently should be no doubt that global payments 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 over time. The ECB says this ultimately stems from a shortfall in China's domestic demand, which makes sense. China has ample scope to meet foreign demand out of capacity that isn't used supplying China's own demand. And a weak domestic economy has led to rate cuts, low yields on Chinese savings and a relatively weak RMB (though the state banks now also have to intervene to keep the yuan super-weak).
The French have recognized the risk that China's ever-growing surplus poses to Europe -- and want to make imbalances a central focus of the next G-7 summit. And the Germans have many reasons to think that this is a very good idea indeed, given the impact that Chinese exports now have on Germany's industrial base.
Yet even with overwhelming evidence of a massive surge in China’s exports over the past five years (absolutely, and relative to imports), the IMF has struggled to clearly identify China's outsized contribution to global imbalances. That is IMF relies exclusively on countries' reported 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 hasn’t really popped.
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Sure, China's reported current account surplus rose to $420 billion in 2024, a bit up from 2023. It reached 2.2 percent 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 in the reported surplus since 2019 isn’t gigantic. Moreover, the IMF’s forward looking forecasts—whether in the July External Sector Report of the October WEO show China’s current account surplus falling back under 2 percent of GDP. For reasons known only to the IMF, the 2025 surplus isn’t likely to be sustained.
That means that, on the measure the IMF relies upon, China just doesn’t look like it has all that big a surplus.
Japan’s surplus is bigger as a share of GDP, 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 in 2024 was bigger as a share of GDP: 2.6 percentage points of GDP versus 2.2 percentage points of GDP.
And it also means that. in much of the IMF’s analysis (see the 2024 staff report), China’s external surplus can be ignored (it is only a bit bigger than it really should be, and it is forecast to go away somewhat magically without any significant Chinese policy changes).** And that judgement in turns leads to serious problems in the IMF's policy recommendations for China: most obviously it has allowed the IMF to define China’s problem as one of lack of internal balance (deflation, weak employment growth) and not as a combination of a lack of internal balance and a simultaneous lack of external balance.
The IMF’s 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 long as China’s external surplus appears small in the only measure the IMF uses, the IMF doesn’t have to make the hard call: it 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 doesn't have to reach the harder conclusion that China has exhausted its ability to draw on external demand to make up for its internal weakness, and thus 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).
But China’s mis-measured and understated current account surplus has a second effect as well—it means that the IMF’s analysis of global payments imbalances isn’t squarely focused on East Asia.
I don’t know how many times I have heard that Europe’s surplus is almost as big and thus a focus on China isn’t really warranted. That isn’t really the case, at least not in the well-measured trade data—China's surplus there is massive and growing, and Europe's surplus disappears if adjustments are made for Ireland's obviously tax driven export surplus.***
That’s largely because China has taken Europe’s market share in a host of manufacturing sectors. That shows up in Germany’s shrinking exports, as well as in the chart showing how China’s exports are growing at a rate that far exceeds global trade growth while Europe’s export volumes are shrinking and far below the overall growth in global trade.
I won’t go over the reasons why China’s reported current account surplus is artificially deflated. Suffice to say that its 2022 balance of payments methodology magically cut the goods surplus by over a percentage point of GDP, and the mysterious income deficit (in the face of a close to $4 trillion positive net international investment position) 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 ships—and not to just trust the Chinese data.
* China still doesn’t produce detailed quarterly GDP data at any level, a major data shortfall. It is thus more or less impossible to confirm China’s reported numbers. There simply isn’t an export volumes series in the GDP data—only changes.
** The IMF’s current account forecasts for China have consistently been off, in part because they treated the surge in the surplus during the pandemic as transitionary and in part because the IMF seems to ignore the impact of lagged exchange rate changes. As an example, the External Sector Report (using the spring WEO forecast) expected China’s 2025 current account surplus to fall from $440 billion to $375 billion. The surplus through Q3 will top $650 billion. The latest forecast is just realized surplus through the first half of the year ($550 billion) and it is somehow supposed to fall in 2026. The fall is of course surprising because China’s property downturn has continued (and the IMF does think that the downturn should raise China's external surplus; see the box in the 2024 ESR) and because China’s currency has fallen further, which also should raise the surplus with a lag.
*** Ireland mucks up the broader data as well. Its 15 percent of GDP current account surplus adds about half a point to the euro area’s aggregate surplus. Its massive FDI income deficit—all the profits of offshore U.S. companies (Microsoft reports in its latest 10-K that it earns 80 percent of its entire offshore profit in Ireland so it alone reduces the Euro area’s income balance by over $40 billion)—means that Europe doesn’t run the kind of income surplus that would be expected after several decades with a trade surplus.