Industrial upgrading and global supply chain adjustments behind China's export growth

Structural Support for Export Growth: Chips and AI Components

According to the latest Reuters survey, China's exports are expected to grow 15% year-on-year in May 2026, accelerating from 14.1% in April. This growth is not driven by traditional low-end manufacturing, but by strong global demand for semiconductors and AI-related components. South Korea, a key intermediate goods supplier in China's manufacturing supply chain, saw its June exports surge 80.9%, mainly driven by semiconductors and technology components, confirming the deep interconnection of this industrial chain.

China's manufacturing sector is undergoing a transition from "assembly for export" to "core component manufacturing." With the expansion of domestic chip production capacity and the explosion of AI applications, the technological content of China's exports has significantly increased. Overseas buyers, seeking to hedge against energy price volatility triggered by the Gulf War, have locked in production capacity in advance, further accelerating the placement of these orders.

Short-Term Nature and Risks of the Frontloading Effect

Despite the strong May data, leading indicators have already flashed warnings. In May, the new export orders sub-index in China's official manufacturing PMI fell sharply month-on-month, ending two consecutive months of high levels. While export orders were described as "booming" in April, the sharp downturn in May suggests that frontloading of inventory is nearing its end. If geopolitical conflicts ease, buyers may shift to destocking, putting downward pressure on export growth in the third quarter.

Economists' forecasts diverge significantly: China Industrial Securities expects growth of only 10%, while ING gives the highest forecast of 19.5%. This divergence reflects fundamental disagreements over the sustainability of export momentum. Once the frontloading effect fades, the weakness of domestic consumption will become more pronounced—the economy's better-than-expected performance in the first quarter was mainly driven by exports, but domestic demand has never been able to take over.

New Record Trade Surplus and Controversy Over Overcapacity

China's trade surplus in May is expected to widen to $92.1 billion, up from $84.8 billion in April and $51.3 billion in March. A recent Federal Reserve study points out that China's trade surplus as a share of global GDP has exceeded 1%, higher than the peaks of Japan and Germany at the end of the 20th century, with no signs of narrowing. This is interpreted as a sign that China's industrial overcapacity will reshape the global manufacturing landscape over the long term.

An OECD report last week further indicated that nearly 60% of the market share growth of Chinese companies can be attributed to subsidies. International criticism of China's "export-heavy, consumption-light" model is growing: China imports large quantities of intermediate goods and re-exports finished products, squeezing the space for other emerging economies to move up the high-end manufacturing value chain. Both the U.S. Treasury Secretary and Federal Reserve officials see China's overcapacity as a core flashpoint for future trade friction.

Absent Domestic Consumption and Policy Dilemma

Although high-level meetings between China and the U.S. have temporarily eased tensions, no substantive breakthroughs have been achieved on core issues such as tariffs and the Iran conflict. China is facing intersecting internal and external pressures: externally, it is being asked to open markets and cut subsidies; internally, due to weak consumption, it has to rely on exports and investment.The growth rate of imports has remained at a high level of 25%, reflecting China's manufacturing sector's rigid dependence on imported intermediate goods—especially high-end chips, precision instruments, and key materials. While this "big imports, big exports" model has maintained a trade surplus, it has weakened economic resilience. On the policy front, in the short term, fiscal stimulus may be increased to boost domestic demand, but in the long run, industrial upgrading must go hand in hand with consumption upgrading; otherwise, the export-oriented model will be unsustainable.

Conclusion: A New Balance for Made in China

The May 2026 export data serves as a mirror for China's industrial upgrading: the increased technological content brings order resilience, but it also exposes vulnerabilities stemming from reliance on foreign demand and subsidy-driven growth. The global supply chain restructuring will continue in the future, and Chinese companies must shift from "passively taking orders" to "actively deploying," establishing more independent competitive advantages in areas such as new energy, AI, and semiconductors. At the same time, the export surplus should be converted into domestic consumption upgrading—this is not only a response to external pressures but also an inherent need for high-quality economic development.