China: Strong high-tech exports mitigate the economic slowdown

Event

China’s latest macroeconomic indicators show persistent imbalances, with strong exports as a dominant GDP growth driver, while the domestic economy is undermined by continued weak domestic demand. After a 5% expansion in the first quarter, real GDP growth decelerated to 4.3% YoY in the second quarter.

Impact

Exports of high technology and AI-related products continue to drive the Chinese economy. During the first eight months of the year, the electronics boom and robust industrial production (including the car industry) led to a 15% YoY surge in exports, particularly to ASEAN countries, followed by the US (despite high tariffs), large emerging markets and the EU. This contrasts sharply with a still struggling domestic economy, where retail sales do not take off. Fixed investment is in a rare decline, and the property crisis is worsening, with new home prices stuck in negative territory since 2023. Beyond the gloomy real estate sector, other structural factors, such as high youth unemployment (around 19% in August), rising automation, a moderate social security system and stubbornly low consumer confidence, largely explain the continued domestic economic weakness. 

This domestic weakness is further exacerbated by external headwinds, from the impact of the Middle East conflict, reflected in rising fuel prices – which are contributing to pause the deflationary spiral and have been contained so far by China’s sharp cuts in fuel imports and use of strategic oil reserves – to geopolitical tensions. A protracted Middle East energy shock and China’s increasing fuel imports could put upward pressures on fuel prices in the coming months.

In this context, Beijing is expected to maintain its economic strategy of prioritising and supporting exports and critical manufacturing industries, while keeping the yuan exchange rate undervalued. However, the expanding trade surplus and industrial overcapacity, particularly in sectors such as EVs and renewables, are likely to intensify trade tensions with China’s trade partners – particularly with the EU – which represents a vulnerability. While the US-China bilateral trade relationship is in a fragile but managed mode – threatened by key issues such as AI and Taiwan, but expected to be preserved after the second Trump-Xi summit of 2026 – a trade war with the EU is looking increasingly likely. Faced with a new Chinese shock and a rapidly deepening bilateral trade deficit with China, the EU industrial sector is on high alert. The outcome of talks between the EU and China, two global trade giants, will therefore be closely scrutinised in the coming months, given their high stakes. At domestic level, if the economy further slows down, Beijing could choose to inject some state stimulus at some point to support flat consumption.

China’s sound ST political risk (1/7) and moderate business environment risk (D/G) have a stable outlook.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com