Why Are China’s Exports Surging Despite a Weak Economy? | Charlene Chu

China's exports are significantly higher over the last year, over 20%. But at the same time, investment in China by Chinese companies is significantly lower in the last few months. And consumers are still in trouble because of real estate market. Today we sit down with Charlene Chu, who's been studying China's economy for decades. And she's an expert in this field. She'll tell us what is really behind the numbers because it's very hard to trust the data you get from inside China. We're hearing more and more Chinese companies on the ground saying that they believe they can't make money in China anymore. And that really reflects multiple years here of deflation, eroding the profit margins and companies effectively selling products at cost. So if you're not going to make any money, why are you going to build another plant? Why are you going to expand capacity? And the reality is China is now making so many things, whether it's cars or batteries or toys or furniture, way in excess of what the domestic population demands. So that just puts downward pressure on prices, and it also leaves a lot of stuff that needs to be exported. it. And that's why even the EU now really starting to push back on trade with China and saying we cannot be the dumping ground for all of your excess capacity. I'm Siamak. Welcome to Market Insider. We want to talk to you about China's economy, and you're an expert in this field. You've done a lot of research and studies on it. Can you tell us what you're seeing right now in the Chinese economy? We've got a pretty severe slowdown happening in the domestic part of the economy. There's also an external part of the economy related to exports that is growing really strongly because of all of the demand for AI-related inputs. But that domestic slowdown is pretty severe. We are seeing four months of double-digit contractions in investment. That's historically about 40% of GDP, and we've seen five months of retail sales growth at 1% or less, and that's another 40% of GDP. So it is hard in our view, given the numbers that I just cited, to believe that true GDP growth is in the region of 4.5%. We think that China's economy is growing much more slowly. The only saving grace is exports at the moment. You mentioned the investment dropping because this is very odd, right? For China, can you tell us what does this mean, the numbers? Yeah, I mean, the last couple of decades, you know, for a number of years, experts would point to the fact that China was too investment focused. And that's where too much of the growth was coming from. Not enough growth was coming from household consumption. And suddenly, over the last 14 months, we've actually seen investment contracting and not by small amounts, by double digit figures. And this really is a sea change for China. So there's a few things involved here. The first is we're hearing more and more Chinese companies on the ground saying that they believe they can't make money in China anymore. And that really reflects multiple years here of deflation, eroding the profit margins and companies effectively selling products at cost. So if you're not going to make any money, why are you going to build another plant? Why are you going to expand capacity? Another reason, of course, is the property slowdown that's been going on for a few years now. And that's just a structural decline in property investment that's not going to turn around. And then on top of that, we've got more attractive earnings options for Chinese companies abroad. So it's not that Chinese companies aren't investing, they're just not investing in China, but they are investing in Brazil and Turkey and Eastern Europe and other parts of Latin America and definitely in ASEAN. But to not be investing at home is a big change. And that used to be a big driver of job growth, of wage increases. And I think this lack of investment is one of the reasons why consumption is also weak right now. You mentioned the deflation. So can you tell us more about that? So people are producing products and the value goes down? Or is it just the deflation and the real estate side of things? There's definitely pretty severe deflation on the real estate side of things, but this is way beyond real estate. It all boils down to the fact that the Chinese growth model has always been focused on supply over demand. So let's just make a bunch of stuff and let's make more stuff and let's make more stuff. And if we can't sell it enough of it at home, then we will sell it abroad. And the reality is China is now making so many things, whether it's cars or batteries or toys or furniture, way in excess of what the domestic population demands. So that just puts downward pressure on prices, and it also leaves a lot of stuff that needs to be exported. And that's why you see, you know, even the EU now really starting to push back on trade with China and saying we cannot be the dumping ground for all of your excess capacity. But it is that imbalance between supply and demand of goods that is at the heart of the deflation problem. And since the start of the Iran war, we've seen the inflation numbers turn positive, but this is really just related to energy costs. The underlying dynamics on the ground are still very deflationary. Is the tariff causing some of that? So basically what you're saying is they can't sell the stuff they're making abroad, so then they have to put it in the Chinese market, and they're even willing to give it away with a lower cost than what they produce. What I would say is, ironically, this time last year, tariffs were the big focus, and what is going to be the fallout for China from these high tariffs? But the reality is Chinese exports have held up really, really well. Export growth is in the 20% to 30% range for a few months this year. That's really strong for the biggest exporter in the world. So I wouldn't say it's about tariffs. I'd say it's more just to do with the fact that China is making so much more than what the domestic economy can absorb, that those prices go down at home. And EVs are the best example of this. You know, China can produce upwards of 30 million cars a year, but the domestic demand is only around 20. So the residual has to go somewhere. And so we're starting to see more and more of those exported. And you mentioned that the Chinese companies like to invest in other countries. How does that math look like? Because usually people would invest in China and they would produce things because it was cheap and then they would export them to other countries. How does the math work now in other countries? Is it cheaper to invest in places like Turkey or is it the trade barriers that allows these companies to do better when they're investing in those other countries? So effectively, what's going on in EVs is the best example of this, because China really is leading the rest of the world when it comes to electric vehicles. They will initially start exporting more of these vehicles into countries, and then countries, and Brazil is a very good example of this, will say, you know what, if you want to sell your cars here, we'd prefer that you make them here, because then they have to build a plant domestically. They have to employ Brazilian people. And so it's more beneficial for the local economy to have China actually opening the factory domestically. So you have a lot of countries saying that even within the EU, they've been telling Chinese companies, if you want to export vehicles here, you really need to build them here. Now, Chinese companies are effectively giving in to this to a degree. They would prefer to make everything at home and just ship everything abroad. But if countries aren't going to allow that, they're increasingly recognizing we're going to have to build a plant here. But they're still trying to pull in as many inputs from the Chinese domestic economy as possible into those assembly operations in other countries. And you mentioned that consumers, the consumption is weak in China. What's the reason behind that? So there's a lot of factors feeding into this. So number one, we've just had a general slowdown in the Chinese economy for a few years now. Property has been a big contributor to that. But because of that, we've got slower wage growth. We've actually had a lot of layoffs in different industries. industries. And so job security is a big question mark for a lot of Chinese consumers, and this has pushed them into savings mode. In addition, about 70% of Chinese household wealth is invested in property, and the average property price is down about 40% across the country. So if that was your nest egg for retirement, the only way you're going to make up that much of a gap is by saving more. So Chinese consumers have just really moved into savings mode. And then the last thing I would highlight is on the demographic side. So the cohort of 30 to 50 year olds, which is typically the main consumer group in most economies around the world, that group contracted by 14.4 million people from 2020 to 2025. It is going to contract by about 47 million people between 2025 and 2030. So the demographic cliff is really starting to hit in China now. And then the last thing I would note that you may have seen in different news stories that have been out over the last couple of months, we've just got more and more Chinese people employed in the gig economy. About 40% of the population is now employed in the gig economy, And there's no benefit. Typically, there's no benefits, much longer days and lower earnings. So all of this is feeding into weaker retail sales and weaker consumption. You mentioned the demographic issues in China. Is it because of the one-child policy? Yes, it definitely is. And we have gotten to the point where it's a one child policy. But then, you know, we've have had a relaxation of the one child policy since the mid 2010s. So for about 10 years now, people have had a lot more flexibility in terms of having more children, and yet they don't want to. So that one-child mentality has really taken hold, and it's hard to get families to say they want to have more kids. And a lot of that has to do with the cost of having children. And when you've got all of these other pressures on income, it's not easy to convince people to have more children. China, usually they do a lot of investment in infrastructure and CapEx. You mentioned this investment is down as well. Is it infrastructure down as well? It is. And that's one of the things that's really surprised people is it's all three main areas of investment are down. So property naturally with the property downturn is going to be down. Manufacturing is also down because of what I had mentioned before, most or many Chinese companies just feel like they can't make money at home anymore. And then infrastructure, which is usually the one area that the government will add a lot of support to when other areas are weak, that is also contracting over the past year. And that reflects the fact that Beijing has allowed local governments to use the money they raise through municipal bonds for things other than infrastructure. So now they're paying down debt, they're clearing arrears. They're even, you know, paying salaries and, you know, trying to catch up on expenses that they haven't been able to meet because of the property slowdown. So even infrastructure is not particularly strong right now, and it has actually been contracting. You mentioned their export is going up. Can you tell us more about that? So this year, we have seen growth for a number of months in the 20% range. And this is really really strong for what is the biggest exporter in the world to begin with. Usually when you're so big, you can't post those kind of growth numbers. But we are seeing that it really comes down to the AI data center build out and the fact that these data centers pull in so many components into them. And a lot of those components are made in China. The other factor driving this up is a lot of the prices of AI-related goods, so memory is a good example, but chips more broadly, those prices are up dramatically. And so that also feeds into the headline growth. It is important that the authorities in China publish what they call nominal export growth and real export growth. And nominal growth is running at about 20% right now, but real export growth adjusted for those price increases I just mentioned is closer to 7 to 8. So, you know, you've got the external economy doing well, but even that part of the economy in real terms is just growing 8%. And that 8% growth isn't enough to lift the rest of the economy out of a CapEx recession and weak consumption. Is it surprising to you that the Chinese are not investing more in the economy? They're not spending more to prop it up, or are they? Yeah, it really is. So we started to see investment turn negative in the second half of last year. And at that point, a lot of analysts were saying, oh, we don't think this is true. That has to be a problem with the numbers. We kept saying, no, we think this is real. And it reflects something that we've never heard before from Chinese companies, which is that they believe they can't make money at home anymore. So I do believe it's real. I think it reflects several years of deep unaddressed deflation. And I don't know that it's going to be the easiest thing to turn around because of that. We've heard that there's different entities in China have different kinds of debt, and it's very hard to tell. The national debt in the U.S. is like $40 trillion, but in China, it's not very clear what it is. Do you have any thoughts on that? Yes. So the run-up in debt, and right now when people talk about debt, they're usually talking about fiscal debt of the government, but there's also just broader debt in the economy that includes household and corporate debt. The broader debt in China's economy, if we go back to 2008, right around the time the global financial crisis was hitting, the amount of outstanding debt for everyone, government, households, companies, was about $6 trillion in China. That number is approaching $70 trillion U.S. dollars now, and that's just 18 years later. The world has never seen this magnitude of debt increase in such a short amount of time. So when people talk about debt problems, they're often focusing on the U.S. or Japan and their 200% of GDP fiscal debt. But in reality, if we talk about all indebtedness, China is by far the most indebted economy in the world. And this is another reason households aren't consuming as much and companies aren't investing as much is because they've just borrowed so much over the last two decades that I think we are hitting a point where borrowers are just saying, you know, we have enough, we've got to start repaying this debt. And households, for example, have been net repaying debt for over a year now. So it's very clear that in that group, people are saying we've got too much debt relative to the income we can make right now. We've got to start repaying this. And of course, that weighs on growth. So from what you are seeing, where is this economy headed? I tend to think we are going to get more of the same because we are not getting any different kind of policy package from Beijing. I think the power that China has been able to wield against the U.S. with rare earths and then also how competitive China is on the tech scene has really focused Xi Jinping and the broader policymaking group in China on the fact that they want to stick to a very tech focused, a very company focused policy, economic policy, they do not want to pivot to something that you see more in Western countries, which is a focus on household consumption. And because of that, we're going to continue to see all of the policy resources directed more at those areas of the economy, we're still going to wind up with Chinese households being neglected. So I tend to think we're going to stay in this situation where we've got weak investment, we've got weak consumption, and the only saving grace is external demand for Chinese exports. How do you see what are they doing on AI side? Because there's a lot of talk of competition and they're building their models versus our models here. You know, certainly from a cost perspective, from the investigations we've done, it is certainly very competitive with the U.S. models. However, what most people do say is if you're only looking at doing one or two specific type of tasks, those can be done quite efficiently with the Chinese models. But if you are looking for something that can be very well rounded and do a whole range of different tasks, then the U.S. models really stand out as being better. But I think at the end of the day, that price, that lower price point makes a big difference. It is making the Chinese models much more attractive in emerging markets in Africa and Latin America and ASEAN. And that is probably going to remain the case until the prices come down for the U.S. models. Now, in terms of the future, so from what you're seeing is that they're not doing that well domestically. They're focusing on exporting technologies and including EV, and now they want to do AI. How sustainable is this in the long run? So exports globally, almost everything really, moves in cycles. And inevitably, we are going to have to see a slowdown at some point in demand for Chinese exports. I don't know that that happens right away because we've got this big AI spending that is still very elevated in the US and is going to be picking up in other regions around the world. And so you could continue to see quite a bit of demand for Chinese goods for the next year and a half or so. But I do think at some point we are going to start lapping these very elevated figures and it's going to be hard to sustain those kind of levels once the data center build out has calmed down. And once, you know, we don't have the price increases and some of these goods that we've been seeing. Do you see a major risk for RMB, for the currency, Chinese currency? I think the authorities have done a really good job of keeping this in a pretty narrow trading band of about 6.6 to 7.3. Given that they have a $1.2 trillion U.S. dollar trade surplus last year and about $1.3 trillion this year, that would tell you the currency should be appreciating. But in reality, they don't want it to appreciate that much. So I tend to think that we're going to get relative stability here. Now, there are times when the currency weakens and gets closer to 7.3 per dollar versus the roughly 6.7 that they're at right now. That tends to be when you are seeing a slowdown in exports on top of the other weakness in the economy. And that's when you start to see the renminbi weakening. And the 1.3 trillion, you said they're bringing that much in with trade. Does that hit the consumer economy? So we've gotten a lot of questions from people this year because they'll read in a newspaper that China had 27% growth of exports this month. And they say, well, how is it that the domestic economy is so weak? I mean, shouldn't that demand for Chinese goods be trickling down to the factories who make them? And the reality is, is it's not as quite as strong as that number sounds. So I'd mentioned earlier that there are the number of nominal export growth is in the 20% range, but the real export growth adjusted for prices is more like seven to eight. So that's still pretty robust, but it's not enough to offset everything else going on in the economy. So you do still see some sectors holding up, but you see a lot of weakness in other areas. China has been a major buyer of industrial goods from different countries across the globe because they had massive construction projects and different kinds of projects. Is that going to continue or has that slowed down? It's really slowed down. So you've seen imports flatline. Now, they've picked up this year again because we have this issue where there's so much inflation in items that are imported, and that includes energy, and China's a big energy importer. So you've seen the import number pick up, but in volume terms, the imports have effectively flatlined for a few years now. So this really reflects the fact that China's property sector has slowed down dramatically. They are not putting up buildings nearly at the rate as they were in the past, and therefore they don't need to pull in as much iron ore and copper and all these other inputs that were going into those things. They're still a big buyer of commodities, but not as dominant as they were just a few years ago. And this, you know, does get to the issue we have with trade tension. And I would just note that the EU has said by mid-October and certainly by late October, they're going to decide whether or not they want to start being much more aggressive with China on trade policy in the way that the US is. The reason they're saying that is there was a report from the EU Chamber of Commerce recently, and they had identified that for every one container that EU companies ship to China, China is shipping six containers of goods to the EU. So the deficit is just really ballooning. And it used to be 1 to 2.5, and now it's gone to 1 to 6. And so, you know, this is an example of the imbalance that we've got on the trade side. But that's certainly another area that could slow exports down because the EU is a big destination for Chinese exports. Charlene, it was great to have you on. Please come back and update us on a regular basis. Charlene Chu, thank you so much for being on Market Insider. Tell us what you think about this conversation with Charlene and what do you think about China selling really cheap products across the globe? Make sure to tell us in the comments. I'm Siamak. This is Market Insider. We'll see you next time