Why China’s next growth phase will hinge on domestic demand

Investing.com -- China’s export engine has shown striking resilience despite U.S. tariffs, weak property markets and persistent geopolitical strain. 

But as the country’s trade surpluses widen across nearly all major partners, Beijing’s next phase of growth will depend on domestic demand, marking a turning point for the world’s second-largest economy, according to a recent note by Alpine Macro.

The investment research firm noted that exports rose 6% year over year even as shipments to the U.S. dropped 10%. 

That strength has been fueled by market share gains, a move up the manufacturing value chain, and deeper trade links with emerging regions such as Southeast Asia, Latin America, and the Gulf. 

However, as exports now account for roughly 20% of China’s GDP, the room for further external expansion is narrowing.

Beijing’s surpluses have reached unprecedented levels. China’s goods surplus stands near US$1.3 trillion on an annualized basis, the largest in recorded history, while its current account surplus remains under 3% of GDP. 

The scale of its trade imbalances has drawn growing backlash even from developing economies once aligned through the Belt and Road Initiative. 

Countries such as India, Mexico, Chile, Vietnam, and Turkey have imposed or are considering new trade barriers against Chinese goods to protect local industries, the report said.

China’s export success is underpinned by rapid productivity gains. Low value-added exports like textiles and footwear now make up less than 10% of total shipments, down from over 35% in the 1990s. 

In contrast, machinery and transport equipment account for more than half. Heavy investment in automation and robotics has reduced labor costs, allowing China to maintain its edge despite rising wages.

Yet the dominance that once powered China’s rise is now constraining it. Alpine Macro’s chief emerging markets strategist Yan Wang said that Beijing’s “mercantilist approach” is increasingly unsustainable, with surpluses even among traditional allies raising the risk of a coordinated backlash.

This shift, the report said, will likely prompt a reorientation in China’s forthcoming 15th Five-Year Plan toward stimulating household consumption and reducing dependence on investment-led growth. 

With the property sector mired in a prolonged downturn, domestic spending has become the only durable lever for sustaining economic momentum.

The report added that while the yuan may stay subdued in the near term to counter deflationary pressures, a gradual appreciation could help rebalance trade and support consumption over the long run.

“The implication is that China must boost domestic consumption to absorb its excess savings and sustain long-term growth,” Wang said. “Stimulating household spending is becoming the only credible policy anchor for sustainable growth.”