Behind China's Economic Slowdown, a Danger That Cannot Be Ignored

China’s economy is sending a rather anomalous signal. From the outside, the trade performance of the Bamboo Curtain country still looks very strong. Exports in June 2026 surged by more than a quarter year-on-year in US dollar terms. Such a rise in exports is usually good news. Moreover, China’s economy is slowing, domestic consumption is not yet strong, and investment remains under pressure. External demand is one of the main pillars keeping China’s factories moving. However, there is another story behind the export surge. Citing The Economist, China’s trade surplus is actually starting to show signs of having peaked. Adam Wolfe from Absolute Strategy Research assesses that the large gap between China’s exports and imports is no longer widening as it did before. The cause is that China’s imports are rising faster than exports. In June 2026, China’s imports grew 36% year-on-year. This increase caused China’s trade surplus in the first half of 2026 to be lower in US dollar terms compared to the same period the previous year. This condition is a surprise because the trade surplus has been one of the main cushions for China’s economy. When domestic consumption is weak and the property sector is still troubled, exports help China maintain growth. Last year, China’s trade surplus even exceeded US$1.2 trillion. That figure made many countries, especially the European Union, worry about a second ‘China shock’ wave, similar to the period after China joined the World Trade Organisation in 2001. At that time, cheap goods from China flooded the global market and changed the industrial map of many countries. Similar concerns are now re-emerging, especially because China’s exports are no longer just cheap goods, but also machinery, vehicles, electronics, and technology products. However, the latest data shows a more complicated picture. Exports are indeed still strong, but imports are also surging faster. This is causing China’s trade surplus to narrow. The Iran war has indeed affected China’s trade data. More expensive oil prices mean China has to pay more for energy imports than last year. However, the oil factor is not the main cause of the narrowing trade surplus. China is paying more for oil, but the country has also sharply cut its oil import volume. A bigger factor actually comes from chips. China has long been known as a major exporter of semiconductor products. However, at the same time, China is also still a major importer of these components. In May 2026, the import value of China’s integrated circuits rose about 70% year-on-year in US dollar terms. The increase was not due to a surge in volume, but because chip prices were more expensive. So, even though China’s exports remain strong, the cost of importing important components like chips also rises and pressures the trade surplus. This shows China’s true position. On one hand, the country is a technology manufacturing giant. On the other hand, its industrial supply chain still requires imports for important components. This condition arises when China’s economy is losing steam. China’s GDP in the second quarter of 2026 only grew 4.3% year-on-year. This figure is slower than expected and is the weakest since 2022, when China was still implementing lockdowns due to Covid-19. This achievement is also below China’s growth target for this year, which is set in the range of 4.5%-5%. Because household consumption is not yet strong and investment is still weak, exports are becoming increasingly important. The problem is, if the trade surplus has truly peaked, then one of the main pillars of China’s economy is starting to lose power. This puts Beijing in a difficult position. China needs exports to maintain growth, but overly strong exports also trigger tensions with trading partners. At the same time, surging imports, especially due to chips, mean the trade surplus is no longer as large as before. China’s dependence on exports has long been a concern. Therefore, many analysts hope Beijing will again push fiscal stimulus to boost domestic spending. However, the opposite is happening. Yu Xiangrong and Ji Xinyu, economists at Citigroup, say China is entering a condition of de facto austerity. The sign is seen from strongly rising tax revenues. In the January-May 2026 period, China’s VAT revenue grew 6.2%, personal income tax rose 12.2%, while stamp duty soared 89% due to busy stock trading. This increase in revenue was also driven by inflation and stricter tax enforcement. Since last year, China’s tax authorities have been sending automatic messages to taxpayers to report overseas income and assets from 2022. As a result, even though the central government is spending more money, state revenues are also rising. The combined deficit of the central and local governments has even narrowed slightly over the last 12 months. This is the opposite of what a weakening economy needs. When domestic demand is sluggish, China is moving tighter, not looser. The direction of government spending is also interesting. President Xi Jinping has been pushing for high-tech manufacturing and new productive forces, but social spending is actually getting larger. According to Citigroup economists, the portion of spending on social security has increased in recent years. This includes spending on pensions, unemployment insurance, poverty alleviation aid, and programmes to help people return to work. Meanwhile, the portion of spending on technology and education is relatively stable. Infrastructure spending has actually declined. This condition shows unavoidable pressure.