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

Jakarta, CNBC Indonesia – China’s economy is sending a rather anomalous signal. From the outside, the trading performance of the Bamboo Curtain nation still looks very strong. Exports in June 2026 surged by more than a quarter year-on-year in US dollar terms.

An export increase of that magnitude is usually good news. Moreover, China’s economy is slowing, domestic consumption remains weak, and investment is still under pressure. Demand from abroad has become one of the main pillars keeping Chinese factories running.

However, there is another story behind the export surge.

Quoting The Economist, China’s trade surplus is actually beginning to show signs of having reached its peak. Adam Wolfe of Absolute Strategy Research believes the gap between China’s exports and imports is no longer widening as it did before.

The reason is that China’s imports are rising faster than its exports. In June 2026, China’s imports grew 36% year-on-year. This increase meant China’s trade surplus in the first half of 2026 was lower in US dollar terms than in the same period a year earlier.

This comes as a surprise because the trade surplus has long been one of the main cushions for China’s economy. When domestic consumption is weak and the property sector remains troubled, exports have helped China sustain growth.

Last year, China’s trade surplus even exceeded US$1.2 trillion, equivalent to around Rp21,672 trillion (at an assumed exchange rate of Rp18,060 per US$1). A figure that large has worried many countries, especially the European Union, about a second China shock, similar to the period after China joined the World Trade Organization (WTO) in 2001.

At that time, cheap goods from China flooded global markets and reshaped the industrial landscape of many countries. Similar concerns have resurfaced now, particularly because China’s exports are no longer just cheap goods, but also machinery, vehicles, electronics and technology products.

However, the latest data shows the picture is more complicated. Exports are indeed still strong, but imports are also soaring faster. As a result, China’s trade surplus is beginning to narrow.

Chips Are the Main Cause

The Iran war has indeed influenced China’s trade data. Higher oil prices have forced China to pay more for energy imports than last year.

But oil is not the main reason for the narrowing trade surplus. China is indeed paying more for oil, but the country has also sharply cut the volume of its oil imports.

The bigger factor comes from chips. China has long been known as a major exporter of semiconductor products.

Yet at the same time, China remains a major importer of these components. In May 2026, the value of China’s integrated circuit imports rose by around 70% year-on-year in US dollar terms.

That rise was not due to a surge in import volumes, but rather to higher chip prices. So even though China’s exports remain strong, the cost of importing key components such as chips has also risen and is squeezing the trade surplus.

This reveals China’s true position. On the one hand, the country is a manufacturing and technology giant. On the other, its industrial supply chain still relies on imports for critical components.

This situation arises as China’s economy loses steam. China’s GDP in the second quarter of 2026 grew only 4.3% year-on-year. That figure was slower than expected and the weakest since 2022, when China was still imposing Covid-19 lockdowns.

The result is also below China’s growth target for this year, which has been set at 4.5%-5%.

With household consumption still weak and investment still soft, exports have become increasingly important. The problem is that if the trade surplus has truly peaked, one of the main pillars of China’s economy is starting to lose strength.

This puts Beijing in a difficult position. China needs exports to sustain growth, but exports that are too strong also stoke tensions with trading partners. At the same time, surging imports, particularly of chips, mean the trade surplus is no longer as large as before.

China Growing More Cautious in Spending as the Economy Slumps

China’s dependence on exports has long been a concern. For that reason, many analysts had hoped Beijing would again push fiscal stimulus to lift domestic spending.

But the opposite has happened. Yu Xiangrong and Ji Xinyu, economists at Citigroup, say China has entered a state of de facto austerity, or indirect fiscal tightening.

The signs are visible in strongly rising tax revenues. Between January and May 2026, China’s VAT receipts grew 6.2%, personal income tax rose 12.2%, while stamp duty jumped 89% thanks to buoyant share trading.

The increase in revenue has also been driven by inflation and stricter tax enforcement. Since last year, China’s tax authorities have also been sending automated messages to taxpayers requiring them to report overseas income and assets dating back to 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 in fact narrowed slightly over the past 12 months.

This runs counter to the needs of a weakening economy. With domestic demand sluggish, China is in fact tightening rather than loosening.

Social Spending Increasingly Hard to Avoid

The direction of China’s government spending is also notable. President Xi Jinping has long championed high-tech manufacturing and ‘new productive forces’, but social spending has been growing larger.

According to Citi economists, the share of spending on social security has increased in recent years. This category covers pensions, unemployment insurance, poverty alleviation assistance, and programmes to help people return to work.

Meanwhile, the share of spending on technology and education has remained relatively stable, while infrastructure spending has actually declined.

This reflects pressure that is difficult to avoid. As the economy weakens and the population ages, the needs of the elderly, the unemployed and the poor must still be funded.

China’s technology may still be racing ahead. But its economy is cooling and its population is growing older.