Gene Ma

For years, China’s large services deficit helped absorb some of the pressure generated by its manufacturing surplus. That offset, however, is becoming less reliable as China's service exports are likely to expand and the service deficit is likely to narrow.

However, China's service trades have been growing at twice the pace of goods trade.

Though it runs the world's largest goods trade surplus, China runs the largest services trade deficit.

Commentary: How China and Europe Should Manage Their Trade Tensions caixinglobal.com/2026-03-13/com…

Therefore, Hormuz's impact on China is much smaller than on its Asian neighbors.

Its sources of oil and gas imports are very diversified.

China consumes 80% more energy than the US and more than twice as much as the EU.

The strong export of copper, EVs, and batteries cannot be attributed to weak domestic demand. Their domestic sales have been strong over the past two years.

Three examples of weak domestic sales but strong exports are rebar and cement, which suffered from plummeting construction and investment, and ICE cars, which domestic consumers are abandoning.

Did the weak Chinese household consumption channel excess output to the global market? Well, retail sales of consumer discretionary items were quite robust ytd, thanks to trade-in subsidies. Except for cars, the export growth of these consumer goods was modest in 2025.

This resilience also cannot be explained by the “under-consumption & over-investment” narrative. In the first half of this year, consumption’s contribution (2.8 ppts) to GDP growth was three times that of capital formation (0.9 ppts).

While some rerouting and transshipment may have occurred via Vietnam, there is little evidence of similar activity through Mexico this year.

Excluding shipments to the US, China’s exports rose by 9.4% y/y in the first eight months of the year. The strength of exports to markets outside the US cannot be explained by front-loading or rerouting.

Consumption/GDP = C/Income * Income/GDP. Chinese household disposable income was 61% of GDP, at par with the EU and Japan, and slightly higher than in Korea, thanks to low direct taxation. Thus, China's low C/GDP is due to high savings (and probably data issues), not low income.

Where are China's rail, port, and power stations? Well, China's engagements in these sectors are mainly through "Overseas Contracted Projects" (OCPs), which are contracted construction works instead of equity investments. These OCPs are now greater in value than ODIs.

Sectoral allocations vary significantly by region. Although manufacturing represents only 10% of total ODI, it is the dominant sector in China’s ODIs in ASEAN, the EU, and the US, accounting for roughly one-third of the total (Table 2).

We recently published an analysis of China’s outbound direct investment, which has exceeded the annual flow of inward FDI in recent years. Yet, the reality may diverge significantly from prevailing perceptions.