Select Language:
From a market expectations standpoint regarding the exchange rate, recent declines in China’s trade surplus carry both positive and negative signals for the yuan.
If investors interpret the shrinking trade surplus as a sign of robust domestic demand and successful economic transformation, the yuan could gain strength. Conversely, if the decline continues or accelerates, it may weaken the currency or even reverse any earlier upward momentum driven by overseas demand. In such cases, the yuan might face renewed downward pressure, the chief global economist at a major securities firm explained in a recent analysis.
Can the positive cycle between future trade surpluses and expectations of currency appreciation sustain itself? Historically, the logic has been that an expanding trade surplus signals an undervalued yuan in foreign exchange markets, fueling expectations of appreciation. Last year, China’s goods trade surplus, calculated in yuan, increased by 19.4%—following a 20.7% rise the year before—marking two consecutive years of growth.
Market sentiment has been that China’s exports will stay resilient, leading to further increases in trade surplus and continued yuan appreciation this year. However, data from the first quarter of 2026 tell a different story. Exports grew by 11.9% year-on-year, while imports surged at a much faster rate of 19.6%. As a result, the overall goods trade surplus shifted from a 23.4% year-on-year increase in the first two months to a 4.7% decline. Since the official import and export figures for March and the first quarter were only released on April 14, the foreign exchange market likely hadn’t fully priced in this unexpected change last month.
The slowdown in exports during the first quarter can partly be attributed to the timing of the Chinese New Year holiday and the high comparison base from last year, but other factors are at play.
First, policies aimed at boosting domestic demand seem to be bearing fruit. In the first quarter, a combination of measures to promote consumption and extended holiday periods led to a 5.4% rise in consumer goods imports. The manufacturing sector also showed solid demand for intermediate inputs, driven by advances in artificial intelligence and data center projects—boosting imports of critical components like chips, memory modules, servers, and semiconductor equipment.
Second, efforts to increase imports continue to influence trade dynamics. In late 2022, the core economic conference in China recognized that the primary challenge in its international balance of payments had shifted from a foreign exchange shortage to an excessive trade surplus and abundant foreign reserves. The goal shifted toward maintaining a balanced international payments system, with this year’s government work report emphasizing the need to “actively expand imports and foster balanced trade growth.”
Third, ongoing conflicts in the Middle East are hampering global trade flows. The World Trade Organization recently forecasted that, without factoring energy prices, global merchandise trade growth will slow to just 1.9% in 2026, down from 4.6% last year. Should energy prices stay high throughout the year, growth could shrink even further—to around 1.4%. High energy costs particularly impact European and Asian economies dependent on Middle Eastern energy, reducing their import growth rates significantly. As Europe and Asia together represent about 70% of China’s exports, prolonged conflicts could negatively shape global trade trends.
Fourth, tensions surrounding trade policies continue to pose risks. Recently, the U.S. Supreme Court invalidated certain tariffs imposed during the Trump administration, removing some tariffs on China, but the U.S. remains active in exploring new tariff measures—like Section 301 and Section 232 investigations launched earlier this year—raising concerns over potential future trade restrictions.
Finally, adverse trade conditions are also likely to lessen China’s trade surplus. Geopolitical conflicts and economic uncertainties in the Middle East could dampen global economic growth and trade volume, which may lead to weaker demand for Chinese exports. Domestically, such tensions could suppress the transmission of producer price inflation to consumer prices. In exports, this might manifest as a slowing increase in export prices compared to import prices, further deteriorating trade conditions and shrinking the trade surplus.
The surge in imports and shrinking trade surplus underscore China’s transition from “world’s factory” to “world market,” demonstrating an effort to rebalance its economy and contribute to global stability. However, the decline in the trade surplus can influence the yuan’s future path through two main channels: demand and supply of foreign exchange, and market expectations.
From the viewpoint of foreign exchange supply and demand, Chinese banks have consistently posted a surplus in foreign exchange settlements and sales, totaling around $597.4 billion from March 2025 to March 2026. These surpluses in bank transactions related to goods trade reached approximately $686.7 billion—about 54% of the total trade surplus during that period—potentially cushioning the impact of a diminishing trade surplus on the yuan’s value and its ability to offset capital outflows.
ChatGPT
Perplexity
Gemini AI
Grok AI
